<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 1996.
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THERMO ELECTRON CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3829 04-2209186
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
81 WYMAN STREET
P. O. BOX 9046
WALTHAM, MASSACHUSETTS 02254-9046
(617) 622-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SANDRA L. LAMBERT, SECRETARY
THERMO ELECTRON CORPORATION
81 WYMAN STREET
P. O. BOX 9046
WALTHAM, MA 02254-9046
(617) 622-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C>
SETH H. HOOGASIAN, ESQ. JANIS B. SALIN, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL RIORDAN & MCKINZIE
THERMO ELECTRON CORPORATION 300 SOUTH GRAND AVENUE
81 WYMAN STREET SUITE 2900
WALTHAM, MASSACHUSETTS 02254-9046 LOS ANGELES, CALIFORNIA 90071
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable
after the Registration Statement has become effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $1.00 par value per
share............................ 1,567,961 shares $4.76(1) $7,468,000(1) $2,575.17
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(f)(2) based upon the book value as of
March 31, 1996, the latest practicable date, of the securities to be
canceled in the exchange.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THERMO ELECTRON CORPORATION
COMMON STOCK
CROSS REFERENCE SHEET
FOR REGISTRATION STATEMENT ON FORM S-4 AND PROSPECTUS
<TABLE>
<CAPTION>
ITEM FORM S-4 CAPTION LOCATION IN PROSPECTUS
- ---- ---------------------------------------- ---------------------------------------------
<C> <S> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and
Outside Front Cover Page of
Prospectus............................ Outside Front Cover Page; Cross Reference
Sheet
2. Inside Front and Outside Back Cover
Pages of Prospectus................... Inside Front Cover Page; Table of Contents;
Available Information
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information......... Summary
4. Terms of the Transaction................ Summary; Special Meeting; The Merger;
Comparison of Rights of Holders of Thermo
Common Stock and SMC Capital Stock;
Description of Thermo's Capital Stock;
Certain Federal Income Tax Consequences;
Appendix A
5. Pro Forma Financial Information......... Not Applicable
6. Material Contacts with the Company Being
Acquired.............................. The Merger
7. Additional Information Required for
Reofferring by Persons and Parties
Deemed to be Underwriters............. Not Applicable
8. Interests of Named Experts and
Counsel............................... Experts; Legal Opinions
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................... Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3
Registrants........................... Not Applicable
11. Incorporation of Certain Information by
Reference............................. Not Applicable
12. Information with Respect to S-2 or S-3
Registrants........................... Not Applicable
13. Incorporation of Certain Information by
Reference............................. Not Applicable
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
ITEM FORM S-4 CAPTION LOCATION IN PROSPECTUS
- ---- ---------------------------------------- ---------------------------------------------
<C> <S> <C>
14. Information With Respect to Registrants
Other Than S-3 or S-2 Registrants..... Available Information; Summary; Description
of Thermo's Capital Stock; Price Range of
Thermo Common Stock; Business of Thermo;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of Thermo; Ownership of Thermo
Common Stock and SMC Common Stock and SMC
Series B Preferred Stock; Index to
Financial Statements
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information With Respect to S-3
Companies............................. Not Applicable
16. Information With Respect to S-2 or S-3
Companies............................. Not Applicable
17. Information With Respect to Companies
Other Than S-2 or S-3 Companies....... Summary; Business of SMC; Management's
Discussion and Analysis of Financial
Condition and Results of Operations of SMC;
Index to Financial Statements
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations Are to be Solicited.... Inside Front Cover Page; Summary; Special
Meeting; The Merger; Rights of Dissenting
Shareholders; Description of Thermo's
Capital Stock; Ownership of Thermo Common
Stock and SMC Common Stock and SMC Series B
Preferred Stock; Thermo and SMC
Managements; Executive Compensation of
Thermo; Executive Compensation of SMC;
Certain Relationships and Related
Transactions; Other Matters; Proposals of
Stockholders
19. Information if Proxies, Consents or
Authorizations Are Not to be
Solicited, or in an Exchange Offer.... Not Applicable
</TABLE>
<PAGE> 4
[SENSORMEDICS LETTERHEAD]
June , 1996
Dear Fellow Shareholders:
You are cordially invited to a Special Meeting of Shareholders (the
"Special Meeting") of SensorMedics Corporation ("SMC") to vote on the proposed
acquisition of SMC by Thermo Electron Corporation ("Thermo") through the merger
(the "Merger") of a wholly owned subsidiary of Thermo with and into SMC. Upon
consummation of the Merger, SMC shareholders shall receive in exchange for each
share of SMC common stock owned on the effective date of the Merger .2864 share
of Thermo common stock. Holders of shares of SMC Series A preferred stock on the
effective date of the Merger shall have the option to receive in exchange for
each share of Series A preferred stock either (i) $1.74 in cash, representing
the liquidation preference with respect to such shares as of the consummation of
the Merger, or (ii) .0411 share of Thermo common stock (which is intended to
represent a value equivalent to the liquidation preference). Based on the
closing price of the Thermo common stock on the New York Stock Exchange on June
, 1996, $ , the Merger would provide $ and $ in value of
Thermo common stock in exchange for each share of SMC common stock and each
share of Series A preferred stock as to which the election to receive Thermo
common stock was made, respectively. However, the closing price of the Thermo
common stock on the effective date of the Merger may be more or less than
$ . A portion of the shares of Thermo common stock SMC shareholders would
be entitled to receive in the Merger will be held in escrow to satisfy SMC's
indemnification and other obligations under the Merger Agreement. See "The
Merger -- Indemnification of Thermo; Escrow" in the accompanying Proxy
Statement/Prospectus. Holders of shares of SMC Series B preferred stock may
elect to convert such shares into shares of SMC common stock (which would then
convert into shares of Thermo common stock) or receive $12.51 in cash per share
of SMC Series B preferred stock, representing the liquidation preference with
respect to such shares as of the consummation of the Merger.
At the Special Meeting, shareholders will be asked to approve and adopt the
Agreement and Plan of Merger (the "Merger Agreement").
The Special Meeting will be held at SMC's corporate offices located at
22705 Savi Ranch Parkway, Yorba Linda, California 92687, on Friday, June 28,
1996, beginning at 10:00 a.m. Pacific Time.
MANAGEMENT BELIEVES THAT THE MERGER AND THE RELATED TRANSACTIONS ARE IN THE
BEST INTERESTS OF SMC AND ITS SHAREHOLDERS AND RECOMMENDS THAT YOU VOTE FOR
APPROVAL OF THE MERGER. For information concerning management's reasons for
making this recommendation, please read carefully the sections in the
accompanying Proxy Statement/Prospectus under "The Merger."
It is very important that your shares be represented at the Special
Meeting, whether or not you plan to attend personally. Therefore, please
complete and sign the enclosed proxy card and return it as soon as possible in
the enclosed postage-paid envelope. This will ensure that your shares are
represented at the Special Meeting.
Yours very truly,
George D. Holmes
Chief Executive Officer
<PAGE> 5
------------------------
SENSORMEDICS CORPORATION
22705 SAVI RANCH PARKWAY
YORBA LINDA, CALIFORNIA 92687
(714) 283-2228
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 28, 1996
------------------------
To the Holders of Common Stock,
Series A Preferred Stock
and Series B Preferred Stock of
SENSORMEDICS CORPORATION:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the "Special
Meeting") of SensorMedics Corporation ("SMC") will be held at the corporate
offices of SMC, located at 22705 Savi Ranch Parkway, Yorba Linda, California
92687, on Friday, June 28, 1996, at 10:00 a.m. Pacific Time for the following
purposes, which are more fully described in the accompanying Proxy
Statement/Prospectus:
1. To consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger, dated June , 1996 (the "Merger Agreement"), among
SMC, Thermo Electron Corporation ("Thermo") and SMC Acquisition Corp.
("Acquisition Corp."), a wholly owned subsidiary of Thermo, providing,
among other things, for the merger of Acquisition Corp. with and into
SMC (the "Merger") pursuant to which (i) each share of SMC's common
stock, no par value ("SMC Common Stock"), outstanding at the effective
time of the Merger (other than shares with respect to which dissenters'
rights are perfected) will be converted into the right to receive .2864
share of Thermo's common stock, $1.00 par value ("Thermo Common Stock"),
(ii) each share of SMC's Series A preferred stock, no par value ("SMC
Series A Preferred Stock"), will be converted, at the option of the
holder, into the right to receive either $1.74 in cash (representing the
liquidation preference with respect to such share as of the consummation
of the Merger) or .0411 share of Thermo Common Stock (which is intended
to represent a value equivalent to the liquidation preference), and
(iii) each share of SMC's Series B preferred stock, no par value ("SMC
Series B Preferred Stock," and collectively with SMC Common Stock and
SMC Series A Preferred Stock, "SMC Capital Stock"), which is not
converted into shares of SMC Common Stock prior to the Merger, will be
converted into the right to receive $12.51 in cash (representing the
liquidation preference with respect to such shares as of the
consummation of the Merger) and SMC will become a wholly owned
subsidiary of Thermo. A copy of the Merger Agreement (including the
principal exhibits thereto) is attached as Appendix A to the
accompanying Proxy Statement/Prospectus.
2. To transact such other business as may properly come before the Special
Meeting or any adjournments or postponements thereof.
The record date for the determination of shareholders entitled to notice of
and to vote at the Special Meeting, and any adjournments or postponements
thereof, is May 28, 1996 (the "Record Date"). Only holders of record of shares
of SMC Capital Stock at the close of business on the Record Date are entitled to
notice of and to vote at the Special Meeting. A list of SMC shareholders
entitled to vote at the Special Meeting will be available, during normal
business hours, at SMC's corporate offices, 22705 Savi Ranch Parkway, Yorba
Linda, California 92687 for examination by any SMC shareholder.
Holders of SMC Common Stock have a right to dissent from the Merger, and if
the Merger is consummated, to receive "fair market value" for their shares in
cash by complying with the provisions of California law, including Sections
1300-1312 of the California General Corporation Law, the full text of which is
attached as Appendix B to the Proxy Statement/Prospectus accompanying this
Notice of Special Meeting.
<PAGE> 6
Your vote is very important regardless of how many shares of SMC Capital
Stock you own. Regardless of whether you plan to attend the Special Meeting, you
are requested to sign, date and return the enclosed Proxy without delay in the
enclosed postage-paid envelope. You may revoke your Proxy at any time prior to
its exercise. If you are present at the Special Meeting or any adjournments or
postponements thereof, you may revoke your Proxy and vote personally on the
matters properly brought before the Special Meeting.
By Order of the Board of Directors
Pierre Sice
Executive Vice President,
Chief Financial Officer and Secretary
June , 1996
------------------------
PLEASE SIGN AND DATE THE ENCLOSED PROXY AND
RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE
------------------------
PLEASE DO NOT SEND IN STOCK CERTIFICATES AT THIS TIME
------------------------
<PAGE> 7
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 4, 1996
PROXY STATEMENT/PROSPECTUS
------------------------
PROXY STATEMENT
SENSORMEDICS CORPORATION
22705 SAVI RANCH PARKWAY
YORBA LINDA, CALIFORNIA 92687
(714) 283-2228
------------------------
PROSPECTUS
THERMO ELECTRON CORPORATION
81 WYMAN STREET
P. O. BOX 9046
WALTHAM, MASSACHUSETTS 02254-9046
(617) 622-1000
1,567,961 SHARES OF COMMON STOCK,
$1.00 PAR VALUE
------------------------
This Proxy Statement/Prospectus is being furnished to shareholders of
SensorMedics Corporation, a California corporation ("SMC"), in connection with
the proposed merger (the "Merger") of SMC Acquisition Corp., a Delaware
corporation ("Acquisition Corp."), which is a wholly owned subsidiary of Thermo
Electron Corporation, a Delaware corporation ("Thermo"), with and into SMC,
pursuant to an Agreement and Plan of Merger by and among Thermo, Acquisition
Corp. and SMC dated June , 1996 (the "Merger Agreement").
See "The Merger" for a description of the terms and conditions of the
Merger.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES AGENCY NOR HAS THE
COMMISSION OR ANY STATE SECURITIES AGENCY PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This Proxy Statement/Prospectus was first furnished to shareholders of SMC on or
about June , 1996.
<PAGE> 8
<TABLE>
TABLE OF CONTENTS
<S> <C>
AVAILABLE INFORMATION.................................................................. 4
SUMMARY................................................................................ 5
The Special Meeting.................................................................. 5
The Merger........................................................................... 5
Rights of Dissenting Shareholders.................................................... 8
Business of Thermo and Acquisition Corp.............................................. 8
Business of SMC...................................................................... 8
Market Prices........................................................................ 9
Ownership of Securities.............................................................. 9
Resale of Thermo Common Stock Received in the Merger; Affiliates..................... 9
Accounting Treatment; Regulatory Approvals........................................... 10
Certain Federal Income Tax Consequences.............................................. 10
Selected Financial Information of Thermo............................................. 11
Selected Financial Information of SMC................................................ 13
Unaudited Pro Forma Combined Selected Financial Information.......................... 14
SPECIAL MEETING........................................................................ 16
General.............................................................................. 16
Purposes; Recommendation of the SMC Board of Directors and Management................ 16
Record Date.......................................................................... 16
Voting and Revocation of Proxies..................................................... 16
Votes Required....................................................................... 17
Solicitation of Proxies.............................................................. 18
THE MERGER............................................................................. 19
Background of the Merger and Related Matters......................................... 19
Thermo's Reasons for the Merger...................................................... 20
SMC's Reasons for the Merger......................................................... 20
Structure and Terms of the Merger.................................................... 21
Assumption of SMC Stock Options and Warrants......................................... 21
Indemnification of Thermo; Escrow.................................................... 22
Procedure for Exchange of Shares; Fractional Shares.................................. 23
Management and Operations of SMC After the Merger.................................... 24
Effective Time....................................................................... 24
Conditions to Consummation of the Merger............................................. 24
Conduct of SMC's Business Pending the Merger......................................... 25
Accounting Treatment................................................................. 26
Regulatory Approvals................................................................. 26
Resale of Thermo Common Stock Received in the Merger; Affiliates..................... 27
Termination, Amendment and Expenses.................................................. 27
Certain Effects of the Merger........................................................ 27
Interests of Certain Persons in the Merger........................................... 28
RIGHTS OF DISSENTING SHAREHOLDERS...................................................... 29
Demand for Purchase.................................................................. 29
Other Requirements................................................................... 30
COMPARISON OF RIGHTS OF HOLDERS OF THERMO COMMON STOCK AND SMC CAPITAL STOCK........... 31
Exchange of Preferred Stock for Common Stock......................................... 31
Amendment of Charter and By-Laws..................................................... 31
Certain Actions Requiring Supermajority Votes........................................ 32
Board of Directors................................................................... 33
Removal of Directors................................................................. 33
Special Meeting of Stockholders...................................................... 34
Actions by Stockholders Without a Meeting............................................ 34
Cumulative Voting.................................................................... 34
Vote Required for Certain Mergers and Consolidations................................. 35
</TABLE>
2
<PAGE> 9
<TABLE>
<S> <C>
Dissenters' Rights................................................................... 35
Anti-Takeover Statutes............................................................... 35
Stockholder Rights Agreement......................................................... 37
Preemptive Rights.................................................................... 37
Dividends............................................................................ 37
Limitation on Directors' Liability; Indemnification.................................. 37
Loans to Officers and Employees...................................................... 39
Voting By Ballot..................................................................... 39
Inspection of Shareholder Lists...................................................... 40
DESCRIPTION OF THERMO'S CAPITAL STOCK.................................................. 41
Common Stock......................................................................... 41
Preferred Stock...................................................................... 41
Preferred Share Purchase Rights; Series B Junior Participating Preferred Stock....... 41
PRICE RANGE OF THERMO COMMON STOCK..................................................... 45
BUSINESS OF THERMO..................................................................... 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF THERMO............................................................................ 63
BUSINESS OF SMC........................................................................ 74
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF SMC............................................................................... 75
THERMO AND SMC MANAGEMENTS............................................................. 78
Executive Officers and Directors of SMC.............................................. 78
Executive Officers and Directors of Thermo........................................... 79
Committees of the Thermo Board of Directors and Meetings............................. 81
Compensation of Thermo Directors..................................................... 81
Compensation Committee Interlocks and Insider Participation.......................... 83
EXECUTIVE COMPENSATION OF THERMO....................................................... 84
EXECUTIVE COMPENSATION OF SMC.......................................................... 90
OWNERSHIP OF THERMO COMMON STOCK AND SMC COMMON STOCK AND SMC SERIES B PREFERRED
STOCK................................................................................ 93
Ownership of Thermo Common Stock..................................................... 93
Ownership of SMC Common Stock and SMC Series B Preferred Stock....................... 99
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................... 101
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................................ 103
EXPERTS................................................................................ 104
LEGAL OPINIONS......................................................................... 105
OTHER MATTERS.......................................................................... 105
PROPOSALS OF STOCKHOLDERS.............................................................. 105
INDEX TO FINANCIAL STATEMENTS.......................................................... F-1
</TABLE>
APPENDIX A -- Merger Agreement
Principal Exhibits to Merger Agreement
Exhibit A -- Indemnification and Stock Escrow Agreement
Exhibit C -- Form of Affiliate Agreement
APPENDIX B -- Sections 1300-1312 of the California General Corporation Law
3
<PAGE> 10
AVAILABLE INFORMATION
Thermo is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by Thermo with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 or at its regional offices located at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such material can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. In addition, Thermo common stock,
$1.00 par value ("Thermo Common Stock") is listed on the New York Stock
Exchange, and the reports, proxy statements and other information filed by
Thermo with the Commission can be inspected at the office of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005.
Thermo has filed with the Commission a Registration Statement on Form S-4
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the shares of Thermo Common Stock, offered by this Proxy
Statement/Prospectus. This Proxy Statement/Prospectus omits certain information
contained in the Registration Statement. Reference is hereby made to the
Registration Statement and the exhibits filed as a part thereof for further
information with respect to Thermo and the Thermo Common Stock offered hereby,
and any statement herein concerning any exhibit is qualified in all respects by
the provisions of such exhibit.
No person is authorized to give any information or to make any
representations, other than those contained in this Proxy Statement/Prospectus,
in connection with the offering made hereby, and, if given or made, such
information or representations must not be relied on as having been authorized.
This Proxy Statement/Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy the securities to which it relates in any
jurisdiction in which, or to any person to whom, it is unlawful to make such an
offer or solicitation. Neither the delivery of this Proxy Statement/Prospectus
nor any offer or sale made hereunder shall, under any circumstances, create any
implication that there has been no change in the information set forth herein or
in the affairs of Thermo, Acquisition Corp. or SMC since the date hereof.
SMC is not subject to the informational requirements of the Exchange Act.
Copies of SMC's Amended and Restated Articles of Incorporation and By-Laws, as
amended, are available without charge, upon written or oral request to
SensorMedics Corporation, 22705 Savi Ranch Parkway, Yorba Linda, California
92687, Attention: Secretary; telephone: (714) 283-2228. In order to ensure
timely delivery of the documents requested, any such request should be made by
June 21, 1996.
------------------------
This Proxy Statement, which is being furnished to the shareholders of SMC,
also constitutes the Prospectus of Thermo for the issuance of Thermo Common
Stock. Each person who controls or who is under common control with SMC at the
time the Merger is submitted for a vote of the SMC shareholders may, in
connection with any distribution of the Thermo Common Stock received in the
Merger, be deemed to be an "underwriter" within the meaning of the Securities
Act unless such stock is sold pursuant to paragraph (d) of Rule 145 promulgated
under the Securities Act, pursuant to an effective registration statement filed
under the Securities Act with respect to such sale or pursuant to another
applicable exemption therefrom. This Proxy Statement/Prospectus does not cover
any resales of the Thermo Common Stock received by such SMC shareholders upon
consummation of the Merger, and no person is authorized to make any use of the
Proxy Statement/Prospectus in connection with any such resale. See "The
Merger -- Resale of Thermo Common Stock Received in the Merger; Affiliates."
4
<PAGE> 11
SUMMARY
The following is a summary of certain information contained in this Proxy
Statement/Prospectus concerning the proposed merger (the "Merger") of SMC
Acquisition Corp., a Delaware corporation ("Acquisition Corp."), which is a
wholly owned subsidiary of Thermo Electron Corporation, a Delaware corporation
("Thermo"), with and into SensorMedics Corporation, a California corporation
("SMC"). Acquisition Corp. has been formed specifically for the purpose of
carrying out the Merger. It is anticipated that the Merger will be consummated
on or about June 28, 1996. Except as otherwise indicated, all information in
this Proxy Statement/Prospectus reflects a three-for-two split of the Thermo
Common Stock effected on June 5, 1996 for Thermo stockholders of record as of
May 22, 1996. This summary should be read in conjunction with, and is qualified
in its entirety by reference to, the full text of this Proxy
Statement/Prospectus, including the appendices hereto. Each shareholder is,
therefore, urged to read the entire Proxy Statement/Prospectus with care.
THE SPECIAL MEETING
THE SPECIAL MEETING. A Special Meeting of Shareholders of SMC (the
"Special Meeting") will be held on Friday, June 28, 1996, at 10:00 a.m. Pacific
Time at the corporate offices of SensorMedics Corporation, 22705 Savi Ranch
Parkway, Yorba Linda, California 92687. Shareholders of record at the close of
business on May 28, 1996 (the "Record Date") are entitled to notice of and to
vote at the Special Meeting. The date of the mailing of this Proxy
Statement/Prospectus to shareholders of SMC was on or about June , 1996. At
the close of business on the Record Date, there were outstanding and entitled to
vote 1,970,822 shares of common stock, no par value, of SMC (the "SMC Common
Stock"), 3,820,000 shares of Series A preferred stock, no par value, of SMC (the
"SMC Series A Preferred Stock"), and 1,187,414 shares of Series B preferred
stock, no par value, of SMC (the "SMC Series B Preferred Stock") (collectively,
SMC Common Stock, SMC Series A Preferred Stock and SMC Series B Preferred Stock
are referred to as "SMC Capital Stock").
The purpose of the Special Meeting is to vote upon a proposal to approve an
Agreement and Plan of Merger dated June , 1996 (the "Merger Agreement"),
entered into by and among Thermo, Acquisition Corp. and SMC, pursuant to which
Acquisition Corp. will be merged with and into SMC, and SMC will become a wholly
owned subsidiary of Thermo. See "The Merger". The Merger Agreement (including
the principal exhibits thereto) is attached to this Proxy Statement/Prospectus
as Appendix A.
REQUIRED VOTE. According to the SMC Amended and Restated Articles of
Incorporation (the "SMC Articles"), approval of the Merger Agreement requires
the affirmative vote of the holders of a majority of the outstanding shares of
the SMC Common Stock and SMC Series B Preferred Stock, voting together as a
single class (for purposes of such vote, all of the shares of SMC Series B
Preferred Stock, including accrued and unpaid dividends thereon, will be counted
as if converted into SMC Common Stock at the then applicable conversion rate),
and of at least 75% of the outstanding shares of each of the SMC Series A
Preferred Stock and the SMC Series B Preferred Stock. However, in the Merger
Agreement, Thermo reserves the right to terminate the Merger Agreement in the
event that the Merger is not approved by holders of at least 95% of each class
of SMC Capital Stock. See "Special Meeting -- Votes Required" and "The Merger."
THE MERGER
EFFECTIVE TIME. The Merger shall become effective upon the later of the
date of filing of a merger agreement together with certain officers'
certificates with the Secretary of State of the State of California pursuant to
Section 1108 of the California General Corporation Law (the "California Law") or
such other time as provided in such merger agreement (the "Effective Time"). It
is anticipated that the Effective Time will occur on or about June 28, 1996.
EXCHANGE OF SHARES; FRACTIONAL SHARES. Upon consummation of the Merger,
(i) each outstanding share of SMC Common Stock (other than shares with respect
to which dissenters' rights are perfected) will be converted into the right to
receive .2864 share of Thermo Common Stock, (ii) each outstanding share of SMC
Series A Preferred Stock will be converted, at the option of the holder, into
the right to receive either
5
<PAGE> 12
$1.74 in cash (representing the liquidation preference with respect to such
shares as of the consummation of the Merger) or .0411 share of Thermo Common
Stock (which is intended to represent a value equivalent to the liquidation
preference), (iii) each outstanding share of SMC Series B Preferred Stock not
converted into SMC Common Stock prior to the Effective Time will be converted
into the right to receive $12.51 in cash (representing the liquidation
preference with respect to such shares as of the consummation of the Merger),
and (iv) Thermo will become the owner of all of the issued and outstanding
shares of SMC Capital Stock. No fractional shares of Thermo Common Stock will be
issued in connection with the Merger. Any SMC shareholder otherwise entitled to
a fractional share of Thermo Common Stock as a result of the Merger shall
receive cash in lieu thereof, without interest, in an amount determined by
multiplying such SMC shareholder's fractional interest by the closing price of
Thermo Common Stock as reported on the New York Stock Exchange on the trading
day immediately preceding the date on which the Effective Time occurs. See "The
Merger -- Procedure for Exchange of Shares; Fractional Shares."
Assuming no shareholders exercise dissenters' rights, no options or
warrants to purchase SMC Common Stock are exercised prior to the Merger, all
holders of SMC Series A Preferred Stock elect to receive shares of Thermo Common
Stock and all shares of SMC Series B Preferred Stock are converted into shares
of SMC Common Stock prior to the Effective Time, based on the number of
outstanding shares of SMC Capital Stock as of the Record Date, a total of
approximately 1,125,835 shares of Thermo Common Stock would be issued to former
SMC shareholders upon the consummation of the Merger. As a result, a total of
approximately 139,645,805 shares of Thermo Common Stock would then be
outstanding, of which approximately 0.8% of the total would be held by former
holders of SMC Capital Stock.
ASSUMPTION OF SMC STOCK OPTIONS AND WARRANTS. At or prior to the Effective
Time, Thermo and SMC shall take all action necessary to cause the assumption by
Thermo as of the Effective Time of the options and warrants to purchase SMC
Common Stock outstanding as of the Effective Time (the "SMC Options" and "SMC
Warrants," respectively). Each of the SMC Options and SMC Warrants shall be
converted without any action on the part of the holder thereof into an option or
warrant to purchase shares of Thermo Common Stock on substantially equivalent
terms as of the Effective Time. As of the Record Date, 601,600 shares of SMC
Common Stock were subject to outstanding SMC Options and 382,157 shares of SMC
Common Stock were subject to outstanding SMC Warrants. See "The
Merger -- Assumption of SMC Stock Options and Warrants."
INDEMNIFICATION OF THERMO; ESCROW. Ten percent of the shares of Thermo
Common Stock issued in the Merger will be delivered into escrow (the "Indemnity
Escrowed Shares") and held pursuant to the Indemnification and Stock Escrow
Agreement attached as Exhibit A to the Merger Agreement (the "Escrow
Agreement"). The Indemnity Escrowed Shares will be reserved to provide
indemnification to Thermo against damages incurred as a result of
misrepresentations, breaches of warranties and breaches of covenants contained
in the Merger Agreement, the Escrow Agreement and the other agreements executed
in connection therewith, and to satisfy other claims of Thermo arising under the
Merger Agreement, the Escrow Agreement and such other agreements, other than
claims relating to the FDA Matter, as defined in "The Merger -- Indemnification
of Thermo; Escrow." In addition, to the extent that the net assets (total assets
minus total liabilities) of SMC as of the Effective Time, determined pursuant to
the Merger Agreement, are less than $11,651,000, Thermo shall be entitled to
receive Indemnity Escrowed Shares having a value equal to such deficiency. In
the event Thermo has an appropriate claim for indemnification, shares of Thermo
Common Stock will be returned to Thermo in satisfaction of the claim. With
respect to breaches of representations and warranties made by SMC in the Merger
Agreement, Thermo will be entitled to indemnification only if and when the total
of all damages with respect thereto exceeds $250,000, at which point Thermo will
be entitled to indemnification for all such damages, and not just those in
excess of $250,000. With respect to damages incurred by Thermo in connection
with all other matters for which Thermo is entitled to indemnification,
including any deficiency in net assets of SMC described above, Thermo will be
entitled to indemnification for all such damages. The Escrow Agreement requires
the escrow agent to deliver to the former SMC shareholders the Indemnity
Escrowed Shares remaining in escrow one year after the Effective Time, except
that if there are any claims by Thermo at or prior to such date, the escrow
agent will retain Indemnity Escrowed Shares in an amount sufficient to cover
such claims until they are resolved. An additional 47,244
6
<PAGE> 13
shares of Thermo Common Stock issued in the Merger will be delivered in escrow
(the "FDA Shares") and held pursuant to the Escrow Agreement to provide
indemnification to Thermo against certain damages incurred as a result of the
FDA Matter. In the event Thermo has an appropriate claim for indemnification
with respect to monetary penalties incurred as result of a judgment, settlement
or other legally binding resolution of the FDA Matter, FDA Shares will be
returned to Thermo in satisfaction of such claim. However, Thermo's right to be
indemnified for such claims shall be limited to the return of the FDA Shares.
The Escrow Agreement requires the escrow agent to deliver to the former SMC
shareholders the FDA Shares remaining in escrow 60 days after a legally binding
resolution of the FDA Matter. However, Thermo shall be entitled to make a claim
for indemnification against the Indemnity Escrowed Shares with respect to costs
and expenses, other than monetary penalties, incurred in connection with the FDA
Matter. For purposes of determining the number of Indemnity Escrowed Shares or
FDA Shares which would be returned to Thermo in satisfaction of any claim for
indemnification under the Merger Agreement, each share will be valued at the
closing price of Thermo Common Stock on the New York Stock Exchange on the last
trading day prior to the date on which the Effective Time occurs. See "The
Merger -- Indemnification of Thermo; Escrow."
CONDITIONS TO THE MERGER. The consummation of the Merger is conditioned
upon, among other things, (i) approval of the Merger and the adoption of the
Merger Agreement by the holders of at least 95% of the outstanding shares of
each of the SMC Common Stock, the SMC Series A Preferred Stock and the SMC
Series B Preferred Stock, (ii) holders of at least 95% of the outstanding shares
of SMC Series B Preferred Stock as of the Record Date having converted such
shares into shares of SMC Common Stock and (iii) the representations and
warranties of each party to the Merger Agreement being true and correct as of
the Effective Time. The Merger Agreement may be terminated by, among other
things, the mutual consent of each of Thermo and SMC. If the Merger is not
consummated, SMC intends to operate in substantially the same manner as it has
in the past. Any of the conditions to the Merger may be waived at any time prior
to the Merger by the party or parties to the Merger Agreement benefiting from
such conditions. However, no assurance can be given that any of such parties
will determine to waive any unfulfilled conditions. See "The
Merger -- Conditions to Consummation of the Merger."
CERTAIN EFFECTS OF THE MERGER. If the Merger is consummated, (i) the
holders of shares of SMC Common Stock (other than holders of shares with respect
to which dissenters' rights are perfected), holders of shares of SMC Series A
Preferred Stock who so elect and holders of shares of SMC Series B Preferred
Stock who have converted such shares into SMC Common Stock as of the Effective
Time will have their shares exchanged for shares of Thermo Common Stock, (ii)
the holders of shares of SMC Series A Preferred Stock who elect to receive cash
shall have their shares converted into the right to receive $1.74 in cash per
share, the Series A Preferred Stock liquidation preference, and (iii) the
holders of SMC Series B Preferred Stock who have not converted such shares into
SMC Common Stock as of the Effective Time shall have their shares converted into
the right to receive $12.51 in cash per share, the SMC Series B Preferred Stock
liquidation preference. The rights of SMC shareholders, which are presently
governed by California law and by the SMC Articles and the By-Laws of SMC, as
amended ("SMC By-Laws"), will be governed by Delaware law and the Amended and
Restated Certificate of Incorporation, as amended and By-Laws of Thermo ("Thermo
Certificate" and "Thermo By-Laws," respectively). Certain differences in the
rights of SMC shareholders will arise as a result of this change in governing
law as well as from distinctions between the SMC Articles and SMC By-Laws and
the Thermo Certificate and Thermo By-Laws. See "The Merger -- Certain Effects of
the Merger" and "Comparison of Rights of Holders of Thermo Common Stock and SMC
Capital Stock."
INTERESTS OF CERTAIN PERSONS IN THE MERGER. Shareholders should be aware
that certain officers and directors of SMC have interests, described below,
which may present them with potential conflicts of interest in connection with
the Merger. The Board of Directors of SMC is aware of the conflicts described
below and has considered them in addition to the other matters described under
"The Merger -- SMC's Reasons for the Merger." Upon consummation of the Merger,
SMC's directors, other than George Holmes, will resign, and Thermo will appoint
the remaining members of SMC's Board of Directors. Certain officers of SMC will
retain their offices after the Effective Time, but Thermo may also appoint
additional officers of SMC. See "The Merger -- Interests of Certain Persons in
the Merger" and "Thermo and SMC Managements -- Executive Officers and Directors
of SMC."
7
<PAGE> 14
In accordance with SMC Board resolutions passed in November 1994 and
October 1995, certain executive officers and other employees of SMC will receive
a supplemental cash distribution upon the consummation of the Merger. This
distribution, which will constitute 13.3% of the gross value of the total Merger
consideration after subtracting the value of SMC Series A Preferred Stock
(including accumulated dividends), is estimated to be approximately $8.3
million. See "The Merger -- Interests of Certain Persons in the Merger."
RIGHTS OF DISSENTING SHAREHOLDERS
Under California Law, holders of SMC Common Stock who have not voted in
favor of the Merger Agreement and who have fully complied with the applicable
provisions of California Law, have the right to require SMC to purchase for cash
their shares at the fair market value thereof (as determined by agreement with
SMC or by a court) in lieu of shares of Thermo Common Stock that they would
otherwise receive in the Merger. Such shareholders exercising such rights
("Dissenting Shareholders") must (i) either abstain from voting or vote such
shares against the Merger Agreement, and (ii) deliver to SMC, within 30 days
after the date on which notice of the Merger's approval is mailed by SMC to its
shareholders, written notice of such Dissenting Shareholders' intent to demand
payment for such shares. Dissenting Shareholders must also comply with the other
requirements of Sections 1300-1312 of the California Law, the full text of which
is attached to this Proxy Statement/Prospectus as Appendix B. Any deviation from
or failure to comply with all such requirements may result in the forfeiture of
the rights of Dissenting Shareholders. See "Rights of Dissenting Shareholders."
BUSINESS OF THERMO AND ACQUISITION CORP.
Thermo and its subsidiaries develop, manufacture and market analytical and
environmental-monitoring instruments, alternative-energy systems, industrial
process equipment, papermaking and recycling equipment, biomedical products and
various devices based on advanced technologies. Thermo and its subsidiaries also
provide environmental engineering, metallurgical and analytical laboratory
services.
Acquisition Corp. was formed specifically for the purpose of effecting the
transactions contemplated by the Merger Agreement. It is not anticipated that
prior to the Merger Acquisition Corp. will have any significant assets or
liabilities other than its rights and obligations under the Merger Agreement or
that Acquisition Corp. will engage in any activities other than those incidental
to its formation and the transactions contemplated by the Merger Agreement.
The principal executive offices of Thermo and Acquisition Corp. are located
at 81 Wyman Street, P. O. Box 9046, Waltham, Massachusetts 02254-9046 (telephone
number: (617) 622-1000). See "Available Information" and "Business of Thermo."
BUSINESS OF SMC
SMC designs, manufactures, markets and services advanced diagnostic and
therapeutic products for the respiratory care market. SMC is a leading worldwide
supplier of pulmonary and metabolic exercise and nutrition diagnostic equipment.
In addition, SMC is a leader in the United States market for diagnostic
equipment used in the computerized analysis of sleep disorders, which frequently
result from serious pulmonary conditions. SMC also markets a High Frequency
Oscillatory Ventilator ("HFOV"), which incorporates patented technology for the
treatment of respiratory complications in newborn infants and pediatric
patients. The HFOV is SMC's initial product introduction into the therapeutic
segment of the respiratory care market. In addition, SMC manufactures and sells
non-invasive blood gas equipment and supplies, both as key components of its
respiratory products as well as on an original equipment manufacturer basis.
The principal executive offices of SMC are located at 22705 Savi Ranch
Parkway, Yorba Linda, California 92687 (telephone number: (714) 283-2228). See
"Business of SMC."
8
<PAGE> 15
MARKET PRICES
The high, low and closing prices of Thermo's Common Stock on the New York
Stock Exchange Composite Transactions Tape on April 9, 1996, the date preceding
the public announcement of the proposed Merger, were $40 1/2, $40 and $40 1/4,
respectively. The high, low and closing prices of Thermo's Common Stock on the
New York Stock Exchange Composite Transactions Tape on June , 1996 were
$ , $ and $ , respectively. Shareholders of SMC are
urged to obtain current quotations for the Thermo Common Stock.
The SMC Common Stock, SMC Series A Preferred Stock and SMC Series B
Preferred Stock are not currently, and have never previously been, traded on any
established public market. Price quotations for SMC Capital Stock are,
therefore, not available.
As of May 28, 1996, there were 7,975 record holders of Thermo Common Stock,
165 record holders of SMC Common Stock, nine record holders of SMC Series A
Preferred Stock and 14 record holders of SMC Series B Preferred Stock.
SMC has never paid cash dividends on the SMC Common Stock. Pursuant to the
SMC Articles, so long as any shares of SMC Series A Preferred Stock or SMC
Series B Preferred Stock are outstanding, SMC is prohibited from paying
dividends on the SMC Common Stock. In addition, SMC's loan agreement with its
senior lender currently contains provisions which prohibit SMC from paying cash
dividends on the SMC Common Stock.
OWNERSHIP OF SECURITIES
At the Record Date, there were outstanding a total of 1,970,822 shares of
SMC Common Stock, 3,820,000 shares of SMC Series A Preferred Stock and 1,187,414
shares of SMC Series B Preferred Stock (convertible into 1,411,888 shares of SMC
Common Stock, taking into account the conversion of accrued dividends on the SMC
Series B Preferred Stock). Accordingly, the Merger will be approved if holders
of 1,691,356 shares of SMC Common Stock (treating the SMC Series B Preferred
Stock as converted into SMC Common Stock for purposes of this vote), 2,865,000
shares of SMC Series A Preferred Stock and 890,561 shares of SMC Series B
Preferred Stock are voted in favor of the Merger. In addition, 601,600 shares of
SMC Common Stock subject to SMC Options and 382,157 shares of SMC Common Stock
subject to SMC Warrants were outstanding on the Record Date, and the weighted
average exercise price of the SMC Options and the SMC Warrants was $4.10 and
$8.17 per share, respectively. See "The Merger -- Interests of Certain Persons
in the Merger" and "Ownership of Thermo Common Stock and SMC Common Stock and
SMC Series B Preferred Stock."
As of the Record Date, the directors and the executive officers of SMC,
together with their affiliates, beneficially owned an aggregate of (i) 1,449,720
shares of SMC Common Stock and 382,477 shares of SMC Series B Preferred Stock,
constituting approximately 56% of the then outstanding SMC Common Stock
(treating the SMC Series B Preferred Stock as converted into SMC Common Stock
for purposes of this vote), (ii) 3,199,250 shares of SMC Series A Preferred
Stock, constituting approximately 84% of the then outstanding SMC Series A
Preferred Stock, and (iii) 382,477 shares of SMC Series B Preferred Stock,
constituting approximately 32% of the then outstanding SMC Series B Preferred
Stock.
As of January 1, 1996, approximately 5.1% of the shares of outstanding
Thermo Common Stock were held by directors and executive officers of Thermo and
their affiliates. The vote of stockholders of Thermo is not required to approve
the Merger Agreement or to consummate the Merger. See "The Merger -- Background
of the Merger and Related Matters."
RESALE OF THERMO COMMON STOCK RECEIVED IN THE MERGER; AFFILIATES
Certain officers, directors and principal shareholders of SMC have agreed
that, until such time as financial results covering at least thirty days of
combined operations of SMC and Thermo have been published by Thermo, they will
not sell, transfer or otherwise dispose of, or offer or agree to sell, transfer
or otherwise dispose of any shares of Thermo Common Stock received by them
pursuant to the Merger or any securities
9
<PAGE> 16
which may be paid as a dividend or otherwise distributed thereon or with respect
thereto or issued or delivered in exchange or substitution therefor. See "The
Merger -- Resale of Thermo Common Stock Received in the Merger; Affiliates."
The Registration Statement and this Proxy Statement/Prospectus do not
relate to or cover the resale after the Effective Time of shares of Thermo
Common Stock issued to shareholders of SMC in the Merger who may be deemed to be
"affiliates" of SMC and thus "underwriters" within the meaning of Rule 145 under
the Securities Act, and no person is authorized to make any use of this Proxy
Statement/Prospectus in connection with any such resale. Such securities may not
be publicly reofferred or resold by such persons except pursuant to an effective
registration statement under the Securities Act or pursuant to another
applicable exemption therefrom. For this purpose, the term "affiliate" means any
person who, directly, or indirectly through one or more intermediaries,
possesses the power to direct or cause the direction of the management and
policies of SMC, whether through the ownership of SMC Capital Stock, by
contract, or otherwise.
ACCOUNTING TREATMENT; REGULATORY APPROVALS
The Merger is expected to meet all of the conditions for
pooling-of-interests accounting.
The Merger is subject to the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 and the regulations thereunder (the
"Antitrust Improvements Act"), which provide that certain acquisition
transactions (including the Merger) may not be consummated until certain
information has been furnished to the Antitrust Division of the Department of
Justice (the "Antitrust Division") and the Federal Trade Commission (the "FTC")
and certain waiting period requirements have been satisfied. Thermo and SMC have
filed the required information and material with the Antitrust Division and the
FTC, but, as of the date of this Proxy Statement/Prospectus, the applicable
waiting period has not yet expired or been terminated. There can be no assurance
that the waiting period will expire without a challenge to the Merger from the
Antitrust Division or the FTC. Expiration or termination of the waiting period
does not preclude the Antitrust Division, the FTC or any other party from
challenging or seeking to delay or enjoin the Merger on antitrust or other
grounds. There can be no assurance that any such challenge, if made, would not
be successful; however, neither Thermo nor SMC believes that the Merger will
violate the antitrust laws. Any such action taken or threatened prior to the
consummation of the Merger could relieve Thermo or SMC of its respective
obligation to consummate the Merger. See "The Merger."
Except for the Antitrust Improvements Act filings, and filings with the
Secretary of State of the States of Delaware and California, no federal or state
regulatory approvals are required in order to consummate the Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to qualify as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
Neither SMC nor Thermo intends to request a ruling from the Internal Revenue
Service with respect to the Merger. Assuming that the Merger is a tax-free
reorganization, (i) no gain or loss will be recognized by Thermo or SMC and (ii)
no gain or loss will be recognized by shareholders of SMC other than holders of
SMC Series A Preferred Stock who elect to receive cash, holders of SMC Series B
Preferred Stock who do not convert such shares into SMC Common Stock prior to
the Effective Time, shareholders perfecting dissenters' rights and holders
receiving a cash settlement of fractional shares. If the Merger fails to qualify
as a reorganization under Section 368(a) of the Code, on the date of the
Effective Time each shareholder of SMC will recognize gain or loss on the
exchange of his, her or its SMC Capital Stock for Thermo Common Stock. See
"Certain Federal Income Tax Consequences." Holders of SMC Capital Stock are
urged to consult with their tax advisers to determine the particular tax
consequences of the Merger to them.
10
<PAGE> 17
SELECTED FINANCIAL INFORMATION OF THERMO
The selected financial information presented below as of and for the fiscal
years ended December 31, 1994 and December 30, 1995, and for the fiscal year
ended January 1, 1994, has been derived from Thermo's Consolidated Financial
Statements, which have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report included elsewhere in this Proxy
Statement/Prospectus. The selected financial information as of and for the
fiscal years ended December 28, 1991 and January 2, 1993, and as of January 1,
1994, has been derived from Thermo's Consolidated Financial Statements, which
have been audited by Arthur Andersen LLP, but have not been included in this
Proxy Statement/Prospectus. This information should be read in conjunction with
Thermo's Consolidated Financial Statements and related notes included elsewhere
in this Proxy Statement/Prospectus. The selected information for the three-month
periods ended April 1, 1995 and March 30, 1996 has not been audited but, in the
opinion of Thermo, includes all adjustments (consisting only of normal,
recurring adjustments) necessary to present fairly such information in
accordance with generally accepted accounting principles applied on a consistent
basis. The results of operations for the three-month period ended March 30, 1996
are not necessarily indicative of results for the entire year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR -----------------------
-------------------------------------------------------------- APRIL 1, MARCH 30,
1991(1) 1992(2) 1993(3) 1994(4) 1995 1995 1996(5)
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues............................. $ 842,538 $ 999,228 $1,354,508 $1,729,191 $2,207,417 $ 478,545 $ 635,094
---------- ---------- ---------- ---------- ---------- ---------- ----------
Costs and Expenses:
Cost of products and services
revenues......................... 532,904 608,975 755,493 928,645 1,209,639 258,447 364,738
Expenses for research and
development and new lines of
business......................... 84,595 106,466 183,965 233,099 269,584 63,143 67,397
Selling, general and administrative
expenses......................... 177,694 213,266 289,282 384,715 480,774 109,583 147,546
Write-off of acquired technology... -- -- -- -- -- -- 3,500
Restructuring and other
nonrecurring costs............... 3,709 -- 6,616 650 21,938 1,522 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
798,902 928,707 1,235,356 1,547,109 1,981,935 432,695 583,181
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating Income..................... 43,636 70,521 119,152 182,082 225,482 45,850 51,913
Gain on Issuance of Stock by
Subsidiaries....................... 27,367 30,212 39,863 25,283 80,815 12,883 28,892
Other Income (Expense), Net.......... 10,557 1,842 (27,548) (989) (6,802) (3,347) (5,472)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income Before Income Taxes, Minority
Interest and Change in Accounting
Principle.......................... 81,560 102,575 131,467 206,376 299,495 55,386 75,333
Provision for Income Taxes........... 25,765 27,750 33,513 70,703 98,900 18,434 22,330
Minority Interest Expense............ 7,269 13,902 21,086 30,962 60,515 7,404 12,561
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income Before Change in Accounting
Principle.......................... 48,526 60,923 76,868 104,711 140,080 29,548 40,442
Change in Accounting Principle, Net
of Tax(6).......................... -- 1,438 -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Income........................... $ 48,526 $ 59,485 $ 76,868 $ 104,711 $ 140,080 $ 29,548 $ 40,442
========== ========== ========== ========== ========== ========== ==========
Earnings per Share Before Change in
Accounting Principle:
Primary.......................... $ .56 $ .64 $ .74 $ .90 $ 1.12 $ .24 $ .31
========== ========== ========== ========== ========== ========== ==========
Fully diluted.................... $ .53 $ .60 $ .67 $ .80 $ .98 $ .22 $ .27
========== ========== ========== ========== ========== ========== ==========
Earnings per Share:
Primary.......................... $ .56 $ .62 $ .74 $ .90 $ 1.12 $ .24 $ .31
========== ========== ========== ========== ========== ========== ==========
Fully diluted.................... $ .53 $ .59 $ .67 $ .80 $ .98 $ .22 $ .27
========== ========== ========== ========== ========== ========== ==========
Weighted Average Shares:
Primary.......................... 86,333 95,811 104,203 116,500 125,483 120,873 132,492
========== ========== ========== ========== ========== ========== ==========
Fully diluted.................... 99,551 111,818 130,618 151,229 158,103 156,654 174,321
========== ========== ========== ========== ========== ========== ==========
</TABLE>
11
<PAGE> 18
SELECTED FINANCIAL INFORMATION OF THERMO (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR APRIL 1, MARCH 30,
1991(1) 1992(2) 1993(3) 1994(4) 1995 1995 1996(5)
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF
PERIOD):
Working Capital...................... $ 468,399 $ 508,685 $ 833,839 $1,150,732 $1,306,390 $1,120,391 $1,709,453
Total Assets......................... 1,212,519 1,837,983 2,507,597 3,061,935 3,744,908 3,144,590 4,638,413
Long-term Obligations................ 255,093 494,152 647,592 1,049,850 1,116,011 1,030,979 1,616,170
Common Stock of Subsidiaries Subject
to Redemption...................... 5,486 5,468 14,511 -- 17,513 17,288 17,591
Shareholders' Investment............. 489,538 563,826 873,720 1,007,486 1,299,834 1,068,357 1,405,371
Book Value per Share................. $ 5.61 $ 6.18 $ 8.10 $ 8.37 $ 9.86 $ 8.68 $ 10.33
========== ========== ========== ========== ========== ========== ==========
</TABLE>
- ---------------
(1) Reflects the issuance of $164.0 million principal amount of convertible
debentures.
(2) Reflects the August 1992 acquisition of Nicolet Instrument Corporation and
the issuance of $260.0 million principal amount of convertible debentures.
(3) Reflects the 1993 public offering of common stock for net proceeds of $246.0
million.
(4) Reflects the issuance of $345.0 million principal amount of convertible
debentures.
(5) Reflects the issuance of $585.0 million principal amount of subordinated
convertible debentures.
(6) Reflects the adoption in fiscal 1992 of Statement of Financial Accounting
Standards No. 106, "Accounting for Post-retirement Benefits Other Than
Pensions."
12
<PAGE> 19
SELECTED FINANCIAL INFORMATION OF SMC
The selected financial information presented below as of and for the fiscal
years ended September 30, 1994 and September 30, 1995, and for the fiscal year
ended September 30, 1993, has been derived from SMC's Consolidated Financial
Statements, which have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report included elsewhere in this Proxy
Statement/Prospectus. The selected financial information as of and for the
fiscal years ended September 30, 1991 and 1992, and as of September 30, 1993,
has been derived from SMC's Consolidated Financial Statements, which have been
audited by Arthur Andersen LLP, but have not been included in this Proxy
Statement/Prospectus. This information should be read in conjunction with the
SMC's Consolidated Financial Statements and related notes included elsewhere in
this Proxy Statement/Prospectus. The selected information for the six-month
periods ended March 31, 1995 and March 31, 1996 has not been audited but, in the
opinion of SMC, includes all adjustments (consisting only of normal, recurring
adjustments) necessary to present fairly such information in accordance with
generally accepted accounting principles applied on a consistent basis. The
results of operations for the six-month period ended March 31, 1996 are not
necessarily indicative of results for the entire year.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED SEPTEMBER 30, ENDED MARCH 31,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues............................................... $48,248 $49,071 $57,182 $55,485 $62,874 $30,079 $32,060
Costs and Expenses:
Cost of products and services revenues............... 25,524 24,647 27,757 27,338 30,943 14,803 14,293
Expenses for research and development................ 3,376 3,333 3,742 3,945 3,225 1,776 1,348
Selling, general and administrative expenses......... 16,138 17,578 21,177 22,017 28,786 12,495 13,750
------- ------- ------- ------- ------- ------- -------
45,038 45,558 52,676 53,300 62,954 29,074 29,391
------- ------- ------- ------- ------- ------- -------
Operating Income (Loss)................................ 3,210 3,513 4,506 2,185 (80) 1,005 2,669
Other Income (Expense), Net............................ (2,018) (1,037) (1,935) (901) (607) 24 (915)
------- ------- ------- ------- ------- ------- -------
Income Before Income Taxes and
Change in Accounting Principle....................... 1,192 2,476 2,571 1,284 (687) 1,029 1,754
Provision (Benefit) for Income Taxes................... 77 109 195 729 (189) 427 702
------- ------- ------- ------- ------- ------- -------
Income (Loss) Before Change in Accounting Principle,
Net of Tax........................................... 1,115 2,367 2,376 555 (498) 602 1,052
Change in Accounting Principle, Net of Tax(1).......... -- -- -- (428) -- -- --
------- ------- ------- ------- ------- ------- -------
Net Income (Loss)...................................... 1,115 2,367 2,376 127 (498) 602 1,052
Preferred Stock Dividends.............................. 1,228 1,228 1,228 1,228 989 495 495
------- ------- ------- ------- ------- ------- -------
Net Income (Loss) Available to Common Shareholders..... $ (113) $ 1,139 $ 1,148 $(1,101) $(1,487) $ 107 $ 557
======= ======= ======= ======= ======= ======= =======
Earnings (Loss) per Common and Equivalent Share Before
Change in Accounting Principle:
Primary............................................ $ (.09) $ .60 $ .49 $ (.35) $ (.76) $ .05 $ .24
======= ======= ======= ======= ======= ======= =======
Fully diluted...................................... $ (.09) $ .56 $ .49 $ (.35) $ (.76) $ .05 $ .23
======= ======= ======= ======= ======= ======= =======
Earnings (Loss) per Common and Equivalent Share:
Primary............................................ $ (.09) $ .60 $ .49 $ (.57) $ (.76) $ .05 $ .24
======= ======= ======= ======= ======= ======= =======
Fully diluted...................................... $ (.09) $ .56 $ .49 $ (.57) $ (.76) $ .05 $ .23
======= ======= ======= ======= ======= ======= =======
Weighted Average Shares:
Primary............................................ 1,313 1,894 2,358 1,916 1,961 2,338 2,336
======= ======= ======= ======= ======= ======= =======
Fully diluted...................................... 1,313 4,192 2,358 1,916 1,961 2,338 4,579
======= ======= ======= ======= ======= ======= =======
BALANCE SHEET DATA (AT END OF PERIOD):
Working Capital........................................ $ 2,983 $ 1,486 $ 2,252 $ 5,991 $ 6,250 $ 5,884 $ 7,031
Total Assets........................................... 30,834 32,559 32,623 34,849 40,140 36,300 37,775
Long-term Obligations and Redeemable Preferred Stock... 21,925 15,802 15,358 18,792 17,646 17,223 18,208
Shareholders' Deficit.................................. (11,145) (5,815) (3,587) (5,287) (5,468) (3,383) (5,549)
Book Value per Share................................... $ (8.48) $ (3.14) $ (1.91) $ (2.71) $ (2.78) $ (1.73) $ (2.82)
======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Reflects the adoption in Fiscal 1994 of Statement of Financial Accounting
Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" and SFAS No. 109, "Accounting for Income
Taxes."
13
<PAGE> 20
UNAUDITED PRO FORMA COMBINED SELECTED FINANCIAL INFORMATION
The following table presents unaudited pro forma combined selected
financial information for Thermo and SMC, historical selected financial
information for Thermo and SMC and unaudited pro forma combined per share data
for Thermo and SMC giving effect to the acquisition of 100% of the shares of SMC
Capital Stock by Thermo. The pro forma information combines the September 30
fiscal year end financial information of SMC and the calendar year end financial
information of Thermo. The historical fiscal year financial information is
derived from the financial statements of Thermo and SMC, including the related
notes thereto, included elsewhere in this Proxy Statement/Prospectus. The
information for the three months ended March 30, 1996 is derived from unaudited
interim consolidated financial statements of Thermo and SMC. The pro forma
combined information has been prepared on the assumption that the Merger will be
accounted for on a pooling-of-interests basis. Accordingly, the pro forma
combined financial information is restated as if Thermo and SMC had been
combined for all periods. The pro forma combined financial information does not
include the effect of nonrecurring bonus payments of approximately $8.3 million
to employees of SMC, resulting from the Merger, and other nonrecurring
transaction costs of $1.2 million which will be recorded in the period in which
the Merger is consumated.
Pro forma combined per Thermo share equivalent data has been calculated
based on the pro forma combined data for Thermo Common Stock, assuming no
holders of SMC Common Stock exercise dissenters' rights and assuming full
conversion of SMC Series A Preferred Stock and SMC Series B Preferred Stock into
SMC Common Stock, multiplied by .2864, which is the fraction of one Thermo share
into which one share of SMC Common Stock would be exchanged pursuant to the
Merger.
This data is not necessarily indicative of the results of the future
operations of the combined entity or the actual results that would have occurred
had the Merger been consummated prior to the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED
------------------------------------- MARCH 30,
1993 1994 1995(1) 1996
--------- --------- --------- ------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
PRO FORMA COMBINED:
STATEMENT OF INCOME DATA:
Revenues..................................................... $1,411,690 $1,784,676 $2,270,291 $ 652,385
Net Income Before Change in Accounting Principle............. 79,244 105,266 139,582 41,233
BALANCE SHEET DATA (AT END OF PERIOD):
Working Capital.............................................. $ 836,091 $1,156,723 $1,312,640 $1,716,484
Total Assets................................................. 2,540,220 3,096,784 3,785,048 4,676,188
Long-term Obligations and Redeemable Preferred Stock......... 662,950 1,068,642 1,133,657 1,634,378
Common Stock of Subsidiaries Subject to Redemption........... 14,511 -- 17,513 17,591
Shareholders' Investment..................................... 870,133 1,002,199 1,294,366 1,399,822
PER SHARE DATA:
THERMO (HISTORICAL)
Book Value per Common Share.................................. $ 9.86 $ 10.33
Earnings per Share:
Primary.................................................... $ .74 $ .90 $ 1.12 $ .31
Fully diluted.............................................. $ .67 $ .80 $ .98 $ .27
PRO FORMA:
COMBINED PER SHARE OF THERMO COMMON STOCK:
Book Value per Common Share.................................. $ 9.74 $ 10.21
Earnings per Share Before Change in Accounting Principle:
Primary.................................................... $ .75 $ .89 $ 1.10 $ .31
Fully diluted.............................................. $ .68 $ .80 $ .97 $ .27
COMBINED PER THERMO SHARE EQUIVALENT:
Book Value per Common Share.................................. $ 2.79 $ 2.92
Cash Dividends Declared per Share............................ -- -- -- --
Earnings per Share Before Change in Accounting Principle:
Primary.................................................... $ .21 $ .25 $ .32 $ .09
Fully diluted.............................................. $ .19 $ .23 $ .28 $ .08
</TABLE>
14
<PAGE> 21
UNAUDITED PRO FORMA COMBINED SELECTED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED SEPTEMBER 30, ENDED
------------------------------------- MARCH 31,
1993 1994 1995 1996
--------- --------- --------- ------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
SMC (HISTORICAL)
Book Value per Common Share.................................. $ (2.78) $ (2.82)
Earnings (Loss) per Common and Equivalent Shares Before
Change in Accounting Principle:
Primary.................................................... $ .49 $ (.35) $ (.76) $ .23
Fully diluted.............................................. $ .49 $ (.35) $ (.76) $ .17
</TABLE>
- ---------------
(1) The results of operations of SMC for the three months ended December 31,
1995 have not been included in the pro forma combined financial information.
Revenues and net income before change in accounting principle and preferred
stock dividends were $14,769,000 and $261,000, respectively, for the three
months ended December 31, 1995.
15
<PAGE> 22
SPECIAL MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished to holders of SMC
Capital Stock in connection with the solicitation of proxies by the Board of
Directors of SMC for use at the Special Meeting, which will be held at SMC's
corporate offices located at 22705 Savi Ranch Parkway, Yorba Linda, California
92687, on Friday, June 28, 1996, beginning at 10:00 a.m. Pacific Time, and at
any adjournments or postponements thereof. This Proxy Statement/Prospectus is
accompanied by a form of proxy for use at the Special Meeting.
This Proxy Statement/Prospectus also constitutes the Prospectus of Thermo
with respect to the shares of Thermo Common Stock to be issued pursuant to the
Merger, which Prospectus is part of a Registration Statement on Form S-4 filed
by Thermo with the Commission under the Securities Act.
No vote by the stockholders of Thermo is required to consummate the Merger.
PURPOSES; RECOMMENDATION OF THE SMC BOARD OF DIRECTORS AND MANAGEMENT
The purposes of the Special Meeting are (i) to consider and vote upon a
proposal to adopt and approve the Merger Agreement and the transactions
contemplated thereby and (ii) to transact such other business as may properly
come before the Special Meeting and any adjournments or postponements thereof.
The Board of Directors of SMC is not presently aware of any such other business.
See "The Merger."
The management of SMC, including all of the members of SMC's Board of
Directors, have approved the Merger Agreement and the transactions contemplated
thereby and believe the Merger and the other transactions contemplated by the
Merger Agreement are fair to and in the best interests of SMC and its
shareholders. THE MANAGEMENT AND BOARD OF DIRECTORS OF SMC RECOMMEND THAT SMC
SHAREHOLDERS VOTE IN FAVOR OF THE ADOPTION AND APPROVAL OF THE MERGER AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED THEREBY.
RECORD DATE
Only holders of record of SMC Capital Stock as of the close of business on
May 28, 1996 are entitled to receive notice of and to vote at the Special
Meeting and any adjournments or postponements thereof. As of the close of
business on May 28, 1996, 1,970,822 shares of SMC Common Stock, 3,820,000 shares
of SMC Series A Preferred Stock and 1,187,414 shares of SMC Series B Preferred
Stock (convertible into 1,411,888 shares of SMC Common Stock, taking into
account the conversion of accrued dividends on the SMC Series B Preferred
Stock), were outstanding.
VOTING AND REVOCATION OF PROXIES
Each share of SMC Common Stock is entitled to one vote and each share of
SMC Series B Preferred Stock (taking into account the conversion of the accrued
dividends on the SMC Series B Preferred Stock) is entitled to one vote per share
of SMC Common Stock into which it is convertible, upon each matter properly
submitted to a vote of SMC shareholders at the Special Meeting, voting together
as a single class. In addition, each share of SMC Series B Preferred Stock is
entitled to one vote upon each matter properly submitted to a vote of holders of
shares of SMC Series B Preferred Stock at the Special Meeting, voting separately
as a class. Each share of SMC Series A Preferred Stock is entitled to one vote
upon each matter properly submitted to a vote of holders of shares of SMC Series
A Preferred Stock at the Special Meeting, voting separately as a class.
Shares of SMC Capital Stock that are entitled to vote and are represented
by a proxy properly signed and received at or prior to the Special Meeting,
unless subsequently properly revoked, will be voted in accordance with the
instructions indicated thereon. If a proxy is signed and returned without
indicating any voting instructions, shares of SMC Capital Stock represented by
such proxy will be voted FOR the proposal to adopt and approve the Merger
Agreement and the transactions contemplated thereby. The Board of Directors of
SMC is not currently aware of any business to be acted upon at the Special
Meeting other than as described herein. If, however, other matters are properly
brought before the Special Meeting or any adjournments or
16
<PAGE> 23
postponements thereof, the persons appointed as proxies will have the discretion
to vote or act thereon in accordance with their best judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before the shares represented by such proxy are voted at
the Special Meeting by (i) filing with the Secretary of SMC a written notice of
revocation bearing a later date than the proxy, (ii) duly executing a proxy
relating to the same shares bearing a later date and delivering it to the
Secretary of SMC, or (iii) voting in person at the Special Meeting. Attendance
at the Special Meeting will not in and of itself constitute a revocation of a
proxy. All written notices of revocation and other communications with respect
to revocation of proxies should be addressed as follows: SensorMedics
Corporation, 22705 Savi Ranch Parkway, Yorba Linda, California 92687, Attention:
Secretary, and must be received before the taking of the vote at the Special
Meeting.
VOTES REQUIRED
Under California Law and pursuant to the SMC Articles and the SMC By-Laws,
the affirmative vote of (i) holders of at least a majority of the outstanding
shares of SMC Common Stock and SMC Series B Preferred Stock voting together as a
single class (for purposes of such vote, all of the shares of SMC Series B
Preferred Stock will be counted as if converted into shares of SMC Common Stock
at the then applicable conversion rate), (ii) holders of at least seventy-five
percent (75%) of the outstanding shares of SMC Series A Preferred Stock, voting
separately as a class and (iii) holders of at least seventy-five (75%) of the
outstanding shares of SMC Series B Preferred Stock, voting separately as a
class, are required to approve the Merger Agreement and the transactions
contemplated thereby. Accordingly, the Merger will be approved if holders of
1,691,356 shares of SMC Common Stock (treating the SMC Series B Preferred Stock
as converted into shares of SMC Common Stock for purposes of this vote),
2,865,000 shares of SMC Series A Preferred Stock and 890,561 shares of SMC
Series B Preferred Stock are voted in favor of the Merger. However, under the
Merger Agreement Thermo's obligation to consummate the Merger is conditioned
upon approval of the Merger and adoption of the Merger Agreement by holders of
at least 95% of the outstanding shares of each of the SMC Common Stock, the SMC
Series A Preferred Stock and the SMC Series B Preferred Stock as of the Record
Date. Accordingly, this condition will be satisfied if holders of 1,872,281
shares of SMC Common Stock, 3,629,000 shares of SMC Series A Prefered Stock and
1,128,044 shares of SMC Series B Preferred Stock vote in favor of the Merger.
The presence, in person or by proxy, at the Special Meeting of the holders
of at least a majority of the votes entitled to be cast at the Special Meeting
is necessary to constitute a quorum for the transaction of business. Abstentions
will be counted as present for the purposes of determining whether a quorum is
present but will not be counted as votes cast in favor of the Merger Agreement.
Because the votes on the Merger Agreement require, among other special
shareholder approvals, the approval of a majority of the votes entitled to be
cast by the holders of the outstanding shares of SMC Common Stock and SMC Series
B Preferred Stock (for purposes of such vote, all of the shares of SMC Series B
Preferred Stock will be counted as if converted into shares of SMC Common Stock
at the then applicable conversion rate) voting as a single class, abstentions
will have the same effect as a negative vote on these proposals.
The adoption of the Merger Agreement and the approval of the Merger
Agreement by holders of SMC Capital Stock shall constitute their ratification
and approval of all actions taken, and all instruments, documents and
certificates executed, by or on behalf of SMC to give effect to the Merger and
the transactions contemplated thereby.
As of the Record Date, the directors and the executive officers of SMC,
together with their affiliates, beneficially owned an aggregate of (i) 1,449,720
shares of SMC Common Stock and 382,477 shares of SMC Series B Preferred Stock,
constituting approximately 56% of the then outstanding SMC Common Stock
(treating the SMC Series B Preferred Stock as converted into shares of SMC
Common Stock for purposes of this vote), (ii) 3,199,250 shares of SMC Series A
Preferred Stock, constituting approximately 84% of the then outstanding SMC
Series A Preferred Stock and (iii) 382,477 shares of SMC Series B Preferred
Stock, constituting approximately 32% of the then outstanding SMC Series B
Preferred Stock.
17
<PAGE> 24
SOLICITATION OF PROXIES
Thermo will bear the costs incurred in preparing this Proxy
Statement/Prospectus (and the related Registration Statement) and the form of
proxy, except that SMC will bear the costs of mailing proxy materials to SMC
shareholders in connection with the Special Meeting. In addition to solicitation
by mail, directors, officers and employees of SMC, who will not be specifically
compensated for such services, may solicit proxies from SMC shareholders
personally or by telephone, telecopy, telegram or other means of communication.
SMC SHAREHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
18
<PAGE> 25
THE MERGER
BACKGROUND OF THE MERGER AND RELATED MATTERS
During 1995, Thermo determined that it would expand its medical products
business and focused on the respiratory market segment as an area of expansion.
In that regard, John T. Keiser, President of Thermo Biomedical and James
DaCosta, Director, Corporate Development of Thermo, contacted SMC. On June 6,
1995, Mr. DaCosta contacted George Holmes, President and Chief Executive Officer
of SMC, to arrange for a meeting with Mr. Holmes at SMC's office in Yorba Linda.
Mr. Holmes stated that management was not actively pursuing a sale of SMC.
However, Mr. Holmes would entertain a visit by Mr. Keiser and Mr. DaCosta.
On June 27, 1995, Mr. Keiser and Mr. DaCosta met with Mr. Holmes and Pierre
Sice, Chief Financial Officer of SMC. During the meeting, Mr. Keiser and Mr.
DaCosta reviewed Thermo's history and its interest in the respiratory therapy
market. Mr. Holmes and Mr. Sice reviewed SMC's history and future business
plans. In addition to the discussion, Mr. Keiser and Mr. DaCosta toured the SMC
facility.
On July 21, 1995, Mr. DaCosta telephoned Mr. Holmes to inform him that
Thermo was interested in having additional discussions with SMC regarding a
possible acquisition. On July 24, 1995, Mr. DaCosta sent Mr. Holmes a letter
outlining Thermo's interest in SMC and informing him that Thermo would pursue
this interest after it closed an unrelated transaction on which it was working.
In early October 1995, Thermo was informed that SMC had hired the
investment banking company, Cowen & Company ("Cowen"), to help SMC evaluate
strategic alternatives to enhance shareholder value. On October 26, 1995, Cowen
sent Mr. DaCosta an SMC Executive Summary and a Confidentiality Agreement.
On November 7, 1995, Mr. Keiser and Mr. DaCosta revisited SMC and met with
Mr. Holmes, Mr. Sice, William Ross, President of SensorMedics Critical Care
Corporation, a wholly owned subsidiary of SMC ("Critical Care"), and
representatives of Cowen. SMC's management provided Mr. Keiser with a business
presentation of SMC's strategic product and business lines. Following the
presentation, Mr. Keiser and Mr. DaCosta informed Mr. Holmes that Thermo was
interested in continuing discussions regarding the acquisition of SMC and would
need additional financial and business information.
On November 15, 1995, Cowen sent a Confidential Information Package on SMC
to Mr. DaCosta. From November 15, 1995 through February 14, 1996, Mr. Keiser and
Mr. DaCosta performed a business evaluation of SMC. During that time, Mr. Keiser
and Mr. DaCosta had several telephone conversations with Mr. Holmes and Mr. Sice
and received additional SMC financial and business information from SMC and
Cowen. On February 14, 1996, Mr. Keiser and Mr. DaCosta reviewed their business
evaluation of SMC with senior management of Thermo and received approval to make
an offer to acquire SMC.
On March 14, 1996, Mr. DaCosta sent Mr. Holmes a Letter of Intent to
acquire SMC. The Letter of Intent outlined Thermo's interest in acquiring SMC in
a tax-free exchange of SMC Capital Stock for Thermo Common Stock valued at
approximately $61 million. Negotiations between Thermo and SMC continued from
March 14, 1996 until April 3, 1996.
On April 3, 1996, Mr. Keiser and Mr. DaCosta visited and met with Mr.
Holmes, Mr. Sice and Mr. Ross. Thermo agreed to increase its offer to
approximately $62 million in Thermo Common Stock. SMC agreed to Thermo's offer
and executed a Letter of Intent.
On April 10, 1996, Thermo issued a press release announcing the signing of
the Letter of Intent with SMC.
Numerous telephone conversations and meetings among counsel for Thermo and
SMC and among representatives of Thermo and SMC subsequently ensued. During
April 1996 through June 1996, Thermo and SMC negotiated the terms of the Merger
Agreement and related agreements. Simultaneously, Thermo completed its business
review of SMC. On June , 1996 the Merger Agreement was executed.
19
<PAGE> 26
THERMO'S REASONS FOR THE MERGER
Thermo believes that the acquisition of SMC will provide Thermo with an
established, well-recognized provider of diagnostic and therapeutic products
servicing the pulmonary function diagnostics market, the high frequency
ventilation market and the sleep diagnostics market which, in turn, will allow
Thermo to further penetrate the respiratory care market. At the same time,
Thermo hopes both to identify opportunities to commercialize SMC's other
existing technologies and to augment its research and development activities
with those of Thermo with a goal of creating new technologies. The structure of
the Merger was established to achieve the general objectives of Thermo, in light
of relevant financial, legal, tax and other considerations. See "Certain Federal
Income Tax Consequences."
SMC'S REASONS FOR THE MERGER
The management and the Board of Directors of SMC believe that the terms of
the Merger are fair to, and in the best interests of, SMC and its shareholders
and unanimously approve the Merger Agreement and the transactions contemplated
thereby. SMC's management believes that a number of significant strategic
benefits will accrue from the Merger and that SMC's technology base, coupled
with Thermo's access to capital, may be of significant benefit to SMC, its
employees and its shareholders. There can be no assurances, however, that all of
the benefits expected from the Merger will be fully realized.
In evaluating the Merger, the Board of Directors and management of SMC
considered and evaluated, among other things, (i) the consideration offered by
Thermo for the outstanding shares of SMC Capital Stock; (ii) information
concerning the results of operations, performance, financial condition and
prospects of Thermo; (iii) the technology and customer base of Thermo's
business; (iv) the prospects for future growth in value of Thermo Common Stock;
(v) current economic, industry and market conditions affecting both SMC and
Thermo; (vi) the terms of the Merger Agreement; (vii) the tax-free nature of the
Merger; (viii) the potential impact of the Merger on SMC's employees and
customers and (ix) the advice of Cowen regarding the value of the Merger
consideration. Based on all of these matters, and such other matters as SMC
deemed relevant, the Board of Directors and management of SMC unanimously
support the Merger Agreement and recommend that the holders of SMC Capital Stock
vote for its approval and adoption.
ACCESS TO CAPITAL. SMC currently possesses a number of technologies with
commercial potential, including, among others, mucocilliary transport, sputum
induction, transcutaneous carbon dioxide and oxygen monitoring and nitric oxide
delivery and monitoring systems. Due to SMC's limited access to capital, SMC has
had to ration capital among, and has not been able to fully exploit, these
technologies. To achieve the full potential value of these technologies for
SMC's shareholders would require significant amounts of future capital. Thermo's
demonstrated ability to raise capital is expected to be a significant benefit in
the continued development of these projects, as well as to the ability of SMC to
enhance worldwide sales, service and manufacturing capabilities.
COMPATIBILITY. SMC has been approached by a number of firms since its
inception about potentially acquiring SMC. The offers that resulted from these
discussions were not considered to represent the fair value of SMC and/or the
acquiring corporation was not viewed as a good fit for the capabilities,
markets, employees and culture of SMC. SMC's management believes that the
proposed Merger overcomes all of the shortcomings of previous offers. In the
opinion of SMC's management, the Merger with Thermo will provide SMC's
shareholders and employees with a fair value for their SMC Capital Stock.
Further, SMC will become an important part of a growing, well-respected
corporation, which will provide expanded opportunities for the growth and
development of SMC's employees.
SHAREHOLDER LIQUIDITY. Thermo Common Stock, which is traded on the New
York Stock Exchange, will provide greater liquidity to SMC's shareholders than
may be possible with SMC Capital Stock. SMC Capital Stock is not currently, and
has never been, traded on any established public market.
SUMMARY. The Board of Directors and management of SMC has concluded, in
light of the above factors and such other factors as they have considered
appropriate, that the terms of the Merger Agreement are fair to, and that the
Merger is in the best interests of, SMC and its shareholders. For information
20
<PAGE> 27
concerning the interests of certain members of SMC management in the Merger, see
"The Merger -- Interests of Certain Persons in the Merger."
STRUCTURE AND TERMS OF THE MERGER
The detailed terms of and conditions to the Merger are contained in the
Merger Agreement, which is included in full as Appendix A to this Proxy
Statement/Prospectus and incorporated herein by reference. The description of
the terms of the Merger contained herein is qualified in its entirety by, and
made subject to, the more complete information set forth in the Merger
Agreement.
If the Merger is consummated, the outstanding shares of Acquisition Corp.
will be converted into new shares of SMC Common Stock (which will be held by
Thermo) and all of the previously outstanding shares of SMC Capital Stock (other
than (i) shares of SMC Series A Preferred Stock not elected to be converted into
shares of Thermo Common Stock, (ii) shares of SMC Series B Preferred Stock not
converted into SMC Common Stock prior to the Effective Time and (iii) shares
with respect to which dissenters' rights are perfected) will be converted into
shares of Thermo Common Stock. As a result of the Merger, SMC will become a
wholly owned subsidiary of Thermo, and each person who previously held shares of
SMC Capital Stock (other than those who perfect dissenters' rights) will
receive, upon the surrender of their stock certificates to a designated agent of
Thermo, (i) .2864 share of Thermo Common Stock for each share of SMC Common
Stock held, (ii) either $1.74 in cash or .0411 share of Thermo Common Stock, as
elected, for each share of SMC Series A Preferred Stock held, and (iii) $12.51
in cash for each share of SMC Series B Preferred Stock held which has not been
converted into shares of SMC Common Stock prior to the Effective Time.
Assuming all holders of shares of SMC Series A Preferred Stock elect to
receive Thermo Common Stock, all shares of SMC Series B Preferred Stock are
converted into shares of SMC Common Stock prior to the Effective Time, no SMC
shareholders exercise dissenters' rights and no SMC Options or SMC Warrants are
exercised prior to the Merger, based on the number of shares of SMC Capital
Stock outstanding at the Record Date, approximately 1,125,835 shares of Thermo
Common Stock will be issued to former SMC shareholders upon the consummation of
the Merger. As a result, a total of approximately 139,645,805 shares of Thermo
Common Stock will then be outstanding, and approximately 0.8% of the total, will
be held by former holders of SMC Capital Stock.
ASSUMPTION OF SMC STOCK OPTIONS AND WARRANTS
At or prior to the Effective Time, Thermo and SMC shall take all action
necessary to cause the assumption by Thermo as of the Effective Time of the SMC
Options and SMC Warrants outstanding as of the Effective Time. Each of the SMC
Options and SMC Warrants shall be converted on substantially equivalent terms
without any action on the part of the holder thereof into options or warrants,
as the case may be, to purchase Thermo Common Stock as of the Effective Time.
The number of shares of Thermo Common Stock that each recordholder of SMC
Options ("Optionholders") and SMC Warrants ("Warrantholders") shall be entitled
to receive upon exercise of such options or warrants shall be the number of
whole shares determined by multiplying the number of shares of SMC Common Stock
subject to such option or warrant, as of the Effective Time, times .2864. The
exercise price of each share of Thermo Common Stock subject to an assumed SMC
Option or SMC Warrant shall be the amount (rounded up to the nearest whole cent)
obtained by dividing the exercise price per share of SMC Common Stock at which
such option or warrant is exercisable immediately before the Effective Time by
.2864. Only whole shares of Thermo Common Stock shall be issued upon exercise of
former options and warrants to purchase SMC Common Stock, and the holder of such
option or warrant shall receive in cash the fair market value of the fractional
share, net of the applicable exercise price of the fractional share and
applicable withholding tax. As of May 28, 1996, 601,600 shares of SMC Common
Stock were subject to outstanding SMC Options, which would be equivalent to
approximately 172,298 shares of Thermo Common Stock after conversion, and
382,157 shares of SMC Common Stock were subject to outstanding SMC Warrants,
which would be equivalent to approximately 109,449 shares of Thermo Common Stock
after conversion.
21
<PAGE> 28
INDEMNIFICATION OF THERMO; ESCROW
Upon consummation of the Merger, Indemnity Escrowed Shares will be
delivered into escrow to provide indemnification to Thermo against costs,
liabilities or damages incurred, paid by or imposed upon Thermo, Acquisition
Corp. or SMC after the Effective Time as a result of misrepresentations,
breaches of warranties and breaches of covenants contained in the Merger
Agreement, the Escrow Agreement and the other agreements executed in connection
therewith other than claims relating to the FDA Matter. See Article 3 of the
Merger Agreement and Section 4 of the Escrow Agreement for a description of the
representations and warranties and covenants that are covered by the Escrow
Agreement. In addition, to the extent that the net assets (total assets minus
total liabilities) of SMC as of the Effective Time, as determined pursuant to
the Merger Agreement, are less than $11,651,000, Thermo shall be entitled to
receive Indemnity Escrowed Shares having a value equal to such deficiency.
In the event Thermo has an appropriate claim for indemnification, Indemnity
Escrowed Shares held in the escrow account will be returned to Thermo in
satisfaction of the claim. The amount of indemnification to which Thermo would
be entitled with respect to an indemnifiable claim shall be determined and
computed by reference to all losses to Thermo, Acquisition Corp. and/or SMC
(including, without limitation, diminution in value of the shares of the capital
stock of SMC) and shall be deemed to include all losses, liabilities, expenses
or costs incurred by Thermo, Acquisition Corp. and/or SMC, including reasonable
attorneys' fees ("Damages"). With respect to breaches of representations and
warranties by SMC in the Merger Agreement, Thermo will be entitled to
indemnification only if and when the total of all Damages relating thereto
exceeds $250,000, at which point Thermo will be entitled to indemnification for
all such Damages, and not just those in excess of $250,000. With respect to
Damages incurred by Thermo in connection with all other matters for which Thermo
is entitled to indemnification, including any deficiency in net assets of SMC
described above, Thermo will be entitled to indemnification for all such
Damages.
If a claim is made, the escrow agent will deliver to Thermo an amount of
shares of Thermo Common Stock with a total value equal to Thermo's Damages
within 30 days of the demand unless written objection to such demand is received
by the escrow agent and Thermo from the Shareholder Representative (as defined
below). If the Shareholder Representative objects to Thermo's claim, the dispute
may be submitted to a court of competent jurisdiction if not previously settled.
George Holmes has agreed to serve as representative of the former SMC
shareholders for purposes of the Escrow Agreement (the "Shareholder
Representative"). Any action taken by the Shareholder Representative with
respect to the settlement of a claim against the escrowed shares will be binding
on all former SMC shareholders. The Shareholder Representative will have the
right to sell shares of Thermo Common Stock held in escrow in order to obtain
funds to pay any expenses incurred or anticipated to be incurred in connection
with his services.
The Escrow Agreement requires the escrow agent to deliver to the former SMC
shareholders the Indemnity Escrowed Shares remaining in escrow one year after
the Effective Time, except that if there is a claim by Thermo at or prior to
such date, the escrow agent will retain Indemnity Escrowed Shares in an amount
sufficient to cover such claims until they are resolved. Except as described
below, SMC is not aware of any claims threatened or asserted that it expects to
give rise to a right of indemnification under the Escrow Agreement. It should be
understood, however, that claims may arise in amounts which would result in all
of the Indemnity Escrowed Shares being either distributed to Thermo or sold by
the Shareholder Representative pursuant to the Escrow Agreement, in which event
none of the Indemnity Escrowed Shares would be distributed to the shareholders
at the end of the escrow period.
On September 21, 1993, SMC received a letter from the U.S. Food and Drug
Administration ("FDA") proposing to assess civil money penalties against SMC and
its Chief Executive Officer in the amount of $1,000,000 each for marketing
products without a 510(k) premarket notification clearance or a premarket
approval (the "FDA Matter"). On October 12, 1993, SMC requested a hearing in
response to the letter from the FDA. A date for the hearing has not yet been
established. Although settlement discussions have occurred with respect to this
matter, no settlement has been reached. SMC believes that it did not violate the
Federal Food, Drug and Cosmetic Act, 21 U.S.C. 301 et seq. and the applicable
rules and regulations thereunder. No
22
<PAGE> 29
assurance, however, can be given that SMC will not ultimately incur some
liability with respect to the FDA Matter. To provide Thermo with indemnification
for certain claims resulting from the FDA Matter, the FDA Shares will be
delivered in escrow pursuant to the Escrow Agreement. In the event Thermo has an
appropriate claim for indemnification with respect to monetary penalties
incurred as a result of a judgment, settlement or other legally binding
resolution of the FDA Matter, a portion or all of the FDA Shares will be
returned to Thermo in order to satisfy such claim. Thermo's right to be
indemnified for such claims shall be limited to the return of the FDA Shares.
The Escrow Agreement requires the escrow agent to deliver to the former SMC
shareholders the FDA Shares remaining in escrow 60 days after a legally binding
resolution of the FDA Matter. There is no time limit for the resolution of the
FDA Matter, and it is possible that no FDA Shares will be returned to the former
SMC shareholders. Moreover, Thermo shall be entitled to make a claim for
indemnification against the Indemnity Escrowed Shares with respect to Damages
other than monetary penalties incurred in connection with the FDA Matter.
For purposes of determining the number of Indemnity Escrowed Shares or FDA
Shares, as the case may be, which would be returned to Thermo in satisfaction of
a claim, each share will be valued at the closing price of Thermo Common Stock
on the New York Stock Exchange on the last trading day prior to the date the
Effective Time occurs. Thus, for purposes of satisfying the indemnification
requirements of the Escrow Agreement, the former SMC shareholders would not have
the benefit of any increase, nor the risk of any decrease, in the market price
of shares of Thermo Common Stock after the Effective Time.
Shares held in escrow will be registered in the name of the escrow agent,
and the shareholders will be entitled to instruct the escrow agent how to vote
his, her or its shares with respect to matters placed before the Thermo
shareholders. SMC shareholders will be entitled to directly receive cash
dividends, if any, paid or declared out of earned surplus on the escrowed shares
during the escrow period; however, any additional shares of Thermo Common Stock
or other property that are distributed with respect to the escrowed shares
during the escrow period will be held pursuant to the Escrow Agreement to
satisfy any indemnification claims.
PROCEDURE FOR EXCHANGE OF SHARES; FRACTIONAL SHARES
Promptly following the consummation of the Merger, Boston Equiserve, L.P.,
acting in the capacity of exchange agent (the "Exchange Agent"), will mail to
each former SMC shareholder a form of letter of transmittal, together with
instructions for the exchange of such holder's certificates representing SMC
Common Stock, SMC Series A Preferred Stock or SMC Series B Preferred Stock, as
the case may be, for certificates representing shares of Thermo Common Stock or
cash, as the case may be. Upon surrender to the Exchange Agent of one or more
certificates for SMC Common Stock together with a properly completed letter of
transmittal, the Exchange Agent will issue and mail to the former SMC
shareholder a certificate representing a number of shares of Thermo Common Stock
that is equal to the number of shares of Thermo Common Stock into which such
shares of SMC Common Stock have been converted pursuant to the Merger (less such
shareholder's pro rata portion of the Indemnity Escrowed Shares and FDA Shares),
and, where applicable, a check for the amount representing any fractional share
determined in the manner described in the following paragraph. Upon surrender to
the Exchange Agent of one or more certificates for SMC Series A Preferred Stock,
together with a properly completed letter of transmittal, the Exchange Agent
will, in accordance with such shareholder's election, either (i) issue and mail
to the former SMC shareholder a certificate representing a number of shares of
Thermo Common Stock that is equal to the number of shares of Thermo Common Stock
into which such shares of SMC Series A Preferred Stock have been converted (less
such shareholder's pro rata portion of the Indemnity Escrowed Shares and FDA
Shares), and, where applicable, a check for the amount representing any
fractional share determined in the manner described in the following paragraph,
or (ii) mail the former SMC shareholder a check in an amount equal to the number
of shares surrendered times $1.74. Under the Merger Agreement, a certificate
representing such former SMC shareholder's portion of the Indemnity Escrowed
Shares and FDA Shares will be delivered into escrow and thereafter delivered to
the shareholder or returned to Thermo in accordance with the terms of the Escrow
Agreement. See "The Merger -- Indemnification of Thermo; Escrow." Upon surrender
to the Exchange Agent of one or more certificates for SMC Series B Preferred
Stock, together with a properly completed letter
23
<PAGE> 30
of transmittal, the Exchange Agent will mail the former SMC shareholder a check
in an amount equal to the number of shares surrendered times $12.51. No interest
will be paid on any cash amounts payable to holders of SMC Series A Preferred
Stock or SMC Series B Preferred Stock.
Neither certificates nor scrip for fractional shares of Thermo Common Stock
shall be issued to SMC shareholders and no SMC shareholder shall be entitled to
any voting or other rights of a holder of shares of a fractional share interest.
Each SMC shareholder who otherwise would have been entitled to receive a
fraction of a share of Thermo Common Stock shall receive cash in lieu thereof,
without interest, in an amount determined by multiplying such shareholder's
fractional interest by the closing price of Thermo Common Stock as reported on
the New York Stock Exchange on the last trading day prior to the date the
Effective Time occurs. All amounts of cash in respect of fractional interests
which have not been claimed at the end of three years from the Effective Time by
surrender of certificates of SMC Capital Stock for shares of Thermo Common Stock
shall be repaid to SMC subject to the provisions of applicable escheat or
similar laws, for the account of the holders entitled thereto.
SMC SHAREHOLDERS SHOULD NOT TENDER THEIR CERTIFICATES UNTIL THEY RECEIVE
THE LETTER OF TRANSMITTAL FORM AND INSTRUCTIONS FROM THE EXCHANGE AGENT.
MANAGEMENT AND OPERATIONS OF SMC AFTER THE MERGER
It is contemplated that after the Merger, SMC will continue to operate as a
separate entity. Thermo does not presently intend to change the domicile, name
or material operations of SMC. Thermo has advised SMC, however, that John N.
Hatsopoulos, John W. Wood Jr., and George D. Holmes will be named as the
Directors of SMC. Thermo currently intends that certain existing officers of SMC
will retain their offices after the Effective Time, but may appoint additional
officers of SMC from time to time. See "Thermo and SMC Managements -- Executive
Officers and Directors of SMC."
EFFECTIVE TIME
The Merger shall become effective upon the later of the date of filing of a
merger agreement and together with certain officers' certificates with the
Secretary of State of the State of California pursuant to Section 1108 of the
California Law, or such date as specified in such merger agreement. It is
currently expected that the Effective Time will occur on or about June 28, 1996.
CONDITIONS TO CONSUMMATION OF THE MERGER
The respective obligations of Thermo, Acquisition Corp. and SMC under the
Merger Agreement are subject to a number of conditions specified in the Merger
Agreement. Unless all such conditions to the obligations have been satisfied or
waived by the party to the Merger Agreement benefiting from such conditions,
such party is not required to consummate the Merger and the transactions
contemplated in connection therewith.
The conditions to the obligations of SMC include the following: (i) the
representations and warranties of Thermo and Acquisition Corp. contained in the
Merger Agreement shall be true and correct as of the Effective Time, (ii) Thermo
and Acquisition Corp. shall have performed their respective agreements contained
in the Merger Agreement, (iii) all necessary consents, permits or approvals
necessary to consummate the Merger by any governmental authority having
jurisdiction over SMC, (iv) the SMC shareholders shall have approved the Merger
and the execution, delivery and performance of the Merger Agreement in
accordance with the applicable laws of the State of California and the SMC
Articles, (v) the Registration Statement of which this Proxy
Statement/Prospectus is a part shall be effective and no stop order suspending
the effectiveness of such Registration Statement shall have been issued and no
proceedings for that purpose shall have been initiated or threatened by the
Commission, (vi) the New York Stock Exchange shall have approved the shares of
Thermo Common Stock to be issued in the Merger for listing, subject to official
notice of issuance, (vii) no legal action or other proceedings shall be pending
or threatened which would (a) prevent the consummation of the transactions
contemplated by the Merger Agreement, (b) cause any
24
<PAGE> 31
transactions contemplated by the Merger Agreement to be rescinded following
consummation or (c) affect adversely the right of Thermo to own, operate or
control any assets and operations of SMC as the surviving corporation following
the Merger, (viii) SMC shall have received an opinion of Riordan & McKinzie in
form and substance reasonably satisfactory to SMC to the effect that when the
Merger is consummated in accordance with the terms of the Merger Agreement, the
Merger should be treated for federal income tax purposes as a tax-free
reorganization within the meaning of Section 368(a) of the Code, (ix) SMC shall
have received an opinion of Seth H. Hoogasian, Esq., Vice President and General
Counsel of Thermo, dated the Effective Time in form and substance reasonably
satisfactory to SMC and (x) compliance with the filing and waiting period
requirements of the Antitrust Improvements Law.
The conditions to the obligations of Thermo and Acquisition Corp. include
the following: (i) SMC's representations and warranties contained in the Merger
Agreement shall be true and correct as of the Effective Time, (ii) SMC shall
have performed all of its agreements contained in the Merger Agreement, (iii)
all necessary consents, permits or approvals necessary to consummate the Merger
by any governmental authority having jurisdiction over Thermo, Acquisition Corp.
or SMC or by any other person in any contractual or other relationship with
Thermo, Acquisition Corp. or SMC shall have been granted, (iv) the Registration
Statement of which this Proxy Statement/Prospectus is a part shall be effective
and no stop order suspending the effectiveness of such Registration Statement
shall have been issued and no proceedings for that purpose shall have been
initiated or threatened by the Commission, (v) the New York Stock Exchange shall
have approved the shares of Thermo Common Stock to be issued in the Merger for
listing, subject to official notice of issuance, (vi) the holders of at least
95% of the outstanding shares of each of the SMC Common Stock, the SMC Series A
Preferred Stock and the SMC Series B Preferred Stock shall have voted in favor
of the Merger, (vii) Thermo and Acquisition Corp. shall have received an opinion
of Riordan & McKinzie, counsel for SMC and the SMC shareholders, dated the
Effective Time in form and substance reasonably satisfactory to Thermo, together
with such other opinions of counsel as Thermo may reasonably require, (viii)
Thermo and Acquisition Corp. shall have received an opinion of Riordan &
McKinzie, in form and substance reasonably satisfactory to Thermo and
Acquisition Corp. to the effect that when the Merger is consummated in
accordance with the terms of the Merger Agreement, the Merger should be treated
for federal income tax purposes as a tax-free reorganization within the meaning
of Section 368(a) of the Code, (ix) all the terms, covenants and conditions of
the Affiliate Agreements, as defined in the Merger Agreement, to be complied
with and performed by SMC and the SMC shareholders on or before the Effective
Time shall have been fully complied with and performed in all material respects,
(x) no legal action or other proceedings shall be pending or threatened that
would (a) prevent the consummation of the transactions contemplated by the
Merger Agreement, (b) cause any of the transactions contemplated by the Merger
Agreement to be rescinded following consummation, or (c) affect adversely the
right of Thermo to own, operate or control any of the assets and operations of
SMC following the Merger, (xi) compliance with the filing and waiting period
requirements of the Antitrust Improvements Law, (xii) the SMC shareholders shall
have approved the Merger and the execution, delivery and performance of the
Merger Agreement in accordance with the applicable laws of the State of
California and the SMC Articles, (xiii) Thermo and Acquisition Corp. shall have
received the resignations, effective as of the Effective Time, of each director
and officer of SMC as specified by Thermo at least five business days prior to
the Effective Time, (xiv) the Securities Purchase Agreement dated as of December
23, 1983 among SMC and the holders of shares of SMC Series A Preferred Stock and
the Series B Preferred Stock Purchase Agreement dated as of September 28, 1984
among SMC and the holders of SMC Series B Preferred Stock each shall have been
terminated prior to the Effective Time, (xv) the holders of at least 95% of the
shares of SMC Series B Preferred Stock outstanding as of the Record Date shall
have converted such shares to SMC Common Stock prior to the Effective Time and
(xvi) the warrants contingently issuable to certain customers of SMC shall have
been terminated and cancelled prior to the Effective Time.
CONDUCT OF SMC'S BUSINESS PENDING THE MERGER
SMC has agreed to conduct its operations prior to the Effective Time in the
ordinary course of business and in compliance with all applicable laws and
regulations. SMC has further agreed, prior to the Effective Time, to (i) use all
reasonable efforts to preserve intact its current business organization, (ii)
keep its physical
25
<PAGE> 32
assets in good working condition, (iii) keep available the services of its
current officers and employees and (iv) preserve its relationships with
customers, suppliers and others having business dealings with it to the end that
its goodwill and ongoing business shall not be impaired in any material respect.
Subject to certain exceptions, SMC has also agreed that prior to the
Effective Time, it will not engage in certain types of transactions without the
prior written consent of Thermo, including, among other transactions, (i)
entering into, adopting or amending any employee benefit plan or employment or
severance agreement or, except normal increases in the ordinary course of
business, increasing the compensation or fringe benefits of, or modifying the
employment terms of, any directors, officers or employees or, paying any benefit
not required by the terms of any existing employee benefit plan, (ii) creating,
incurring, assuming, guaranteeing, or otherwise becoming liable with respect to
any indebtedness not outstanding as of the date of the Merger Agreement
(including obligations in respect of capital leases) other than in the ordinary
course of business or making any loans, advances or capital contributions to, or
investments in, any other person or entity, (iii) amending its Articles of
Incorporation or By-Laws, (iv) acquiring, selling, leasing, encumbering or
disposing of any of its properties or assets (including shares of stock in any
subsidiary or other entity) other than purchases and sales of assets in the
ordinary course of business, (v) issuing, selling, redeeming or repurchasing, or
authorizing the issuance, sale or delivery of, any shares of capital stock or
any other securities, rights, warrants, or options to acquire any such capital
stock except pursuant to existing stock option agreements and warrants, or
entering into any commitment or agreement, to do any of the foregoing or
amending any terms of any stock, securities, rights, warrants or options, (vi)
splitting, reclassifying or combining any shares of its capital stock or
declaring any dividends on or in respect of shares of capital stock, (vii)
entering into, amending, terminating or canceling any material contract, or
doing any act or omitting to do any act which would cause a material breach of
or default under any contract, commitment or obligation or waiving any material
right, (viii) making or committing to make any capital expenditure, capital
addition or capital improvement involving an amount in excess of $25,000 per
item, (ix) taking any action that would constitute or result in a breach of any
representation or warranty in the Merger Agreement, either as of the date made
or as of the Effective Time, (x) taking any action that would result in any of
the conditions of the Merger not being satisfied, (xi) taking any action
directly or indirectly that would prevent Thermo from accounting for the Merger
and other transactions contemplated by the Merger Agreement as a pooling-of-
interests for accounting purposes, (xii) changing in any material respect its
accounting methods, principles or practices except as may be required by a
generally applicable change in generally accepted accounting principles, (xiii)
discharging or satisfying any security interests or paying any obligations or
liability except in the ordinary course of business, (xiv) selling,
transferring, assigning or licensing any intellectual property, other than in
the ordinary course of business, (xv) making any tax election or, except in the
ordinary course of business, settling or compromising any federal, state, local
or foreign tax liability, (xvi) mortgaging or pledging any of its property or
assets, or subjecting any such assets to any security interest other than in the
ordinary course of business, or (xvii) agreeing to take any of the foregoing
acts.
ACCOUNTING TREATMENT
The Merger is expected to meet all of the conditions for
pooling-of-interests accounting treatment.
REGULATORY APPROVALS
The Merger is subject to the requirements of the Antitrust Improvements Law
and the regulations thereunder, which provide that certain acquisition
transactions (including the Merger) may not be consummated until certain
information has been furnished to the Antitrust Division and the FTC, and
certain waiting period requirements have been satisfied. Thermo and SMC have
filed the required information and material with the Antitrust Division and the
FTC, but, as of the date of this Proxy Statement/Prospectus, the applicable
waiting period has not yet expired or been terminated. There can be no assurance
that the waiting period will expire without a challenge to the Merger from the
Antitrust Division or the FTC. Expiration or termination of the waiting period
does not preclude the Antitrust Division, the FTC or any other party from
challenging or seeking to delay or enjoin the Merger on antitrust or other
grounds. There can be no assurance that any such challenge, if made, would not
be successful; however, neither Thermo nor SMC believes that
26
<PAGE> 33
the Merger will violate the antitrust laws. Any such action taken or threatened
prior to the consummation of the Merger could relieve Thermo or SMC of their
respective obligations to consummate the Merger.
RESALE OF THERMO COMMON STOCK RECEIVED IN THE MERGER; AFFILIATES
Certain officers, directors and principal shareholders of SMC have entered
into an agreement with SMC and with Thermo, in the form attached as Exhibit C to
the Merger Agreement, pursuant to which they have agreed that, until such time
as financial results covering at least thirty days of combined operations of SMC
and Thermo have been published by Thermo, they will not sell, transfer or
otherwise dispose of, or offer or agree to sell, transfer or otherwise dispose
of any shares of Thermo Common Stock received by them pursuant to the Merger or
any securities which may be paid as a dividend or otherwise distributed thereon
or with respect thereto or issued or delivered in exchange or substitution
therefor. Legends restricting the transfer of such shares of Thermo Common Stock
will be placed on all certificates representing such shares. The purpose of this
restriction is to comply with conditions necessary for the Merger to be treated
as a "pooling-of-interests" for accounting and financial reporting purposes. See
also "Certain Federal Income Tax Consequences."
The shares of Thermo Common Stock to be issued in the Merger to the SMC
shareholders pursuant to the Merger Agreement have been registered under the
Securities Act, thereby allowing such shares to be freely traded without
restriction by persons who are not deemed to be "affiliates," as that term is
defined in the Securities Act, of Thermo or of SMC. Certain officers, directors
and principal shareholders of SMC may be deemed to be affiliates of SMC and thus
"underwriters" within the meaning of Rule 145 under the Securities Act. Such
persons will not be able to resell the Thermo Common Stock received by them in
the Merger except pursuant to an effective registration statement under the
Securities Act or pursuant to another applicable exemption therefrom. All
persons who may be deemed to be affiliates should carefully consider the
limitations imposed by Rules 144 and 145 under the Securities Act prior to
effecting resales of the Thermo Common Stock.
TERMINATION, AMENDMENT AND EXPENSES
The Merger Agreement may be terminated and the Merger contemplated thereby
abandoned at any time prior to the consummation of the Merger by the mutual
consent of Thermo and SMC. The Merger Agreement may be terminated by Thermo or
SMC acting alone, (i) if there shall be any order of a court in effect to
prevent consummation of the Merger Agreement, (ii) if there shall be any action
taken or any statute, rule, regulation or order enacted, promulgated, issued or
deemed applicable to the Merger Agreement or the transactions contemplated
thereby by any governmental entity that would make the consummation of the
Merger Agreement illegal, (iii) if there is a failure to obtain requisite
approval from SMC's shareholders of the Merger Agreement or (iv) if the other
party is in breach of any material term of the Merger Agreement and such breach
is not cured within 10 days of notice of such breach. Thermo may terminate the
Merger Agreement if the Merger has not been consummated by the close of business
on June 28, 1996 by reason of failure of any condition precedent under Section
5.1 or 5.2 of the Merger Agreement (unless the failure results from a breach of
the Merger Agreement by Thermo or Acquisition Corp.). SMC may terminate the
Merger Agreement if the Merger has not be consummated by the close of business
on June 28, 1996 by reason of failure of any condition precedent under Section
5.1 or 5.3 of the Merger Agreement (unless the failure results from any breach
of the Merger Agreement by SMC).
In the event that the Merger is terminated in accordance with the terms of
the Merger Agreement, each party will be responsible for the costs incurred by
it in connection with the transactions contemplated by the Merger Agreement.
CERTAIN EFFECTS OF THE MERGER
Upon consummation of the Merger, the holders of SMC Capital Stock (other
than holders of shares of SMC Series A Preferred Stock who have not elected to
receive shares of Thermo Common Stock, holders of shares of SMC Series B
Preferred Stock who have not converted such shares into shares of SMC Common
27
<PAGE> 34
Stock prior to the Effective Time and holders of shares with respect to which
dissenters' rights are perfected) will exchange their shares of SMC Capital
Stock for an equity interest in Thermo, a large diversified company of which SMC
will be a small part. Thermo will continue to be subject to the periodic
reporting requirements of the Exchange Act and, under current regulations
promulgated thereunder, will continue to furnish information to the Commission
so long as any securities of Thermo are listed on a national securities exchange
or held of record by at least 300 holders. See "Available Information." It is a
condition to SMC's and Thermo's obligations under the Merger Agreement that the
shares of Thermo Common Stock to be issued in connection with the Merger be
listed on the New York Stock Exchange, or approved for listing on the New York
Stock Exchange subject to official notice of issuance. See "The
Merger -- Conditions to Consummation of the Merger."
It is expected that, following the Merger, the business and operations of
SMC will be continued by Thermo in substantially the same manner as it has been
operating. However, Thermo will continue to evaluate SMC's business and
operations following the Merger and will make such changes as are deemed
appropriate.
Upon consummation of the Merger, the holders of SMC Capital Stock (other
than holders of shares of SMC Series A Preferred Stock who have elected to
receive cash, holders of shares of SMC Series B Preferred Stock who have not
converted such shares into shares of SMC Common Stock prior to the Effective
Time and holders of shares with respect to which dissenters' rights are
perfected) will exchange their shares of SMC Capital Stock for Thermo Common
Stock. The rights of such SMC shareholders, which are presently governed by
California law and by the SMC Articles and SMC By-Laws, will be governed by
Delaware law and the Thermo Certificate and Thermo By-Laws. Certain differences
in the rights of SMC shareholders will arise as a result of this change in
governing law as well as from distinctions between the SMC Articles and SMC
By-Laws and the Thermo Certificate and Thermo By-Laws. See "Comparison of Rights
of Holders of Thermo Common Stock and SMC Capital Stock."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Shareholders should be aware that certain officers and directors of SMC
have interests, described below, which may present them with potential conflicts
of interest in connection with the transaction. Management of SMC, and members
of the Board of Directors of SMC, are aware of the conflicts described below and
considered them in addition to the other matters described under "The
Merger -- SMC's Reasons for the Merger."
Upon consummation of the Merger, all of the members of SMC's Board of
Directors, other than George Holmes, will resign, and Thermo intends to name
John Hatsopoulos and John Wood to SMC's Board. Thermo currently intends that
certain existing officers of SMC will retain their offices after the Effective
Time, but may appoint additional officers of SMC from time to time. See "Thermo
and SMC Managements."
In accordance with SMC Board resolutions passed in November 1994 and
October 1995, certain executive officers and other employees of SMC will receive
a supplemental cash distribution upon the consummation of the Merger. This
distribution, which will constitute 13.3% of the gross value of the total Merger
consideration after subtracting the value of SMC Series A Preferred Stock
(including accumulated dividends), is estimated to be approximately $8.3
million. This cash distribution will be allocated according to the following
percentages:
<TABLE>
<S> <C>
George Holmes......................................................... 18.5%
Pierre Sice........................................................... 14.5%
William Ross.......................................................... 14.5%
Steven Sidwell........................................................ 10.5%
James Weersing........................................................ 8.5%
18 other key employees................................................ 16.5%
All other permanent employees with more than one year of service...... 17.0%
</TABLE>
28
<PAGE> 35
RIGHTS OF DISSENTING SHAREHOLDERS
The rights of shareholders who dissent in connection with the Merger are
governed by specific legal provisions contained in Chapter 13 (Sections
1300-1312) of the California Law, the text of which is attached as Appendix B
hereto. The description of dissenters' rights contained in this Proxy
Statement/Prospectus is qualified in its entirety by reference to those sections
of the California Law.
If the Merger is consummated, the shareholders of SMC who have not voted in
favor of the Merger and who have fully complied with all applicable provisions
of Chapter 13 of the California Law have the right to require SMC to purchase
shares of SMC Common Stock held by them for cash at the fair market value of
those shares as of the day before the terms of the Merger were first announced,
excluding any appreciation or depreciation in consequence of the Merger. Because
the SMC Articles specifically set forth the amount to be paid in respect of
shares of SMC Series A Preferred Stock and SMC Series B Preferred Stock in the
event of a merger, holders of shares of SMC Series A Preferred Stock and SMC
Series B Preferred Stock are not entitled to dissenters' rights under California
Law. Instead, holders of shares of SMC Series A Preferred Stock who do not elect
to receive Thermo Common Stock in the Merger will receive the liquidation
preference with respect to such shares, or $1.74 in cash per share, and holders
of shares of SMC Series B Preferred Stock who have not converted such shares
into SMC Common Stock prior to the Effective Time will receive the liquidation
preference with respect to such shares, or $12.51 in cash per share.
Persons who are beneficial owners of shares of SMC Common Stock but whose
shares are held by another person should instruct the recordholder to follow the
procedures required by California Law if such persons wish to dissent with
respect to any or all of their shares. Under the California Law, no shareholder
who is entitled to exercise dissenters' rights has any right at law or in equity
to attack the validity of the Merger or to have the Merger set aside or
rescinded, except in an action to test whether the number of shares required to
authorize or approve the Merger had been legally voted in favor of the Merger.
For an SMC shareholder to exercise dissenters' rights, the shareholder of
record must either abstain from voting or have voted the shares against the
Merger. The shareholder may vote part of those shares for the Merger without
losing the right to have purchased those shares which were abstained from voting
or voted against the Merger.
Within ten (10) days after the approval of the Merger by SMC shareholders,
SMC must mail a notice of approval to the respective holders of shares of SMC
Common Stock who abstained from voting or voted against the Merger. This notice
must be accompanied by a statement of the prices that SMC considers to represent
the fair market value of the dissenting shares as of the day before the terms of
the Merger were first announced, excluding any appreciation or depreciation in
consequence of the proposed Merger. This statement will constitute an offer by
SMC to purchase at the prices stated any dissenting shares, unless they lose
their status as dissenting shares. The notice also must contain a brief
description of the procedures to be followed under Chapter 13 of the California
Law in order for a shareholder to exercise the right to have SMC purchase his or
her shares and a copy of the relevant provisions of the California Law.
DEMAND FOR PURCHASE
Merely abstaining from voting or voting against the approval of the Merger
does not constitute a demand for purchase. A written demand is essential and
must be received by SMC at its principal office or at the office of any transfer
agent thereof within thirty (30) days after the date on which the notice of
approval of the Merger is mailed by SMC to its shareholders.
In general, the written demand that the dissenting shareholder must deliver
to SMC must:
(i) be made by the person who was the shareholder of record on the
Record Date set for voting on the Merger (or his or her duly authorized
representative) and not by someone who is merely a beneficial owner of the
shares and not by a shareholder who acquired the shares subsequent to the
Record Date;
(ii) state the number and class of dissenting shares; and
29
<PAGE> 36
(iii) include a demand that SMC purchase the shares at what the
shareholder claims to be the fair market value of such shares as of the day
before the terms of the Merger were first announced, excluding any
appreciation or depreciation in consequence of the proposed Merger. It is
SMC's position that this day was April 9, 1996. A shareholder may take the
position in the written demand that a different date is applicable. The
shareholder's statement of fair market value constitutes an offer by such
dissenting shareholder to sell the shares to SMC at such price.
In addition, it is recommended that dissenting shareholders comply with the
following conditions:
(i) The demand should be sent by registered or certified mail, return
receipt requested.
(ii) The demand should be signed by the shareholder of record (or his,
her or its duly authorized representative) exactly as his, her or its name
appears on the stock certificates evidencing the shares.
(iii) A demand for the purchase of shares owned jointly by more than
one person should identify and be signed by all such holders.
(iv) Any person signing a demand for purchase in any representative
capacity (such as attorney-in-fact, executor, administrator, trustee or
guardian) should indicate his or her title and, if SMC so requests, furnish
written proof of his or her capacity and authority to sign the demand.
A shareholder may not withdraw a demand for payment without the consent of
SMC. Under the terms of the California Law, a demand by a shareholder is not
effective for any purpose unless it is received by SMC.
OTHER REQUIREMENTS
Within thirty (30) days after the date on which the notice of the approval
of the Merger is mailed by SMC to its shareholders, the shareholder's
certificates representing any shares which the shareholder demands be purchased
must be submitted to SMC at its principal office, or at the office of any
transfer agent thereof, to be stamped with a statement that the shares are
dissenting shares. Upon subsequent transfer of these shares, the new
certificates will be similarly stamped, together with the name of the original
dissenting shareholder.
If SMC and a dissenting shareholder agree that the shares held by such
shareholder are eligible for dissenters' rights and agree upon the price of such
shares, the dissenting shareholder is entitled to receive from SMC the agreed
price with interest thereon at the legal rate on judgments from the date of such
agreement. Any agreement fixing the fair market value of dissenting shares as
between SMC and the holders thereof must be filed with the Secretary of SMC at
the address set forth below. Subject to certain provisions of Section 1306 and
Chapter 5 of the California Law (relating to limitations on corporate
distributions), payment of the fair market value of the dissenting shares shall
be made within thirty (30) days after the amount thereof has been agreed upon or
within thirty (30) days after the statutory or contractual conditions to the
Merger are satisfied, whichever is later. Cash dividends declared and paid by
SMC upon the dissenting shares after the date of approval of the Merger by its
shareholders and prior to payment for the shares shall be credited against the
total amount to be paid by SMC.
If SMC and a dissenting shareholder fail to agree on either the fair market
value of the shares or on the eligibility of the shares to be purchased, then
either the shareholder or SMC may file a complaint for judicial resolution of
the dispute in the superior court of the proper county. The complaint must be
filed within six months after the date on which the notice of approval is mailed
to the shareholders. If a complaint is not filed within six months, the shares
will lose their status as dissenting shares. Two or more dissenting shareholders
may join as plaintiffs or be joined as defendants in such an action. If the
eligibility of the shares is at issue, the court will first decide this issue.
If the fair market value of the shares is in dispute, the court will determine,
or shall appoint one or more impartial appraisers to assist in its determination
of, the fair market value. The costs of the action will be assessed or
apportioned as the court considers equitable, but if the fair market value is
determined to exceed 125% of the price offered to the shareholder, SMC will be
required to pay such costs.
Any demands, notices, certificates or other documents required to be
delivered to SMC may be sent to the Secretary, SensorMedics Corporation, 22705
Savi Ranch Parkway, Yorba Linda, California 92687.
30
<PAGE> 37
COMPARISON OF RIGHTS OF HOLDERS OF THERMO
COMMON STOCK AND SMC CAPITAL STOCK
The rights of the SMC shareholders are governed by the laws of the State of
California, including the California Law, and by the SMC Articles and SMC
By-Laws. Upon consummation of the Merger, SMC shareholders holding SMC Common
Stock (other than holders of shares to which dissenters' rights are perfected)
or SMC Series A Preferred Stock (who so elect) as of the Effective Time will
become stockholders of Thermo and their rights as stockholders and the internal
affairs of Thermo will be governed by the laws of the State of Delaware,
including the General Corporation Law of the State of Delaware (the "Delaware
Law"), and by Thermo Certificate and Thermo By-Laws, which differ in certain
material respects from California Law, the SMC Articles and the SMC By-Laws. The
following is a summary of certain differences between the rights of SMC
shareholders compared with those of Thermo stockholders.
The following summary does not purport to be a complete description of the
rights of shareholders of SMC or the rights of stockholders of Thermo or a
comprehensive comparison of such rights, and is qualified in its entirety by
reference to the governing law, to the Thermo Certificate and Thermo By-Laws and
to the SMC Articles and SMC By-Laws, to which shareholders are referred. For
more information regarding reviewing or obtaining a copy of either company's
charter documents or by-laws, see "Available Information."
EXCHANGE OF PREFERRED STOCK FOR COMMON STOCK
Holders of shares of SMC Series A Preferred Stock who so elect and holders
of shares of SMC Series B Preferred Stock who have converted such shares into
shares of SMC Common Stock on or prior to the Effective Time will receive shares
of Thermo Common Stock in connection with the Merger. As common stockholders,
such holders will no longer possess the rights, preferences, privileges and
restrictions of preferred stock contained in the SMC Articles. For example, such
holders will no longer have their current dividend or liquidation preferences,
supermajority approval rights or conversion rights, or be subject to mandatory
redemption by SMC, and instead will possess the rights and be subject to the
limitations of Thermo Common Stock. See "Description of Thermo's Capital Stock."
AMENDMENT OF CHARTER AND BY-LAWS
Section 242 of the Delaware Law provides that stockholders may amend their
corporation's certificate of incorporation if a majority of the outstanding
stock entitled to vote thereon, and a majority of the outstanding stock of each
class entitled to vote thereon as a class, has been voted in favor of the
amendment. The Delaware Law also provides that after a corporation has received
any payment for its stock, the power to adopt, amend or repeal by-laws resides
with the stockholders entitled to vote. A corporation may, however, grant to its
board of directors in its certificate of incorporation concurrent power to
adopt, amend or repeal by-laws.
Under California Law, shareholders may amend their articles of
incorporation if the amendment is approved by vote of the board of directors and
the holders of a majority of outstanding shares entitled to vote thereon and,
where their rights are affected, by the holders of a majority of the outstanding
shares of a class, whether or not such class is entitled to vote thereon by the
provision of the articles. In addition, by-laws may be adopted, amended or
repealed either by the vote of a majority of the outstanding shares entitled to
vote thereon or (subject to any restrictions in the articles or by-laws) by the
approval of the board of directors, except that amendments to the by-laws
specifying or changing a fixed number of directors or the maximum or minimum
number or changing from a fixed to a variable board or vice versa may only be
adopted by the approval of the outstanding shares entitled to vote thereon. In
addition, a by-law or amendment to the articles reducing the number of directors
to a number less than five cannot be adopted if the vote cast against its
adoption at a meeting, or the shares not consenting in the case of action by
written consent, are equal to more than 16 2/3% of the outstanding shares
entitled to vote thereon. See also "-- Certain Actions Requiring Supermajority
Votes."
THERMO. Thermo's Certificate expressly provides that the board of directors
is authorized to adopt, repeal, alter, amend or rescind Thermo's By-Laws.
SMC. Under the SMC Articles, holders of shares of SMC Series B Preferred
Stock are entitled to vote as a single class together with the holders of shares
of SMC Common Stock upon any matter submitted to the
31
<PAGE> 38
shareholders for a vote (including votes to amend the SMC Articles and By-Laws).
Holders of shares of SMC Series B Preferred Stock are entitled to a number of
votes equal to the number of shares of SMC Common Stock into which their Series
B Preferred Stock could then be converted. The SMC Articles also require the
approval of at least 75% of the outstanding shares of SMC Series A Preferred
Stock and/or SMC Series B Preferred Stock (as applicable) to amend or change the
SMC Articles or the SMC By-Laws so as to amend or change any of the rights,
preferences, privileges or restrictions provided in the SMC Articles for the
benefit of any shares of SMC Series A Preferred Stock or SMC Series B Preferred
Stock, respectively. The SMC By-Laws empower the board of directors to adopt,
amend or repeal the SMC By-Laws, other than a by-law or an amendment thereof
changing the authorized numbers of directors.
CERTAIN ACTIONS REQUIRING SUPERMAJORITY VOTES
Both Delaware Law and California Law set certain minimum voting
requirements for selected corporate actions that may be changed by appropriate
provisions contained in a corporation's charter and/or by-laws.
THERMO. Under the Thermo Certificate, the votes of the holders of 66 2/3%
of the shares of stock then entitled to vote for the election of directors of
Thermo ("Voting Stock") are required for the following actions: (i) the merger
of Thermo into another corporation or other business entity, (ii) the merger of
another corporation or other business entity into Thermo, (iii) the
consolidation of Thermo with another corporation or other business entity, (iv)
the sale, exchange, lease or other transfer all or substantially all of Thermo's
assets to any other person, (v) dissolution, (vi) amendments to the Thermo
Certificate and (vii) amendments to the Thermo By-Laws or ratification of the
amendment thereof by Thermo's Board of Directors.
The Thermo Certificate further provides that, in the event that any
corporation or other business entity, together with all affiliates thereof, owns
beneficially, directly or indirectly, 25% or more of the outstanding Thermo
Common Stock (a "Related Entity"), the vote of the holders of 85% of all shares
of the Voting Stock exclusive of all shares the Voting Stock held by Related
Entities shall be required for any of the following actions: (i) the merger of
Thermo into a Related Entity, (ii) the merger of a Related Entity into Thermo,
(iii) the consolidation of Thermo with a Related Entity, (iv) the sale,
exchange, lease or other transfer of all or substantially all of Thermo's assets
to a Related Entity, (v) the acquisition of an interest in a Related Entity
through the issuance of Thermo's stock, the exchange of Thermo's assets or
otherwise, (vi) the entering into of any agreement to take any of the actions
contemplated by the preceding clauses (i) through (v), (vii) the further
amendment of the Thermo Certificate relating to the actions contemplated by the
preceding clauses (i) through (vi) or amendment of the Thermo By-Laws or the
ratification of the amendment thereof by Thermo's Board of Directors in such
regard. For these purposes, the Thermo Certificate defines an "affiliate" of any
entity as any person which controls, is controlled by or is under common control
with that entity, and any officer or director of that entity or any other
affiliate thereof and any person which owns beneficially, directly or
indirectly, 10% or more of any class of equity securities of that entity or any
other affiliate thereof.
The Thermo Certificate also contains a requirement that if any person
acquires by tender offer more than 50% of the outstanding Thermo Common Stock
and Thermo's Board of Directors does not recommend that the tender offer be
accepted, each remaining Thermo stockholder will have the right to have his
shares redeemed by Thermo at a price generally equal to the tender offer price.
SMC. Under the SMC Articles, so long as any shares of SMC Series A
Preferred Stock or SMC Series B Preferred Stock remain outstanding, SMC may not,
without the approval of at least 75% of the outstanding shares of SMC Series A
Preferred Stock and/or SMC Series B Preferred Stock (as applicable): (i) amend
or change the SMC Articles or SMC By-Laws so as to amend or change any of the
rights, preferences, privileges or restrictions provided therein for the benefit
of any shares of SMC Series A Preferred Stock or SMC Series B Preferred Stock,
(ii) authorize or issue any preferred equity security senior to or on a parity
with the SMC Series A Preferred Stock or SMC Series B Preferred Stock, (iii)
effect any sale, lease, assignment, transfer or other conveyance of all or
substantially all of the assets of SMC or any consolidation, merger,
reclassification or recapitalization of SMC (other than a transfer or merger
between SMC and a wholly-owned subsidiary of SMC or between wholly-owned
subsidiaries), (iv) increase or decrease the total number of authorized shares
of SMC Series A Preferred Stock or SMC Series B Preferred Stock, (v) alter,
32
<PAGE> 39
amend or repeal any provision in the SMC Articles requiring a specified vote of
SMC Series A Preferred Stock or SMC Series B Preferred Stock, (vi) reduce the
amount payable upon or change the relative seniority in connection with
liquidation, (vii) repurchase any common stock (except for repurchases in
connection with terminations of employment), or (viii) permit any subsidiary of
SMC or any other corporation organized or controlled by SMC to issue or sell
(except to SMC or a wholly-owned subsidiary of SMC) any stock of such subsidiary
or other corporation.
BOARD OF DIRECTORS
Under Delaware Law, a corporation's board of directors must consist of one
or more individuals, with the number fixed by (or in the manner provided in) the
corporation's by-laws or its certificate of incorporation. Under California Law,
a corporation having at least three shareholders must have a board of directors
consisting of at least three individuals, with the number fixed by (or in the
manner provided in) the corporation's by-laws or its articles; provided,
however, that after the issuance of shares, a by-law specifying or changing a
fixed number of directors or the maximum or minimum number or changing from a
fixed to a variable board or vice versa may only be adopted by approval of the
outstanding shares entitled to vote thereon; provided, further, that a by-law or
amendment of the articles reducing the fixed number or the minimum number of
directors to a number less than five cannot be adopted if the votes cast against
its adoption at a meeting or the shares not consenting in the case of action by
written consent are equal to more than 16 2/3% of the outstanding shares
entitled to vote thereon.
THERMO. Under the Thermo By-Laws, Thermo's Board shall consist of between
eight and twelve directors. The Thermo By-Laws state that the directors will be
divided into three classes, as nearly as equal in number as possible, with each
class of director being elected to serve for three years. Currently, Thermo's
Board has set the number of directors at ten. The provisions for classification
of the Board, which are designed to provide continuity and longer-term
participation on the Board, would prevent stockholders holding a majority of
shares of Thermo Common Stock outstanding from electing a majority of the
directors of Thermo at any one annual meeting of stockholders. Such provisions
may discourage or render more difficult certain transactions, whether or not
beneficial to public stockholders, and could discourage certain types of tactics
which involve an actual or threatened change of control of Thermo because at
least two annual meetings of stockholders could be required to replace a
majority of the Board.
SMC. The SMC By-Laws state that the Board shall consist of seven directors
elected at each annual meeting of shareholders to hold office until the next
annual meeting.
REMOVAL OF DIRECTORS
Delaware Law permits any director or the entire board of directors to be
removed, with or without cause, by the vote of the holders of a majority of the
shares entitled to vote. Directors of a corporation with a classified board of
directors, however, such as Thermo, can be removed only for cause unless the
certificate of incorporation provides otherwise.
Under California Law, the holders of at least 10% of the number of
outstanding shares of any class of stock may initiate a court action to remove
any director for cause. In addition, any or all of the directors of a California
corporation may be removed without cause by the affirmative vote of a majority
of the outstanding shares entitled to vote. However, no director may be removed
(unless the entire board is removed) when the votes cast against removal would
be sufficient to elect the director if voted cumulatively at an election at
which the same total number of votes were cast and the entire number of the
directors authorized at the time of the director's most recent election were
then being elected.
THERMO. Neither the Thermo Certificate nor the Thermo By-Laws specifically
address the requirements for the removal of directors generally. Therefore, a
Thermo director may be removed by stockholders only for cause. Any vacancy on
the board resulting from any increase in the authorized number of directors may
be filled only by a majority of the directors then in office, provided that a
quorum is present. Any other vacancy on the board may be filled only by a
majority of the directors then in office, even if less than a quorum, or by a
sole remaining director.
33
<PAGE> 40
SMC. Neither the SMC Articles nor the SMC By-Laws change the requirements
under California Law for the removal of directors generally. The SMC By-Laws
provide that vacancies in the Board of Directors may be filled by a majority of
the remaining directors, though less than a quorum, or by a sole remaining
director, except that a vacancy created by the removal of a director by the vote
or written consent of the shareholders or by court order may be filled only by
the vote of a majority of the shares represented and voting at a duly held
meeting at which a quorum is present, or by the written consent of the holders
of all outstanding shares entitled to vote.
SPECIAL MEETING OF STOCKHOLDERS
Under Delaware Law, special meetings of stockholders may be called by the
board of directors and by such other person or persons authorized to do so by
the corporation's certificate or by-laws. Under California Law, a special
meeting of shareholders may be called by the board of directors, the chairman of
the board, the president or the holders of shares entitled to cast not less than
10% of the votes at the meeting or such additional persons as may be provided in
the articles or by-laws.
THERMO. Pursuant to the Thermo By-Laws, special meetings of the
stockholders may be called by the President and shall be called by the
President, Secretary or an Assistant Secretary when directed to do so by the
Board.
SMC. Neither the SMC Articles nor the SMC By-Laws permit any other person
to call a special meeting.
ACTIONS BY STOCKHOLDERS WITHOUT A MEETING
Unless a corporation's charter provides otherwise, Delaware Law and
California Law allow any action required to be taken, or which may be taken, at
an annual or special meeting of stockholders to be taken without prior notice
and without a vote so long as the written consent of not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted is
delivered to the corporation, except under California Law that the election of
directors by written consent (other than elections to fill certain vacancies)
generally requires the unanimous consent of all shares entitled to vote.
THERMO. Neither the Thermo Certificate nor the Thermo By-Laws addresses the
issue relating to actions by stockholders without a meeting. However, the rules
of the New York Stock Exchange, on which the Thermo Common Stock is listed for
trading, generally prohibit listed corporations from taking actions by written
consent.
SMC. The SMC By-Laws conform with the California Law with respect to
actions by shareholders without a meeting.
CUMULATIVE VOTING
Under Delaware Law, cumulative voting in the election of directors is
available only if specifically provided for in a corporation's certificate of
incorporation. Under California Law (unless a corporation's articles provide
otherwise), any shareholder of a corporation is entitled to cumulate his votes
for the election of directors provided that at least one shareholder has given
notice at the meeting prior to the voting of such shareholder's intention to
cumulate his votes. Cumulative votes may only be cast for candidates who have
been nominated before the voting. The Thermo Certificate does not provide for
cumulative voting. The SMC Articles do not modify California Law with respect to
cumulative voting. In addition, the SMC Articles provide that holders of shares
of SMC Series A Preferred Stock have no voting rights, except as otherwise
required by law or by the SMC Articles, and holders of SMC Series B Preferred
Stock are entitled to voting rights equal to the number of shares of SMC Common
Stock into which their SMC Series B Preferred Stock could be converted and vote
as a single class together with the holders of SMC Common Stock.
34
<PAGE> 41
VOTE REQUIRED FOR CERTAIN MERGERS AND CONSOLIDATIONS
California Law generally requires approval of any reorganization (which
includes a merger, certain exchange reorganizations and certain sale-of-asset
reorganizations) or sale of all or substantially all of the assets of a
corporation by the affirmative vote of the holders of a majority (unless the
articles require a higher percentage) of the outstanding shares of each class of
capital stock of the corporation entitled to vote thereon. Under the SMC
Articles, holders of SMC Series B Preferred Stock are entitled to vote as a
single class together with the holders of SMC Common Stock upon any matters
submitted to the shareholders for a vote. Holders of SMC Series B Preferred
Stock are entitled to a number of votes equal to the number of shares of SMC
Common Stock into which their shares of SMC Series B Preferred Stock could then
be converted. The SMC Articles also require the approval of 75% of the
outstanding shares of each of the SMC Series A Preferred Stock and SMC Series B
Preferred Stock, voting separately as a class. Delaware Law and California Law
generally provide for a shareholder vote (except as indicated below) of both the
acquiring and acquired corporations to approve certain mergers. In addition,
both laws generally require a shareholder vote of the selling corporation for
the sale by the corporation of all or substantially all of its assets.
Neither California Law nor Delaware Law requires a shareholder vote of the
surviving or acquiring corporation in a merger provided certain conditions are
satisfied. For example, under California Law, no approval of a reorganization is
required by the holders of the outstanding shares in the case of any corporation
if such corporation, or its shareholders immediately before such reorganization,
or both, own, immediately after such reorganization, equity securities (other
than warrants or rights) of the surviving or acquiring corporation, or the
parent of either of the constituent corporations, possessing more than
five-sixths of the voting power of such surviving or acquiring corporation or
such parent. Delaware Law does not require a shareholder vote of the surviving
corporation in a merger if (i) the merger agreement does not amend the existing
certificate of incorporation; (ii) each outstanding or treasury share of the
surviving corporation before the merger is unchanged after the merger; and (iii)
the number of shares to be issued by the surviving corporation in the merger
does not exceed 20% of the shares outstanding immediately prior to such
issuance.
Neither California Law nor Delaware Law requires a shareholder vote for
certain "short-form mergers" between a parent company and its subsidiary,
provided that the subsidiary is at least 90% owned by the parent.
DISSENTERS' RIGHTS
Under both California Law and Delaware Law, a dissenting shareholder of a
corporation participating in certain transactions, under varying circumstances,
may receive cash in the amount of the fair value of his or her shares (as
determined by a court or by agreement between the corporation and the
shareholder) in lieu of the consideration otherwise receivable in any such
transaction. Under California Law, in connection with the merger of a
corporation for which the approval of outstanding shares is required, dissenting
shareholders of such corporation who follow prescribed statutory procedures are
entitled to receive payment of the fair market value of their shares. See
"Rights of Dissenting Shareholders."
Unless the certificate of incorporation provides otherwise, under Delaware
Law, dissenters' rights are not available with respect to a plan of merger or
share exchange or a proposed sale or exchange of property to holders of shares
of any class or series which, on the record date fixed to determine the
shareholders entitled to vote at the meeting of shareholders at which such
action is to be acted upon or to consent to any such action without a meeting,
were (i) listed on a national securities exchange or designated as a national
market system security on an inter dealer quotation system by the National
Association of Securities Dealers, Inc. or (ii) held of record by not fewer than
2,000 shareholders; and further provided that no appraisal rights are available
for any shares of stock of the constituent corporation surviving a merger if the
merger did not require shareholder approval of the surviving corporation.
ANTI-TAKEOVER STATUTES
THERMO. Thermo is subject to Section 203 of the General Corporation Law of
the State of Delaware ("Section 203"), which regulates large accumulations of
shares, including those made by tender offers. Section 203 may have the effect
of significantly delaying a purchaser's ability to acquire the entire interest
in
35
<PAGE> 42
Thermo if such acquisition is not approved by Thermo's Board of Directors. In
general, Section 203 prevents an "Interested Stockholder" (defined generally as
a person with 15% or more of a corporation's outstanding voting stock) from
engaging in a "Business Combination" (defined below) with a Delaware corporation
for three years following the date such person became an Interested Stockholder.
For purposes of Section 203, the term "Business Combination" includes sales, or
other dispositions to the Interested Stockholder (except proportionately with
the corporation's other shareholders) of assets of the corporation or a
subsidiary equal to 10% or more of the aggregate market value of the
corporation's consolidated assets or its outstanding stock; the issuance or
transfer by the corporation or a subsidiary of stock of the corporation or such
subsidiary to the Interested Stockholder (except for transfers in a conversion
or exchange or a pro rata distribution or certain other transactions, none of
which increase the Interested Stockholder's proportionate ownership of any class
or series of the corporation's or such subsidiary's stock); or receipt by the
Interested Stockholder (except proportionately as a stockholder), directly or
indirectly, of any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation or a subsidiary.
The three-year moratorium imposed on Business Combinations by Section 203
does not apply if: (a) prior to the date on which such stockholder becomes an
Interested Stockholder the Board of Directors approves either the Business
Combination or the transaction which resulted in the person becoming an
Interested Stockholder; (b) the Interested Stockholder owns 85% of the
corporation's voting stock upon consummation of the transaction which made him
or her an Interested Stockholder (excluding from the 85% calculation shares
owned by directors who are also officers of the target corporation and shares
held by employee stock plans which do not permit employees to decide
confidentially whether to accept a tender or exchange offer); or (c) on or after
the date such person becomes an Interested Stockholder, the Board approves the
Business Combination and it is also approved at a stockholder meeting by holders
of 66 2/3% of the voting stock not owned by the Interested Stockholder.
Under Section 203, the restrictions described above do not apply if, among
other things, the corporation's original certificate of incorporation contains a
provision expressly electing not to be governed by Section 203. The Thermo
Certificate does not contain such a provision. Thermo could, at its option,
exclude itself from the coverage of Section 203 by amending its Certificate or
By-Laws at any time to exempt itself from coverage; but a by-law or charter
amendment may not become effective for a period of 12 months after the amendment
is adopted. The restrictions described above do not apply to certain Business
Combinations proposed by an Interested Stockholder following the announcement or
notification of one of certain extraordinary transactions involving the
corporation and a person who had not been an Interested Stockholder during the
previous three years or who became an Interested Stockholder with the approval
of a majority of the corporation's directors.
Section 203 is currently under challenge in lawsuits arising out of ongoing
takeover disputes, and it is not yet clear whether and to what extent its
constitutionality will be upheld by the courts. Although the United States
District Court of Delaware has consistently upheld Section 203, the Delaware
Supreme Court has not yet considered the issue. Thermo believes that, so long as
the enforceability of Section 203 is upheld, Section 203 will encourage any
potential acquiror to negotiate with Thermo's Board of Directors prior to
effecting any takeover attempt. Section 203 also should have the effect of
limiting the ability of a potential acquiror to make a two-tiered bid in which
all of Thermo's stockholders would not be treated equally. Section 203 should
also discourage certain potential acquirors unwilling to comply with its
provisions. Shareholders should note that the application of Section 203 to
Thermo will confer upon the Board the power to reject a proposed Business
Combination, even though a potential acquiror may be offering a substantial
premium for Thermo's shares over the then-current market price.
SMC. Under California Law, if a party that makes a tender offer or proposes
to acquire a corporation by a reorganization or certain sales of assets is
controlled by such corporation or an officer or director of such corporation, or
if a director or executive officer of such corporation has a material financial
interest in such party (each an "Interested Party Proposal"), (i) an affirmative
opinion in writing as to the fairness of the consideration to the shareholders
of such corporation must be delivered to shareholders of such corporation and
(ii) such shareholders must be (x) informed of certain later tender offers or
written proposals for a reorganization or sale of assets made by other persons
and (y) afforded a reasonable opportunity to withdraw any vote, consent or proxy
previously given or shares previously tendered in connection with the Interested
36
<PAGE> 43
Party Proposal. However, these requirements do not apply to a corporation that
does not have shares held of record by at least 100 persons or to a transaction
which has been qualified (and no stop order is in effect) under California state
securities laws.
In addition, in consideration with any merger transaction, California Law
generally requires that, unless all shareholders of a class or series consent,
each share of such class or series must be treated equally with respect to any
distribution of cash, property, rights or securities. California Law also
provides generally that if a corporation that is party to a merger, or its
parent, owns more than 50% but less than 90% of the voting power of the other
corporation that is party to such merger, the nonredeemable shares of common
stock of the controlled corporation may be converted only into nonredeemable
shares of the surviving corporation or a parent party unless all of the
shareholders of the class consent.
STOCKHOLDER RIGHTS AGREEMENT
Thermo has declared a dividend of one right to purchase 1/10,000th of a
share of Series B Junior Participating Preferred Stock for each outstanding
share of Thermo Common Stock, pursuant to the provisions of a Rights Agreement.
These rights, commonly referred to as a "poison pill," may have certain
anti-takeover effects. See "Description of Thermo's Capital Stock -- Preferred
Share Purchase Rights; Series B Junior Participating Preferred Stock." SMC does
not have a comparable shareholder rights agreement.
PREEMPTIVE RIGHTS
THERMO. Delaware Law generally permits a Delaware corporation to provide
its stockholders with the preemptive right to subscribe to capital stock or
securities convertible into stock in its certificate of incorporation. The
Thermo Certificate does not provide for preemptive rights.
SMC. California Law provides that, unless the articles provide otherwise,
the board of directors may issue shares, options or securities having conversion
or option rights without first offering them to shareholders of any class. The
SMC Articles do not provide for such preemptive rights.
DIVIDENDS
THERMO. Delaware Law provides that a corporation, unless otherwise
restricted by its certificate of incorporation, may declare and pay dividends
out of surplus, or if no surplus exists, out of net profit for the fiscal year
in which the dividend is declared or the preceding fiscal year (provided that
the amount of capital of the corporation following the declaration and payment
of the dividend is not less than the aggregate amount of the capital represented
by the issued and outstanding shares of all classes having preference upon the
distribution of assets). Additionally, Delaware Law provides that, in general, a
corporation may redeem or repurchase its shares only out of surplus.
SMC. California Law provides that a corporation may generally pay dividends
(or repurchase shares) out of retained earnings or if, after giving effect
thereto, the sum of (i) the assets (excluding goodwill and certain other assets)
of the corporation is at least equal to 1 1/4 times its liabilities (excluding
certain deferred credits) and (ii) the current assets of such corporation is at
least equal to (x) its current liabilities or (y) if the average of the earnings
of such corporation before taxes and interest expense for the two preceding
fiscal years was less than the average of the interest expense of such
corporation for such fiscal years, 1 1/4 times its current liabilities. Under
the SMC Articles, no dividends or distributions (or repurchases, other than from
employees or consultants upon termination of their employment or services) may
be made with respect to the SMC Common Stock so long as any shares of SMC Series
A Preferred Stock or SMC Series B Preferred Stock remain outstanding.
LIMITATION ON DIRECTORS' LIABILITY; INDEMNIFICATION
Under Delaware Law, the corporation may include in its certificate of
incorporation a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary
37
<PAGE> 44
damages for breach of fiduciary duty as a director under a broad range of
circumstances. The Thermo Certificate includes a provision which eliminates the
directors' liability for monetary damages for a breach of the directors' duty of
care to Thermo or its stockholders (the "Delaware Duty of Care Provision"). As a
result of the Delaware Duty of Care Provision, no director of Thermo will be
liable for monetary damages for negligence or gross negligence occurring after
the Merger. Each director will remain personally liable to Thermo for failure to
act in good faith or to comply with his or her duty of loyalty to Thermo. The
directors will continue to be subject to equitable remedies, although such
remedies in some circumstances may not be available as a practical matter. In
addition, under Delaware Law, each director will remain liable for engaging in a
transaction from which such director derives an improper personal benefit or for
engaging in intentional misconduct or a knowing violation of law. Moreover, the
Delaware Duty of Care Provision also will not limit directors' liability for
violations of the federal securities laws. With regard to directors who are also
officers of Thermo, these persons would be insulated from liability only with
respect to their conduct as directors and would not be insulated from liability
for acts or omissions in their capacity as officers.
Under California Law, a corporation may in its articles limit or eliminate
liability for monetary damages in an action brought by or in the right of the
corporation for a breach of a director's duties to the corporation and its
shareholders, provided that a corporation may not eliminate or limit the
liability of directors (i) for acts or omissions that involve intentional
misconduct or a knowing and culpable violation of law, (ii) for acts or
omissions that a director believes to be contrary to the best interests of the
corporation or its shareholders or that involve the absence of good faith on the
part of the director, (iii) for any transaction from which a director derived an
improper personal benefit, (iv) for acts or omissions that show a reckless
disregard for the director's duty to the corporation or its shareholders in
circumstances in which the director was aware, or should have been aware, in the
ordinary course of performing a director's duties, of a risk of serious injury
to the corporation or its shareholders, (v) for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the director's duty to the corporation or its shareholders, (vi) under Section
310 of the California Law (concerning transactions between the director and the
corporation or corporations having interrelated directors), or (vii) for certain
distributions of corporate assets in violation of the California Law. In
addition, like Delaware Law, directors who are also officers of SMC may be
insulated from liability only with respect to conduct as directors and not as
officers.
Delaware Law authorizes the corporation to indemnify any person or party to
any threatened, pending or completed action, suit or proceeding, other than an
action by or in the right of the corporation, by reason of the fact that he or
she was serving as a director, officer, employee or agent of the corporation or
is or was serving at the request of the corporation at a like position of
another corporation (the "Indemnitee") against expenses, judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with
such action if the Indemnitee acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
corporation (or, with respect to a criminal action, had no reasonable cause to
believe his or her conduct was unlawful). California Law contains a similar
provision which authorizes the corporation to indemnify such person against
liability incurred in connection with such action if he or she acted in good
faith and in a manner he or she reasonably believed to be in the best interests
of the corporation (and, with respect to a criminal action, had no reasonable
cause to believe his or her conduct was unlawful).
Delaware Law also authorizes the corporation to indemnify such person in
connection with any threatened, pending or completed action by or in the right
of the corporation to procure a judgment in its favor against expenses actually
and reasonably incurred by him or her in connection with the defense or
settlement of such action if he or she acted with the requisite conduct.
California Law contains similar provisions to Delaware Law, provided, however,
that no indemnification may be made by a corporation in respect of any claim,
issue or matter as to which a person shall have been adjudged liable to the
corporation unless and only to the extent that the court determines that, in
view of all the circumstances of the case, the person is fairly and reasonably
entitled to indemnity and then only to the extent that the court shall
determine, or for amounts paid or expenses incurred in settling or otherwise
disposing of a pending action without court approval. Under both Delaware Law
and California Law, to the extent an Indemnitee is successful on the merits or
otherwise in defense of any proceeding (whether or not by or in the right of the
corporation), or in defense of any claim,
38
<PAGE> 45
issue or matter therein, such Indemnitee shall be indemnified against expenses
actually and reasonably incurred by him in connection therewith.
Under both Delaware Law and California Law, the corporation must provide
for indemnification on a case by case basis only after a determination that the
Indemnitee met the applicable standard of conduct. Both laws provide that the
determination is made (i) by the board of directors by a majority vote of a
quorum consisting of directors who were not parties to such proceeding, (ii) if
a quorum is not obtainable (or, under Delaware Law, even if obtainable, if the
board, including directors who are parties, so directs), by independent legal
counsel in a written opinion, (iii) by the stockholders (provided that, under
California Law, the shares owned by the person to be indemnified are not
entitled to vote) or (iv) by the court handling the action.
Furthermore, both California Law and Delaware Law provide that a
corporation may make other or further indemnification or advancement of expenses
not expressly prohibited by such laws of any of its directors, officers,
employees or agents under any by-law, agreement, vote of shareholders or
disinterested directors, or otherwise both as to action in an official capacity
and as to action in another capacity while holding such office. Thermo has
indemnification agreements with its directors and officers that provide for the
maximum indemnification allowed by law.
The Thermo Certificate takes advantage of the permissive Delaware
indemnification laws and provides that: (i) Thermo is required to indemnify its
officers and directors to the fullest extent permitted by law; and (ii) expenses
incurred in defending a civil or criminal action, suit or proceeding may be paid
by Thermo in advance of the final disposition of such action, suit or proceeding
upon receipt of an undertaking by or on behalf of the director or officer to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by Thermo.
The SMC Articles provide that the liability of directors for monetary
damages shall be eliminated to the fullest extent permissible under California
Law as currently or hereafter in effect and that SMC is authorized to provide
indemnification of Indemnitees for breach of duty to SMC and its shareholders
and in excess of the indemnification otherwise permitted by California Law,
subject to the limits on such excess indemnification under California Law. In
addition, the SMC Articles provide that no amendment or repeal of the liability
or indemnification provisions shall apply with respect to any act or omission
occurring prior to the effective date of such amendment or repeal. The SMC
By-Laws provide that SMC will indemnify its directors and officers to the
maximum extent permitted by law.
LOANS TO OFFICERS AND EMPLOYEES
Delaware Law provides that a corporation may make loans to, or guarantee
the obligations of, or otherwise assist, its officers and other employees and
those of its subsidiaries when such action, in the judgment of the corporation's
board of directors, may reasonably be expected to benefit the corporation,
however, Delaware Law applies only to those directors who are also officers or
employees of the corporation or a subsidiary. California Law contains a similar
provision covering loans to directors and officers, provided that the
corporation has outstanding shares of record held by 100 or more persons and a
by-law approved by the outstanding shares entitled to vote thereon permitting
the board alone to approve such a loan or guaranty, provided, further, that the
interested director or directors may not vote; otherwise, approval of a majority
of shareholders entitled to vote thereon is necessary. However, under California
Law, loans may be made to directors, officers or employees pursuant to a stock
purchase plan or stock option plan without any shareholder vote.
VOTING BY BALLOT
Under Delaware Law, each stockholder has the right to require a vote by
written ballot for the election of directors at a shareholder meeting unless
otherwise restricted as provided in the certificate of incorporation. Under
California Law, elections for directors need not be by ballot unless a
shareholder so demands or unless the by-laws so require. The SMC By-Laws do not
require an election by ballot unless a shareholder so demands.
39
<PAGE> 46
INSPECTION OF SHAREHOLDER LISTS
California Law provides that a shareholder may inspect or copy the
shareholders' list at any time during usual business hours upon written demand
for a purpose reasonably related to such holder's interests as a shareholder.
California Law also provides an absolute right to inspect and copy the
shareholders' list to, among others, persons holding at least 5% of a
corporation's voting shares, upon five business days' prior written demand.
Delaware Law provides to any stockholder of record the right to inspect the
stockholder list of the corporation for any purpose germane to the meeting for a
ten-day period preceding a stockholder meeting.
40
<PAGE> 47
DESCRIPTION OF THERMO'S CAPITAL STOCK
The authorized capital stock of Thermo consists of 350,000,000 shares of
common stock, $1.00 par value per share (the "Thermo Common Stock") and 50,000
shares of Preferred Stock, $100.00 par value per share (the "Thermo Preferred
Stock"), of which 40,000 shares have been designated Series B Junior
Participating Preferred Stock, $100.00 par value per share ("Thermo Series B
Preferred Stock").
COMMON STOCK
Holders of Thermo Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. There are no cumulative voting
rights. The holders of Thermo Common Stock have no preemptive rights or rights
to convert their Thermo Common Stock into any other securities. The Thermo
Common Stock is not subject to redemption. Upon any liquidation, distribution or
sale of assets, dissolution or winding up of Thermo, the holders of Thermo
Common Stock are entitled to share pro rata in the assets of Thermo available
for distribution after provision for the payment of creditors and subject to the
preferential rights of any then outstanding Thermo Preferred Stock. The
outstanding shares of Thermo Common Stock are fully paid and nonassessable.
There are no restrictions on transferability contained in the Thermo Certificate
or Thermo By-Laws. Subject to preferences that may be applicable to any
outstanding shares of Thermo Preferred Stock, holders of Thermo Common Stock are
entitled to receive ratably such dividends as may be declared by Thermo's Board
of Directors out of funds legally available therefor. The Thermo Common Stock is
listed on the New York Stock Exchange.
As of June 3, 1996, there were outstanding approximately 138,519,970 shares
of Thermo Common Stock. Additional information concerning the rights of holders
of Thermo Common Stock, including information with respect to the division of
the Thermo Board of Directors into three classes, is set forth under "Comparison
of Rights of Holders of Thermo Common Stock and SMC Capital Stock."
PREFERRED STOCK
The Board of Directors of Thermo may, without further action of Thermo's
stockholders, issue up to 50,000 shares of Thermo Preferred Stock, in one or
more classes and one or more series and fix the number of shares constituting
any such class or series. The Thermo Board may similarly fix the rights and
preferences of any class or series of Thermo Preferred Stock, including the
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption (including sinking fund provisions), maturity dates, redemption
prices and liquidation preferences. The rights of the holders Thermo Common
Stock will be subject to, and may be adversely affected by, the rights of
holders of any Thermo Preferred Stock that may be issued in the future. Issuance
of Thermo Preferred Stock could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding voting stock of Thermo.
PREFERRED SHARE PURCHASE RIGHTS; SERIES B JUNIOR PARTICIPATING PREFERRED STOCK
On January 19, 1996, the Board of Directors of Thermo declared a dividend
distribution of one right ("Right") for each outstanding share of Thermo Common
Stock to stockholders of record at the close of business on January 29, 1996.
Each Right entitles the registered holder to purchase from Thermo a unit
consisting of one ten-thousandth of a share (a "Unit") of Thermo Series B
Preferred Stock at a Purchase Price, as defined in the Rights Agreement (as
defined below), of $250.00 in cash per Unit, subject to adjustment. The Rights
are subject to a Rights Agreement (the "Rights Agreement") between Thermo and
The First National Bank of Boston, as Rights Agent.
Initially, the Rights will be attached to all Thermo Common Stock
certificates representing shares then outstanding, and no separate Rights
certificates will be distributed. The Rights will separate from the Thermo
Common Stock and a Distribution Date, as defined in the Rights Agreement, will
occur upon the earlier of (i) 10 days following a public announcement that a
person or group of affiliated or associated persons (an "Acquiring Person") has
acquired, or obtained the right to acquire, beneficial ownership of 15% or more
of the outstanding shares of Thermo Common Stock (the "Stock Acquisition Date"),
or (ii) 10 business days following the commencement of a tender offer or
exchange offer that would result in a person or group
41
<PAGE> 48
beneficially owning 15% or more of such outstanding shares of Thermo Common
Stock. Until the Distribution Date, (i) the Rights will be evidenced by the
Thermo Common Stock certificates and will be transferred with and only with such
Thermo Common Stock certificates, (ii) new Thermo Common Stock certificates
issued after January 29, 1996 will contain a notation incorporating the Rights
Agreement by reference and (iii) the surrender for transfer of any certificates
for Thermo Common Stock outstanding will also constitute the transfer of the
Rights associated with the Thermo Common Stock represented by such certificate.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on January 29, 2006, unless earlier redeemed or
exchanged by Thermo as described below.
As soon as practicable after the Distribution Date, Rights certificates
will be mailed to holders of record of the Thermo Common Stock as of the close
of business on the Distribution Date and, thereafter, the separate Rights
Certificates alone will represent the Rights. Except as otherwise determined by
the Board of Directors and except in connection with shares of Thermo Common
Stock issued upon the exercise of employee stock options, issuances under other
employee stock benefit plans or the conversion of convertible securities issued
prior to the Distribution Date, only shares of Thermo Common Stock issued prior
to the Distribution Date will be issued with Rights.
In the event that a Person, as defined in the Rights Agreement, becomes the
beneficial owner of 15% or more of the then outstanding shares of Thermo Common
Stock, except pursuant to an offer for all outstanding shares of Thermo Common
Stock which the independent directors determine to be fair to, and otherwise in
the best interests of, stockholders, each holder of a Right will thereafter have
the right to receive, upon exercise, that number of shares of Thermo Common
Stock (or, in certain circumstances, cash, property or other securities of
Thermo) which equals the exercise price of the Right divided by one-half of the
current market price (as defined in the Rights Agreement) of the Thermo Common
Stock at the date of the occurrence of the event. However, Rights are not
exercisable following the event set forth above until such time as the Rights
are no longer redeemable by Thermo as set forth below. Notwithstanding any of
the foregoing, following the occurrence of such event, all Rights that are, or
(under certain circumstances specified in the Rights Agreement) were,
beneficially owned by any Acquiring Person will be null and void. The event set
forth in this paragraph is referred to as "Section 11(a)(ii) Event."
For example, at an exercise price of $250.00 per Right, each Right not
owned by an Acquiring Person (or by certain related parties) following an event
set forth in the preceding paragraph would entitle its holder to purchase for
$250.00 such number of shares of Thermo Common Stock (or other consideration, as
noted above) as equals $250.00 divided by one-half of the current market price
(as defined in the Rights Agreement) of the Thermo Common Stock. Assuming that
the Thermo Common Stock had a per share value of $50.00 at such time, the holder
of each valid Right would be entitled to purchase ten shares of Thermo Common
Stock for $250.00.
In the event that, at any time after any person has become an Acquiring
Person, (i) Thermo is acquired in a merger or other business combination
transaction in which Thermo is not the surviving corporation or its Common Stock
is changed or exchanged (other than a merger which follows an offer determined
by the independent directors to be fair as described in the first sentence of
the second preceding paragraph), or (ii) 50% or more of Thermo's assets or
earning power is sold or transferred, each holder of a Right (except Rights
which previously have been voided as set forth above) shall thereafter have the
right to receive, upon exercise, that number of shares of common stock of the
acquiring company which equals the exercise price of the Right divided by
one-half of the current market price of such common stock at the date of the
occurrence of the event.
For example, at an exercise price of $250.00 per Right, each Right
following an event set forth in the preceding paragraph would entitle its holder
to purchase for $250.00 such number of shares of common stock of the acquiring
company as equals $250.00 divided by one-half of the current market price (as
defined in the Rights Agreement) of such common stock. Assuming that such common
stock had a per share value of $100.00 at such time, the holder of each valid
Right would be entitled to purchase five shares of common stock of the acquiring
company for $250.00.
42
<PAGE> 49
At any time after the occurrence of a Section 11(a)(ii) Event, and subject
to the concurrence of a majority of the Continuing Directors (as defined in the
Rights Agreement), the Board of Directors of Thermo may exchange the Rights
(other than Rights owned by such Acquiring Person which have become void), in
whole or in part, at an exchange ratio of one share of Thermo Common Stock, or
one ten-thousandth of a share of Thermo Series B Preferred Stock (or of a share
of a class or series of Thermo's preferred stock having equivalent rights,
preferences and privileges), per Right (subject to adjustment).
The Purchase Price payable, and the number of Units of Thermo Series B
Preferred Stock or other securities or property issuable, upon exercise of the
Rights are subject to adjustment from time to time to prevent dilution (i) in
the event of a stock dividend on, or a subdivision, combination or
reclassification of, Thermo Series B Preferred Stock, (ii) if holders of Thermo
Series B Preferred Stock are granted certain rights or warrants to subscribe for
Preferred Stock or convertible securities at less than the current market price
of the Series B Preferred Stock, or (iii) upon the distribution to holders of
Thermo Series B Preferred Stock of evidences of indebtedness or assets
(excluding regular quarterly cash dividends) or of subscription rights or
warrants (other than those referred to above).
The number of Rights associated with each share of Thermo Common Stock is
also subject to adjustment in the event of a stock split of the Thermo Common
Stock or a stock dividend on the Thermo Common Stock payable in Thermo Common
Stock or subdivisions, consolidations or combinations of Thermo Common Stock
occurring, in any such case, prior to the Distribution Date. The stock split
effected in the form of a three-for-two stock split in June 1996 resulted in an
adjustment such that currently two-thirds of a Right are associated with each
share of Thermo Common Stock.
Thermo Series B Preferred Stock purchasable upon exercise of the Rights
will not be redeemable. Each share of Thermo Series B Preferred Stock will be
entitled to a minimum preferential quarterly dividend payment of $100 per share
and will be entitled to an aggregate dividend of 10,000 times the dividend
declared per share of Thermo Common Stock. In the event of liquidation, the
holders of Thermo Series B Preferred Stock will be entitled to a minimum
preferential liquidating payment of $100 per share and will be entitled to an
aggregate payment of 10,000 times the payment made per share of Thermo Common
Stock. Each share of Thermo Series B Preferred Stock will have 10,000 votes,
voting together with the Thermo Common Stock. Finally, in the event of any
merger, consolidation or other transaction in which Thermo Common Stock is
changed or exchanged, each share of Thermo Series B Preferred Stock will be
entitled to receive 10,000 times the amount received per share of Thermo Common
Stock. These rights are protected by customary antidilution provisions.
Because of the nature of Thermo Series B Preferred Stock's dividend,
liquidation and voting rights, the value of one ten-thousandth of a share of
Thermo Series B Preferred Stock purchasable upon exercise of each Right should
approximate the value of one share of Thermo Common Stock.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional Units will be issued and, in lieu thereof, an adjustment in
cash will be made based on the market price of Thermo Series B Preferred Stock
on the last trading date prior to the date of exercise.
At any time until ten days following the Stock Acquisition Date, the
Company may redeem the Rights in whole, but not in part, at a price of $.01 per
Right (payable in cash or stock). Immediately upon the action of the Board of
Directors ordering redemption of the Rights, the Rights will terminate and the
only right of the holders of Rights will be to receive the $.01 redemption
price. The Rights may also be redeemable following certain other circumstances
specified in the Rights Agreement.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of Thermo, including, without limitation, the right to
vote or to receive dividends. While the distribution of the Rights will not be
taxable to stockholders or to Thermo, stockholders may, depending upon the
circumstances, recognize taxable income in the event that the Rights become
exercisable for Thermo Common Stock (or other consideration) of Thermo or for
common stock of the acquiring company as set forth above.
43
<PAGE> 50
Prior to the Distribution Date, the terms of the Rights are subject to
amendment by the Thermo Board of Directors without the consent of the holders of
the Rights, except that the redemption price of the Rights is not subject to
amendment. After the Distribution Date, only limited terms of the Rights are
subject to amendment by the Board.
Each outstanding share of Thermo Common Stock on January 29, 1996 received
one Right. As long as the Rights are attached to the Thermo Common Stock, one
additional Right (as such number may be adjusted pursuant to the provisions of
the Rights Agreement) shall be deemed to be delivered for each share of Thermo
Common Stock issued or delivered by Thermo after January 29, 1996 and prior to
the Distribution Date. In addition, following the Distribution Date and prior to
the expiration or redemption of the Rights, Thermo shall issue Rights upon the
exercise, conversion or exchange of securities issued on or before the
Distribution Date that are exercisable or exchangeable for, or convertible into,
Thermo Common Stock, and may otherwise issue Rights when it issues Thermo Common
Stock only if the Thermo Board of Directors deems it to be necessary or
appropriate for tax purposes. Forty thousand shares of Thermo Series B Preferred
Stock are initially reserved for issuance upon exercise of the Rights.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire Thermo
without conditioning the offer on a substantial number of Rights being acquired.
The Rights, however, should not affect any prospective offeror willing to make
an offer at a fair price and otherwise in the best interests of Thermo and its
stockholders, as determined by a majority of unaffiliated Directors, or willing
to negotiate with the Thermo Board of Directors. The Rights should not interfere
with any merger or other business combination approved by the Board of Directors
of Thermo since the Board of Directors may, at its option, at any time prior to
the close of business on the earlier of (i) the tenth day following the Stock
Acquisition Date or (ii) January 29, 2006, and in certain other circumstances,
redeem all but not less than all of the then outstanding Rights at the
Redemption Price as defined in the Rights Agreement. It should be noted,
however, that the Thermo Certificate contains certain provisions, including a
classified board of directors and the prohibition of written actions of
stockholders, which may also have certain anti-takeover effects. See "Available
Information," and "Comparison of Rights of Holders of Thermo Common Stock and
SMC Capital Stock."
44
<PAGE> 51
PRICE RANGE OF THERMO COMMON STOCK
The Thermo Common Stock is traded on the New York Stock Exchange under the
symbol "TMO." The following table sets forth for the fiscal periods indicated
the range of high and low sales prices of the Thermo Common Stock on the New
York Stock Exchange. Prices have been restated to reflect a three-for-two stock
split, effected in the form of a 50% stock dividend, which was distributed in
June 1996.
<TABLE>
<CAPTION>
HIGH LOW
--- ---
<S> <C> <C>
1994
First Quarter..................................................... $19 11/15 $16 8/9
Second Quarter.................................................... 18 2/5 16 5/6
Third Quarter..................................................... 20 2/5 16
Fourth Quarter.................................................... 21 5/18 18 1/9
1995
First Quarter..................................................... 22 5/6 19 1/2
Second Quarter.................................................... 27 1/3 21 7/9
Third Quarter..................................................... 3 11/12 26 2/5
Fourth Quarter.................................................... 34 2/3 28 1/4
1996
First Quarter..................................................... 42 1/12 30 5/12
Second Quarter (through June , 1996)............................
</TABLE>
As of May 28, 1996, Thermo had 7,975 shareholders of record. This figure
does not reflect beneficial ownership of shares held in "street" or nominee
name.
Thermo has never paid cash dividends and does not expect to pay cash
dividends in the forseeable future because its policy has been to use earnings
to finance expansion and growth. Payments of dividends will rest within the
discretion of the Thermo Board of Directors and will depend upon, among other
things, Thermo's earnings, capital requirements and financial condition.
45
<PAGE> 52
BUSINESS OF THERMO
DESCRIPTION OF BUSINESS
(A) General Development of Business
Thermo and its subsidiaries (collectively, the "Company," unless the
context requires otherwise) develop, manufacture, and market environmental
monitoring and analysis instruments; biomedical products including heart-assist
devices, respiratory care equipment, and mammography systems; paper-recycling
and papermaking equipment; alternative-energy systems; industrial process
equipment; and other specialized products. The Company also provides
environmental, laboratory, and metallurgical services and conducts
advanced-technology research and development. The Company performs its business
through divisions and wholly owned subsidiaries, as well as majority-owned
subsidiaries that are partially owned by the public or by private investors.
A key element in the Company's growth has been its ability to commercialize
innovative products and services emanating from research and development
activities conducted at the Company's various subsidiaries and divisions. The
Company's strategy has been to identify business opportunities arising from
social, economic, and regulatory issues and to seek a leading market share
through the application of proprietary technology. As part of this strategy, the
Company continues to focus on the acquisition of complementary businesses that
can be integrated into its existing core businesses to leverage the Company's
access to new markets.
The Company believes that maintaining an entrepreneurial atmosphere is
essential to its continued growth and development. In order to preserve this
atmosphere, 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. The
Company's wholly and majority-owned subsidiaries are provided with centralized
corporate development, administrative, financial, and other services that would
not be available to many independent companies of similar size. As of May 31,
1996, the Company had 19 subsidiaries that have sold minority equity interests,
14 of which are publicly traded and five of which are privately held. In
addition, one subsidiary has privately sold debentures that will be convertible
into shares of common stock upon completion of its initial public offering.
The Company is a Delaware corporation and was incorporated in 1956. The
Company completed its initial public offering in 1967 and was listed on the New
York Stock Exchange in 1980. The principal executive office of the Company is 81
Wyman Street, Waltham, Massachusetts 02254-9046 (telephone: 617-622-1000).
(B) Financial Information About Industry Segments
The Company's products and services are divided into six segments:
Instruments, Alternative-energy Systems, Process Equipment, Biomedical Products,
Environmental Services, and Advanced Technologies. Products or services within a
particular segment are provided by more than one subsidiary, and certain
subsidiaries' products or services are included in more than one segment. The
principal products and services offered by the Company in the six industry
segments are described in detail below (see "Principal Products and Services").
Financial information concerning the Company's industry segments is summarized
in Note 15 to its Consolidated Financial Statements contained herein.
(C) Description of Business
(i) Principal Products and Services
INSTRUMENTS
The Company, through its Thermo Instrument Systems Inc. subsidiary, is a
worldwide leader in the development, manufacture, and marketing of analytical,
monitoring, process control, and imaging, inspection,
46
<PAGE> 53
and measurement instruments used to identify and analyze air pollution,
radioactivity, complex chemical compounds, toxic metals, and other elements in a
broad range of liquids and solids, as well as to control, monitor, image,
inspect, and measure various industrial processes and life sciences phenomena.
Thermo Instrument historically has expanded both through the acquisition of
companies, product lines, and technologies and through internal development of
new products and technologies. During the past several years Thermo Instrument
has completed a number of complementary acquisitions that have provided
additional technologies, specialized manufacturing or product development
expertise, and broader capabilities in marketing and distribution. In 1995,
Thermo Instrument's acquisitions included Gould Instrument Systems, Inc. and the
Analytical Instrument Division of Analytical Technology, Inc.
On March 29, 1996, the Company's Thermo Instrument subsidiary completed the
acquisition of a substantial portion of the businesses comprising the Scientific
Instruments Division of Fisons plc (Fisons), a wholly owned subsidiary of
Rhone-Poulenc Rorer Inc., for approximately 123 million British pounds sterling
in cash (approximately $187 million) and the assumption of approximately 24
million British pounds sterling of indebtedness (approximately $36 million). The
purchase price is subject to post-closing adjustments equal to the amounts by
which the net tangible assets and net debt of the acquired businesses on the
closing date are greater or less than certain target amounts agreed to by the
parties. In the first quarter of 1996, Thermo Instrument wrote-off $3.5 million
of acquired technology in connection with this acquisition. The businesses
acquired are involved in the research, development, manufacture, and sale of
analytical instruments to industrial and research laboratories worldwide.
Thermo Instrument has adopted Thermo's spinout strategy in an effort to
more clearly focus its many analytical technologies on their more specific niche
markets. To date, Thermo Instrument has completed an initial public offering of
ThermoSpectra Corporation, has privately offered equity in Thermo BioAnalysis
Corporation, and has privately sold convertible debentures in Thermo Optek
Corporation and ThermoQuest Corporation.
ThermoSpectra develops, manufactures, and markets precision imaging,
inspection, and measurement instruments based on high-speed data acquisition and
digital processing technologies to provide industrial and research customers
with integrated systems that address their specific needs. ThermoSpectra's
products include digital oscillographic recorders and data acquisition systems
that continuously measure and monitor signals from various sensors; digital
storage oscilloscopes (DSOs) capable of taking hundreds of millions of
measurements per second of transient signals or short bursts of data; X-ray
microanalyzers used as accessories to electron microscopes to provide elemental
materials analysis as a supplement to the microscope's imaging capabilities;
nondestructive X-ray inspection systems for process monitoring and quality
control applications; and confocal laser scanning microscopes that use laser
light to generate precise optical images primarily for life science
applications.
Thermo BioAnalysis develops, manufactures, and sells capillary
electrophoresis, matrix-assisted laser desorption/ionization time-of-flight
(MALDI-TOF) mass spectrometry, and health physics instrumentation. Capillary
electrophoresis is a powerful separation technique based on a combination of
chromatographic and electroanalytical technologies. MALDI-TOF mass spectrometers
measure the weight of the components of a sample and identify inorganic chemical
components and/or inorganic elements contained within the sample. Thermo
BioAnalysis' health physics division manufactures and sells radiation detection
and counting instrumentation and sophisticated radiation monitoring systems to
the nuclear industry throughout the world. In February 1996, Thermo BioAnalysis
acquired Dynatech Laboratories Worldwide from Dynatech Corporation, which
designs, manufactures, and markets products used in the immunoassay segment of
the bioinstrumentation market. Immunoassay is an analytical method widely used
in pharmaceutical and biopharmaceutical research, as well as for clinical
testing of patient samples.
Thermo Optek is a leader in the development, manufacture, and marketing of
products used for both elemental and molecular analysis. These products are
based on several optical spectroscopy techniques, including Atomic Emission
(AE), Atomic Absorption (AA), and Fourier transform infrared (FT-IR) and
FT-Raman technologies. Thermo Optek's AE and AA spectrometers identify and
measure trace quantities of metals and other elements in a wide variety of
materials, including environmental samples (such as soil, water,
47
<PAGE> 54
and wastes), foods, drugs, cosmetics, and alloys. Thermo Optek sells its
products to a range of customers from manufacturing industries to service
industries to government and university laboratories. Thermo Optek is a leading
manufacturer of FT-IR and FT-Raman spectrometers, which nondestructively
determine the chemical composition and physical properties of materials. These
instruments are used in chemical research, industrial quality control, and
process monitoring, and for solving a wide variety of materials analysis
problems.
ThermoQuest is a leading manufacturer of commercial mass spectrometers and
has pioneered many of the significant developments and applications of mass
spectrometry. ThermoQuest's mass spectrometry products identify and measure the
components of a sample for organic chemical compounds or for inorganic
compounds. These instruments are used by customers in research and the
production of pharmaceuticals; in environmental analysis and pollution control;
in biochemistry; in analysis of foods, chemicals, and petrochemicals; and in
health and forensic sciences. ThermoQuest also manufactures high performance
liquid chromatographs, gas chromatographs, and related instruments and equipment
used principally in the research and development and production monitoring of
pharmaceuticals and chemicals, and for environmental monitoring. These
instruments separate the chemical components of substances for purposes of
identification and measurement.
Thermo Instrument's wholly owned businesses manufacture monitoring
instruments for two principal markets: the detection and measurement of nuclear
radiation, and the monitoring of air pollutants including toxic and combustible
gases.
The Company's nuclear radiation monitoring instruments detect and measure
alpha, beta, gamma, neutron, and X-ray radiation emitted by natural sources and
by radioactive materials used in nuclear power plants and certain governmental,
industrial, and medical facilities. The Company is a major supplier of
instruments and systems that are manufactured to European standards for
personnel protection and environmental monitoring. The Company also manufactures
industrial gauging and process control instruments used principally by
manufacturers of flat-sheet materials, including metals, plastics, rubber,
paper, and fibers.
The Company's air-monitoring instruments measure pollutants in ambient air
and from stationary sources such as industrial smoke stacks. The principal
pollutants measured are oxides of nitrogen, sulfur dioxide, carbon monoxide,
ozone, and volatile organic compounds (VOCs). These instruments are used by
utility and industrial customers to ensure compliance with environmental
regulations, by government agencies to monitor air quality, and by research
facilities. The Occupational Safety and Health Administration's safety
requirements for protecting workers from toxic or explosive atmospheres in
confined spaces are addressed with the Company's detectors, instruments, and
systems for sensing, monitoring, and warning of such dangers.
In addition, the Company manufactures equipment that provides on-line,
real-time analysis of elements in bulk raw materials, such as coal and cement.
The Company manufactures and markets a number of process monitoring,
analysis, and control systems including: analog and digital recorders for
continuous process industries; process and laboratory analytical instruments and
monitors to detect lethal gases for the oil, gas, and petrochemical industries;
supervisory control and data acquisition software for process monitoring and
operator interface in a variety of industrial processes; and turnkey, integrated
systems to control networks of distant oil and gas wells.
The Company also manufactures and markets process gauges and non-contacting
and non-intrusive process control instrumentation to measure liquid levels,
density, weight, and flows for a variety of industries. The Company's X-ray
fluorescence instruments allow for the nondestructive analysis of inorganic
elements. Applications include alloy identification, on-line process monitoring
and quality control, characterization of toxic metals in soil, and thickness
and/or composition of semiconductor thin films.
The 1995 acquisition of ATI's Analytical Instrument Division added to the
Company's product offerings in several analytical areas, notably in ultraviolet
visual spectrometry and thermogravimetric analysis.
48
<PAGE> 55
ALTERNATIVE-ENERGY SYSTEMS
The Company's Alternative-energy Systems segment includes the operation
and, prior to 1994, the construction and sale of independent (nonutility) power
plants. This segment also includes the manufacture, sale, and servicing of
industrial refrigeration systems; natural gas and marine engines; packaged
cooling and cogeneration systems; and steam turbines and compressors.
Alternative-energy Power Plants
Through its Thermo Ecotek Corporation subsidiary, the Company designs,
develops, owns, and operates independent (nonutility) electric power generation
facilities that use a range of environmentally responsible combustion
technologies. Since 1987, the Company has owned and operated facilities fueled
by agricultural and wood waste, including urban wood waste (referred to as
"biomass"). The Company currently operates seven facilities representing total
electric generating capacity of approximately 140 megawatts. The Company
develops and operates its facilities through joint ventures or limited
partnerships in which the Company has a majority interest or through wholly
owned subsidiaries.
Thermo Ecotek intends to pursue project development and acquisition
opportunities both in the U.S. and internationally. Projects are expected to
include power generation and "clean-fuels" production and processing facilities,
and may include natural gas infrastructure facilities and investments in other
environmental businesses in the future.
The facilities that are leased by the Company are owned by institutional
investors and leased on a long-term basis to the Company or to joint ventures or
partnerships in which the Company has ownership interests. The Company uses
internal funds for preconstruction development expenses and generally obtains
external financing for construction. The Company has equity ownership interests
in three operating plants. The Company may make additional significant equity
investments in future projects. The process of locating, developing, financing,
and constructing power plants is highly complex, lengthy, and expensive and only
a small percentage of the power projects that the Company evaluates or pursues
results in operating projects.
In August 1995, Thermo Ecotek, through two wholly owned subsidiaries,
entered into a Limited Partnership Agreement with KFX Wyoming, Inc., a
subsidiary of KFX Inc. (KFX), to develop, construct, and operate a subbituminous
coal-beneficiation plant to be located near Gillette, Wyoming. The plant, which
is expected to begin commercial operation in late 1996, will employ certain
patented clean coal technology.
Thermo Ecotek also entered into an agreement with KFX under which Thermo
Ecotek acquired 3,000,000 shares of KFX common stock, or approximately 14% of
the outstanding stock of KFX, for $2.00 per share, and obtained the rights to
purchase up to 51% of KFX common stock at certain times through 2000.
In July 1995, Thermo Ecotek entered into an agreement to invest $15 million
in a 185 megawatt combined cycle, steam-turbine electric generation facility
located in Puerto Plata, Dominican Republic, owned by Smith/Enron Cogeneration
Limited Partnership (SECLP), contingent upon the satisfaction by the facility of
certain performance tests. In other international projects, Thermo Ecotek has
two plants under development in India, and has begun development efforts in the
Czech Republic, to provide environmentally friendly power generation.
In May 1996, Thermo Ecotek acquired the assets of the W.R. Grace & Co.
business unit specializing in the manufacture and distribution of botanical
extracts and microbial products used for pest control, for approximately $8
million. Thermo Ecotek will also pay a royalty fee of seven percent on annual
sales in excess of $14 million through the year 2000. The new business unit will
be known as Thermo Trilogy Corporation.
Waste-recycling Facility
In early 1994, the Company completed construction and commenced operation
of a 2,100-ton-per-day municipal solid waste-recycling facility (the Recycling
Facility) in San Diego County, California (the County). The construction of the
Recycling Facility was financed by the issuance of $133.7 million principal
amount of bonds by the California Pollution Control Financing Authority (the
CPCFA Bonds). The County
49
<PAGE> 56
is a party to these financing arrangements and is responsible for payment of the
facility debt in the event of County defaults. The obligations are nonrecourse
to the Company for events of County default.
The Company entered into a 24-year agreement with the County under which
the Company, for a service fee, was committed to recycle materials recovered
from the County's waste stream to reduce the volume of remaining waste. During
1995, the County ceased delivering waste to the facility and defaulted on
certain payment obligations to the Company. The County was also not in
compliance with certain covenants of its agreements with the bank group that
provided the facility financing. As a result of the preceding events, the
Company wrote off its net investment in the facility during 1995. (See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Thermo.")
Other
The Company, through its Thermo Power Corporation subsidiary, develops,
manufactures, markets, and services environmentally sound and economically
efficient industrial refrigeration equipment, natural gas-fueled and
low-emission natural gas engines for vehicular and stationary applications,
lift-truck engines, marine engines, and commercial cooling and cogeneration
units.
Through its industrial refrigeration business, the Company provides
environmentally sound solutions to the refrigeration needs of the
food-processing, petrochemical, and pharmaceutical industries. More than 80% of
the Company's refrigeration products operate on ammonia, a non-ozone-depleting
alternative to the chlorofluorocarbon refrigerants gradually being phased out by
government regulations. The 1994 acquisition of NuTemp, Inc., which rents and
sells new and remanufactured commercial cooling and industrial refrigeration
equipment, broadens the product lines and services the Company offers.
Many of Thermo Power's products are powered by its low-emission dedicated
natural gas-fueled TecoDrive(R) engines. Thermo Power has supplied major fleet
operators such as United Parcel Service and the U.S. Postal Service with
TecoDrive engines to power some of their alternative-fuel vehicles. Thermo Power
also manufactures natural gas engines for stationary applications, including
compressor drives. Other products that operate with TecoDrive engines include
cooling and cogeneration systems and gas engine-driven refrigeration systems.
The Company also manufactures gasoline and LPG (liquefied petroleum gas) engines
for lift trucks and gasoline engines for marine applications, primarily
"cruiser" class boats ranging in size from 25 to 45 feet.
In addition, the Company conducts sponsored research and development on
advanced systems for clean combustion, including a low-cost system for
converting a diesel-fueled engine to operate solely on natural gas without major
modifications to the engine.
Through its ThermoLyte Corporation subsidiary, formed in March 1995, Thermo
Power is developing a line of propane-powered lighting products, including
flashlights, area lights or lanterns, and hazard lights. These products will be
based on proprietary technology for a rigid mantle, the "bulb" in gas lighting
products.
The Company's Alternative-energy Systems segment also includes its Peter
Brotherhood Ltd. subsidiary, a U.K.-based manufacturer of steam turbines and
compressors.
PROCESS EQUIPMENT
The Company designs, manufactures, and sells advanced, custom-engineered
processing machinery, including paper-recycling and papermaking equipment,
metallurgical thermal-processing systems, and electroplating systems.
Paper-recycling and Papermaking Equipment
Through its Thermo Fibertek Inc. subsidiary, the Company designs and
manufactures processing machinery and accessories for the paper-recycling and
papermaking industries. The Company's principal products include
custom-engineered systems and equipment for the preparation of wastepaper for
conversion into recycled paper, and accessory equipment and related consumables
important to the efficient operation of papermaking machines. The Company has
developed technologically advanced equipment for the preparation of white
recycled fiber (e.g. printing and office paper, newsprint, and tissue). The
Company sells in countries
50
<PAGE> 57
outside the Pacific Rim technologically advanced equipment for the preparation
of brown recycled fiber (e.g. corrugated boxes and paper bags) pursuant to a
license from Aikawa Iron Works Co., Ltd., a leading Japanese manufacturer of
this equipment.
Thermo Fibertek also designs and manufactures accessories used in the
papermaking industry, including doctor blades and showers that perform on-line
continuous cleaning of the fabrics and rolls used in the papermaking process.
This cleaning process is important to papermakers because it reduces machine
breakdowns, extends the life of consumable paper machine fabrics, and improves
paper quality. Thermo Fibertek also manufactures forming tables, vacuum systems,
and water-management systems.
In December 1994, a wholly owned subsidiary of the Company entered into a
$145 million contract for engineering, procurement, and construction services
for an office wastepaper de-inking facility located in Menominee, Michigan.
Completion of construction is expected in 1996. Thermo Fibertek is supplying
approximately $16 million of equipment and services under the contract over a
two-year period.
Metallurgical Thermal-processing Systems
The Company, through a division of its Thermo TerraTech Inc. subsidiary
(formerly Thermo Process Systems Inc.), designs, manufactures, and sells
computer-controlled, custom-engineered thermal-processing systems used to treat
primary metals and metal parts.
The Company also manufactures electroplating systems, heavy metal and
waste-treatment systems, and aqueous cleaning systems that offer an alternative
to the use of ozone-damaging solvents in a variety of production processes.
BIOMEDICAL PRODUCTS
The Company's Biomedical Products segment comprises a number of different
businesses. The Company made several acquisitions in 1995, including Bird
Medical Technologies, Inc. and Bennett X-Ray Corporation.
Thermo Cardiosystems Inc., a majority-owned subsidiary of Thermedics Inc.,
has developed two versions of an implantable left ventricular-assist system
(LVAS): a pneumatic system that can be controlled by either a bedside console or
portable unit, and an electric system that features an internal electric motor
powered by an external battery-pack worn by the patient. These devices are
designed to perform substantially all or part of the pumping function of the
left ventricle of the natural heart for patients suffering from cardiovascular
disease. Unlike a total artificial heart system, an LVAS allows the natural
heart to remain in place to assist the heart when it is unable to provide
sufficient cardiac function to maintain life. In October 1994, the U.S. Food and
Drug Administration (FDA) granted approval for commercial sale of the pneumatic
LVAS. With this approval, the pneumatic system is available for sale to cardiac
centers throughout the United States. In April 1994, the Company received the
European Conformity Mark (CE Mark) for the commercial sale of the pneumatic LVAS
in all European Community countries. The electric version of the LVAS, which
received the CE Mark in August 1995, is currently being used in clinical trials
in the U.S. for patients awaiting heart transplants and may not be sold
commercially in this country until it has received approval from the FDA. In
December 1995, the FDA approved the protocol for conducting clinical trials
using Thermo Cardiosystems' electric LVAS as an alternative to transplant. It is
implanted both as a bridge to transplant and as an alternative to heart
transplants in Europe.
The Company's wholly owned International Technidyne Corporation subsidiary
is a leading manufacturer of hemostasis management products, including blood
coagulation-monitoring instruments. International Technidyne also manufactures
and markets skin-incision devices that can draw minute but medically significant
blood samples through precisely controlled incisions.
Nicolet Biomedical Inc., another wholly owned subsidiary of the Company, is
a leading manufacturer of biomedical instruments for assessing muscle, nerve,
sleep, hearing, and brain blood-flow disorders and for related work in clinical
neurophysiology. These instruments are used in hospitals, clinics, universities,
private practice medical offices, and medical research facilities by physicians
and technologists for routine clinical testing and intra-operative monitoring.
Nicolet Biomedical also manufactures systems that record and display
51
<PAGE> 58
spontaneous brain waves in the form of a topographic colored "map." Such maps of
brain activity are used in conjunction with other measurements to assist in the
diagnosis of various neurologic disorders.
Trex Medical Corporation, a majority owned subsidiary of ThermoTrex
Corporation, is a leading manufacturer of low-dose X-ray mammography equipment
and minimally invasive needle-biopsy systems. In 1992, the Company introduced a
digital imaging mammography system designed to target only a specific area of
the breast where a suspicious lesion has been detected, creating a digital image
of the lesion on a video monitor within seconds of taking an X-ray. The
advantage of digital imaging is that the radiologist can manipulate and enhance
the image quality to scrutinize subtle differences that may go undetected on a
film-based X-ray. The Company is developing a digital imaging system capable of
imaging the whole breast rather than just a specific area. The FDA is currently
evaluating whether this type of screening system will require a premarket
approval application or a 510(k) application. The Company does not expect to
submit data to the FDA seeking market clearance for its full-breast digital
imaging system before the end of 1996.
Trex Medical's needle-biopsy systems provide a less-invasive alternative to
conventional surgical biopsies. Compared with open surgery, these needle
techniques are less traumatic to the patient, result in less scarring, which can
affect the accuracy of future mammograms, and are performed on an outpatient
basis at significantly lower cost.
Acquired in September 1995, Bennett X-Ray Corporation, a subsidiary of Trex
Medical, is a leading manufacturer of general-purpose and specialty radiographic
systems, including mammography systems. Bennett manufactures office-based
radiographic systems, which are cost-effective units generally used in doctors'
offices and surgi-care centers. In 1993, Bennett broadened its focus by offering
the more sophisticated, more expensive systems typically used in hospitals.
Bennett entered the hospital market with systems based on its patented
high-frequency generator, which permits shorter exposure times that result in
lower radiation doses and greater image contrast and resolution.
In May 1996, Trex Medical acquired XRE Corporation for approximately $17
million in cash. In addition, Trex Medical repaid approximately $1.8 million of
XRE's debt. XRE designs, manufactures and markets specialized X-ray systems used
in the diagnosis and treatment of coronary artery disease and other vascular
conditions. XRE had revenues of approximately $29.3 million in 1995.
ThermoLase Corporation, a majority-owned subsidiary of ThermoTrex,
manufactures skin-care, bath, and body products sold through salons, spas, and
stores, including the lotion that is an integral part of the laser-based
SoftLight(SM) system that has been developed for the removal of unwanted hair.
Bird Medical Technologies, Inc. was acquired by the Company in August 1995.
Bird Medical Technologies develops, manufactures, and sells respiratory care
equipment and accessories and infection-control products to hospitals, subacute
care facilities, outpatient surgical centers, doctors, dentists, the military,
as well as other manufacturers.
ENVIRONMENTAL SERVICES
Through its Thermo TerraTech subsidiary, the Company provides comprehensive
laboratory-based environmental testing and analysis, as well as design and
construction inspection of water supply and wastewater treatment facilities,
natural resource management consultation, surveying and site planning,
transportation engineering services, solid waste management services, and
building services.
In February 1995, Thermo TerraTech acquired Elson T. Killam Associates
Inc., which provides environmental consulting and engineering services and
specializes in wastewater treatment and water resources management.
In May 1995, Thermo TerraTech acquired substantially all of the assets of
Lancaster Laboratories, Inc. and its affiliate Clewmark Holdings (collectively
Lancaster Laboratories). Lancaster Laboratories, based in Lancaster,
Pennsylvania, is a provider of high-quality analytical services to the
environmental, food, and pharmaceutical industries.
52
<PAGE> 59
Thermo Remediation Inc., a majority-owned subsidiary of Thermo TerraTech,
provides soil-remediation services from a network of regional centers. These
soil-remediation centers thermally treat soils to remove and destroy hydrocarbon
contamination caused by leaking storage tanks, spills accumulated at
manufactured-gas plants and refineries, and from other sources. Thermo
Remediation also operates a waste fluids-recycling facility through a
fluids-recovery company based in Arizona, and offers services in nuclear
remediation and health safety at radioactivity contaminated sites. Through
Thermo Remediation's December 1995 acquisition of Remediation Technologies,
Inc., the Company also offers a broad array of remedial solutions, including
bioremediation and the application of risk-based corrective actions such as
brownfield development. A majority-owned subsidiary of Thermo TerraTech, Thermo
EuroTech N.V. (formerly J. Amerika N.V.), provides waste-oil recycling,
underground tank removal, and other environmental services from its
Netherlands-based operation.
In addition, metallurgical heat-treating services are provided for
customers in the automotive, aerospace, defense, and other industries. The
Company also provides metallurgical fabrication services, principally on
high-temperature materials, for customers in the aerospace, medical,
electronics, and nuclear industries.
ADVANCED TECHNOLOGIES
The Company's ThermoTrex subsidiary conducts sponsored research and
development and is also attempting to commercialize new products based on
advanced technologies it has developed in its laboratories. Sponsored research
and development conducted by ThermoTrex, principally for the U.S. government,
includes basic and applied research in electro-optic and electro-acoustic
systems, signal processing, materials technology, and lasers.
ThermoTrex is currently developing a passive microwave camera intended to
"see" through clouds and fog to enhance safety in aerial navigation, the Sonic
CT(TM) (computed tomography) system for the early detection of breast cancer,
and a blood-flow measurement system, called the Doppler CT, for the diagnosis
and monitoring of peripheral vascular disease. Because ThermoTrex's products are
at different stages of development and subject to different levels of regulatory
approval, no assurance can be given that the necessary approvals for any of the
projects will be obtained on a timely basis, or at all, or that any of them will
eventually result in commercially viable products.
In April 1995, ThermoLase received clearance from the FDA to commercially
market its laser-based hair-removal system, SoftLight. The SoftLight system uses
a low-energy dermatology laser, in combination with a laser-absorbing lotion, to
remove hair. On October 30, 1995, ThermoLase opened its first pilot retail
center, Spa Thira, in La Jolla, California. ThermoLase has signed leases for Spa
Thira locations in Dallas and Beverly Hills, and plans to begin opening
additional centers in the second half of calendar 1996. In January 1996,
ThermoLase formed a joint venture to market the SoftLight process in Japan.
Through Thermedics' Thermo Sentron Inc. (formerly Ramsey Technology, Inc.)
subsidiary, the Company manufactures high-speed precision weighing and
inspection equipment for industrial production and packaging lines serving two
principal markets: packaged goods and bulk materials. The packaged goods market
includes a wide range of checkweighing equipment and metal detectors that can be
integrated at various stages in production lines for process control and quality
assurance and are sold primarily to customers in the food processing and
pharmaceutical industries. The bulk materials product line includes conveyor
belt scales, solids level measurement and conveyor monitoring devices, and
sampling systems, all sold primarily to customers in the mining and material
processing industries, as well as electric utilities, chemical, and other
manufacturing companies.
Through the Orion laboratory products division of Analytical Technology,
Inc., acquired by Thermedics in December 1995, the Company manufactures
electrochemistry, microweighing, process, and other instruments used to analyze
the chemical composition of foods, beverages, and pharmaceuticals and detect
contaminants in environmental and high-purity water samples.
Based on technology that has been used to develop instruments sold by the
Company for the detection of nitrogen-based compounds, the Company developed the
EGIS(R) system for screening people, baggage, and
53
<PAGE> 60
electronic equipment, such as personal computers, for the presence of a wide
range of explosives, including the plastic explosives that have proven difficult
to detect using conventional methods. In 1992, the Company introduced a
high-speed product quality assurance system based on its vapor-detection
technology for use in bottling lines in the carbonated beverage industry (the
Alexus(R) system). The Alexus system is currently being used to ensure product
quality in more than 200 bottling lines worldwide. In 1994, the Company
introduced a new system to the bottled water industry, and it continues to
develop new technologies for product quality applications in response to
consumer demand for product quality and regulatory influences.
Thermo Voltek Corp., a majority-owned subsidiary of Thermedics, designs,
develops, and manufactures electronic test instruments that test electronic and
electrical systems and components for electromagnetic compatibility (EMC),
offers EMC-consulting and systems-integration services, acts as a distributor of
a broad range of EMC-testing products, and manufactures power-conversion systems
for use in telecommunications equipment. Thermo Voltek also designs,
manufactures, and markets high-voltage power conversion systems, modulators,
fast-response protection systems, and related high-voltage equipment for
industrial, medical, and environmental processes, and defense and scientific
research applications.
The Company's wholly owned Coleman Research Corporation subsidiary,
acquired in March 1995, provides systems integration, systems engineering, and
analytical services to government and commercial customers in fields of
information technology, energy and the environment, software engineering, launch
systems, advanced radar imaging, and health systems.
PUBLICLY AND PRIVATELY HELD SUBSIDIARIES
In 1983, the Company adopted a strategy of having certain subsidiaries sell
a minority interest in a public or private offering to outside investors. An
important goal of this strategy is to provide the entrepreneurial atmosphere and
focused performance incentives of a separate business. As of May 31, 1996, the
Company had 19 subsidiaries that have sold minority equity interests, 14 of
which are publicly traded and five of which are privately held. In addition, one
subsidiary has privately sold debentures that will be convertible into shares of
common stock upon the completion of its initial public offering.
Thermedics Inc. develops, manufactures, and markets product quality
assurance systems, precision weighing and inspection equipment,
explosives-detection devices, microweighing and electrochemistry instruments, as
well as biomaterials and other biomedical products. Thermedics' products are
included in the Company's Biomedical Products and Advanced Technologies
segments.
Thermo Cardiosystems Inc., a majority-owned subsidiary of
Thermedics, develops, manufactures, markets, and sells implantable
left ventricular-assist systems designed to perform substantially all
or part of the pumping function of the left ventricle of the natural
heart for patients suffering from cardiovascular disease. Thermo
Cardiosystems' products are included in the Company's Biomedical
Products segment.
Thermo Voltek Corp., a majority-owned subsidiary of Thermedics,
designs, manufactures, and markets instruments that test electronic
systems and components for electromagnetic compatibility, and provides
related distribution and consulting services. Thermo Voltek also
designs and manufactures high-voltage power conversion systems for
research and commercial applications, and specialized power supplies
for telecommunications equipment. Thermo Voltek's products are
included in the Company's Advanced Technologies segment.
Thermo Sentron Inc., a majority-owned subsidiary of Thermedics
develops, manufactures, and markets high speed precision-weighing and
inspection equipment for producers of bulk materials and for packaging
lines in the food, pharmaceutical and other diverse industries. Thermo
Sentron's products for the packaged goods industry include check
weighers and metal detectors.
Thermedics Detection Inc., a majority-owned subsidiary of
Thermedics, develops, manufactures and markets instruments used to
detect ultratrace (parts-per-trillion) concentrations of chemical
compounds. Thermedics Detection's instruments are used in security
applications, primarily the
54
<PAGE> 61
detection of explosives at airports and other locations, and in
process applications in the food and beverage industry.
Thermo Instrument Systems Inc., develops, manufactures, and markets
analytical, monitoring, and process control instruments used to detect and
measure air pollution, nuclear radioactivity, complex chemical compounds, toxic
metals, and other elements in a wide range of materials as well as to control
and monitor various industrial processes. Thermo Instrument's products represent
the Company's Instruments segment.
ThermoSpectra Corporation, a majority-owned subsidiary of Thermo
Instrument, develops, manufactures, and markets precision imaging,
inspection, and measurement instruments based on high-speed data
acquisition and digital processing technologies.
ThermoQuest Corporation, a majority-owned subsidiary of Thermo
Instrument, develops, manufactures and sells mass spectrometers,
liquid chromatographs, and gas chromatographs for the environmental,
pharmaceutical and industrial marketplaces. These analytical
instruments are used in the quantitative and qualitative chemical
analysis of organic and inorganic compounds at ultra-trace levels of
detection.
Thermo BioAnalysis Corporation, a majority-owned, privately held
subsidiary of Thermo Instrument, develops, manufactures, and sells
instrumentation for the analytical biochemistry, biopharmaceutical,
and health physics instrumentation markets. It comprises four
operations that specialize in capillary electrophoresis;
matrix-assisted laser desorption/ionization time-of-flight mass
spectrometry; health physics instrumentation; and immunoassays, which
are analytical methods widely used in pharmaceutical and
biopharmaceutical research, as well as for clinical testing of patient
samples.
Thermo Optek Corporation, a wholly owned, privately held
subsidiary of Thermo Instrument, is a worldwide leader in the
development, manufacture, and marketing of optical and energy-based
analytical instruments. These instruments are used in the quantitative
and qualitative chemical analysis of elements and molecular compounds
in a wide variety of solids, liquids, and gases.
Thermo TerraTech Inc. provides environmental services and infrastructure
planning and design encompassing a range of specializations within consulting
and design, soil and water remediation, and laboratory testing. Thermo TerraTech
also provides metal-treating services. Thermo TerraTech's products and services
are included in the Company's Environmental Services and Process Equipment
segments.
Thermo Remediation Inc., a majority-owned subsidiary of Thermo
TerraTech, is a leading provider, to clients nationwide, of services
for the recycling of petroleum-contaminated soils and fluids as well
as manufactured-gas plant and refinery wastes. Thermo Remediation is
also a major supplier of nuclear remediation and safety services at
radioactively contaminated sites, and is a leader in the application
of bioremediation technology. Thermo Remediation's services are
included in the Company's Environmental Services segment.
Thermo EuroTech N.V., a majority-owned, privately held subsidiary
of Thermo TerraTech, provides environmental services in the
Netherlands, including recycling waste oils, testing, removal, and
installation of underground storage tanks, and groundwater cleanup.
Thermo EuroTech's services are included in the Company's Environmental
Services segment.
Thermo Power Corporation manufactures, markets, and services industrial
refrigeration equipment; natural gas engines for vehicular and stationary
applications; natural gas-fueled cooling and cogeneration systems; lift-truck
engines; and marine engines. Thermo Power also conducts sponsored research and
development on advanced systems for clean combustion and other high-efficiency
gas-fueled devices. Thermo Power's products are included in the Company's
Alternative-energy Systems segment.
ThermoLyte Corporation, a majority-owned, privately held
subsidiary of Thermo Power, was formed in March 1995 to develop and
commercialize a line of propane-powered lighting products, including
flashlights, area lights or lanterns, and hazard lights.
55
<PAGE> 62
ThermoTrex Corporation manufactures and markets mammography and
needle-biopsy systems for the early detection of breast cancer, and develops
advanced technologies that it is incorporating into commercial products for the
medical imaging, personal-care, and avionics industries. ThermoTrex's products
are included in the Company's Advanced Technologies and Biomedical Products
segments.
ThermoLase Corporation, a majority-owned subsidiary of
ThermoTrex, has developed a laser-based system for the removal of
unwanted hair, and manufactures skin-care and other personal-care
products sold through salons, spas, and stores. ThermoLase's
hair-removal system, called SoftLight, is included in the Company's
Advanced Technologies segment, and its skin-care products are included
in the Company's Biomedical Products segment.
Trex Medical Corporation, a majority-owned privately held
subsidiary of ThermoTrex, designs, manufactures, and markets
mammography equipment and minimally invasive stereotactic needle
biopsy systems used for the detection of breast cancer, as well as
office-based general radiography equipment. Trex Medical's products
are included in the Company's Biomedical Products segment.
Thermo Fibertek Inc. develops, manufactures, and markets a range of
equipment and accessory products for the domestic and international paper
industry, including de-inking and stock-preparation equipment, and
water-management systems for paper recycling. Thermo Fibertek's products are
included in the Company's Process Equipment segment.
Thermo Ecotek Corporation develops and operates independent (nonutility)
power plants that use clean combustion technology and alternative-energy
sources, such as agricultural waste. The Company is also now involved in
engineered clean fuels, as well as a range of other environmentally sound
technologies. Thermo Ecotek's operations are included in the Company's
Alternative-energy Systems segment.
(ii) New Products
The Company's business includes the development and introduction of new
products and may include entry into new business segments. The Company has made
no commitments to new products that require the investment of a material amount
of the Company's assets, nor does it have any definitive plans to enter new
business segments that would require such an investment (see Section (xi)
"Research and Development").
(iii) Raw Materials
Thermo Cardiosystems relies upon several custom-designed components and
materials supplied by other companies to manufacture its LVAS. In 1992, several
suppliers of such components and materials notified Thermo Cardiosystems that
they intended to exit the biomedical market. While the Company believes that it
will be able to develop new sources of, or alternatives to, these materials and
components, no assurance can be given that the Company will develop such sources
or alternatives in a timely manner, or that the FDA will approve the use of any
such alternative materials or components.
Except as described above, in the opinion of management, the Company has a
readily available supply of raw materials for all of its significant products
from various sources and does not anticipate any difficulties in obtaining the
raw materials essential to its business.
(iv) Patents, Licenses, and Trademarks
The Company considers patents to be important in the present operation of
its business. Except for ThermoLase's patents for its laser-based hair-removal
system, the Company does not consider any patent, or related group of patents,
to be of such importance that its expiration or termination would materially
affect the Company's business taken as a whole. The Company seeks patent
protection for inventions and developments made by its personnel and
incorporated into its products or otherwise falling within its fields of
interest. Patent rights resulting from work sponsored by outside parties do not
always accrue exclusively to the Company and may be limited by agreements or
contracts.
56
<PAGE> 63
The Company protects some of its technology as trade secrets and, where
appropriate, uses trademarks or registers its products. It also enters into
license agreements with others to grant and/or receive rights to patents and
know-how.
(v) Seasonal Influences
There are no significant seasonal influences on the Company's sales of
products and services.
(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 single customer accounted for more than 10% of the Company's total
revenues in any of the past three years. The Advanced Technologies segment
derived approximately 27%, 13%, and 23% of its revenues in 1995, 1994, and 1993,
respectively, from contracts with various agencies of the U.S. government and
approximately 23% of its revenues in 1994 from one customer for a
process-detection instrument. In connection with the development of power
plants, the Company typically enters into long-term power supply contracts with
a single customer for the sale of power generated by each plant. The
Alternative-energy Systems segment derived 16% of its revenues in 1995 and 1994
and 9% of its revenues in 1993, from Pacific Gas & Electric and 15%, 19%, and
18% of its revenues in 1995, 1994, and 1993, respectively, from Southern
California Edison.
(viii) Backlog
The Company's backlog of firm orders at year-end 1995 and 1994 was as
follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Instruments.................................................... $188,700 $139,600
Alternative-energy Systems..................................... 112,900 109,100
Process Equipment.............................................. 114,800 199,000
Biomedical Products............................................ 77,100 37,300
Environmental Services......................................... 76,500 46,700
Advanced Technologies.......................................... 117,200 206,500
-------- --------
$687,200 $738,200
======== ========
</TABLE>
The Alternative-energy Systems segment backlog for 1994 has been restated
to exclude the backlog of the Recycling Facility (see "Alternative-energy
Systems" under sub-section (i), "Principal Products and Services," above).
Backlog includes the uncompleted portion of research and development
contracts and the uncompleted portion of certain equipment contracts that are
accounted for using the percentage-of-completion method. The Company believes
approximately 95% of the 1995 backlog will be filled during fiscal 1996.
(ix) Government Contracts
Approximately 9% of the Company's total revenues in 1995 were derived from
contracts or subcontracts with the federal government, which are subject to
renegotiation of profits or termination. The Company does not have any knowledge
of threatened or pending renegotiation or termination of any material contract
or subcontract.
57
<PAGE> 64
(x) Competition
The Company is engaged in many highly competitive industries. The nature of
the competition in each of the Company's markets is described below:
INSTRUMENTS
The Company is among the principal manufacturers of analytical
instrumentation. Within the markets for the Company's analytical instrument
products, the Company competes with several large corporations with broad
product offerings, as well as numerous smaller companies that address only
particular segments of the industry or specific geographic areas. The Company's
instruments business generally competes on the basis of technical advances that
result in new products and improved price-performance ratios, reputation among
customers as a quality leader for products and services, and active research and
application-development programs. To a lesser extent, the Company competes on
the basis of price.
ALTERNATIVE-ENERGY SYSTEMS
The worldwide independent power market consists of numerous companies,
ranging from small startups to multinational industrial companies. In addition,
a number of regulated utilities have created subsidiaries that compete as
nonutility generators. Nonutility generators often specialize in market
"niches," such as a specific technology or fuel (for example, gas-fired
cogeneration, refuse-to-energy, hydropower, geothermal, wind, solar, wood or
coal) or a specific region of the country where they believe they have a market
advantage. However, many nonutility generators, including the Company, seek to
develop projects on a best-available-fuel basis. The Company competes primarily
on the basis of project experience, technical expertise, capital resources, and
power pricing.
The Company's sale of industrial refrigeration systems is subject to
intense competition. The industrial refrigeration market is mature, highly
fragmented, and extremely dependent on close customer contacts. Major industrial
refrigeration companies, of which the Company is one, account for approximately
one-half of worldwide sales, with the balance generated by many smaller
companies. The Company competes principally on the basis of its advanced control
systems and overall quality, reliability, service, and price. The Company
believes it is a leader in remanufactured refrigeration equipment. Its rental
services business has one large competitor that supplies rental equipment. The
Company competes in this market based on price, delivery time, and customized
equipment.
The Company's sale of packaged cogeneration systems is subject to intense
competition, both direct and indirect. Direct competitors consist of companies
that sell cogeneration products resembling those sold by the Company as well as
electric utilities' pricing programs. Indirect competitors include manufacturers
of conventional heating and cooling systems.
As the alternative-fuel engine market becomes fully developed, the Company
anticipates that competition, specifically in the market for natural gas engines
for vehicles, will be intense, and potential competitors may include major
automotive and natural gas companies and other companies that have substantially
greater financial resources than those of the Company.
The Company has experienced intense competition in the marine engine
business in recent years as some of its former customers have been acquired by
competitors following the vertical integration of the boating industry.
Competition is primarily on the basis of quality, reliability, and service.
PROCESS EQUIPMENT
The Company faces significant competition in the markets for
paper-recycling and water handling equipment and papermachine accessories, and
competes in these markets primarily on the basis of quality, service, technical
expertise, and product innovation. The Company is a leading supplier of
accessory equipment for papermaking machines, and competes in this market
primarily on the basis of service, technical expertise, and performance. The
market for thermal-processing systems is subject to intense competition
worldwide. The Company is aware of at least eight companies that market a number
of products comparable
58
<PAGE> 65
to the Company's, but competition for particular projects is typically limited
to fewer companies. The Company competes on the basis of several factors,
including technical performance, product quality and reliability, timely
delivery, and often price.
BIOMEDICAL PRODUCTS
Competition in the markets for most of the Company's biomedical products,
including those manufactured by Thermo Cardiosystems, ThermoTrex, Nicolet
Biomedical, ITC, and Bird Medical Technologies, is based to a large extent upon
technical performance.
The Company is aware of one other company that has submitted a PMA
application with the FDA for an implantable LVAS. The Company is unaware whether
this PMA application has been accepted for filing by the FDA. Also, the Company
is aware of one other company that has received approval by the FDA Advisory
Panel on Circulatory System Devices and subsequent commercial approval for its
cardiac-assist device. This is an external device that is positioned on the
outside of the patient's chest and is intended for short-term use in the
hospital environment. The Company is also aware that a total artificial heart is
currently undergoing clinical trials. The requirement of obtaining FDA approval
for commercial sale of an LVAS is a significant barrier to entry into the U.S.
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. In addition, other research groups
and companies are developing cardiac-assist 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, reimbursement status, and price.
The Company is one of a number of competitors in the markets for
mammography and general radiographic systems and is one of two competitors in
the market for prone stereotactic needle biopsy systems. The Company competes in
these markets primarily on the basis of product features, product performance,
and reputation, as well as price and service. Many of the Company's radiographic
products are technologically innovative, and the markets in which the Company
competes with these products are characterized by rapid technological change.
The Company believes that in order for it to be competitive in these markets it
will be important for it to continue to be technologically innovative.
ENVIRONMENTAL SERVICES
The Company competes in the market for soil-remediation services based on
its ability to offer customers superior protection from environmental
liabilities using a national network of cleanup facilities. The Company believes
that there are two other companies that operate fixed-site thermal-treatment
facilities for soil-remediation in multiple states. However, the Company faces
competition in local markets from landfills, other treatment technologies, and
from companies competing with similar technologies, which limits the prices that
can be charged by the Company. Pricing is therefore a major competitive factor
for the Company.
The Company's metallurgical services business competes in specialty
machining services. Competition is based principally on services provided,
turnaround time, and price.
Hundreds of independent analytical testing laboratories and consulting
firms compete for environmental services business nationwide. Many of these
firms use equipment and processes similar to those of the Company. Competition
is based not only on price, but also on reputation for accuracy, quality, and
the ability to respond rapidly to customer requirements. In addition, many
industrial companies have their own in-house analytical testing capabilities.
The Company believes that its competitive strength lies in certain niche markets
within which the Company is recognized for its expertise.
ADVANCED TECHNOLOGIES
In its contract research and development business, the Company not only
competes with other companies and institutions that perform similar services,
but must also rely on the ability of government agencies and other clients to
obtain allocations of research and development monies to fund contracts with the
Company.
59
<PAGE> 66
The Company competes for its research and development programs principally on
the basis of technical innovations. As government funding becomes more scarce,
particularly for defense projects, the competition for such funding will become
more intense. In addition, as the Company's programs move from the development
stage to commercialization, competition is expected to intensify.
The Company's Orion division competes with several international companies.
In the markets for the products made by its Orion division, the Company competes
on the basis of performance, service, technology, and price.
The Company's Thermo Sentron subsidiary competes with several international
and regional companies in the market for its products. Thermo Sentron's
competitors in the packaged goods market differ from those in the bulk materials
market. The principal competitive factors in both markets are customer service
and support, quality, reliability, and price.
The Company's product quality assurance systems compete with
chemical-detection systems manufactured by several companies and with other
technologies and processes for product quality assurance. Competition in the
markets for all of the Company's detection products is based primarily on
performance, service, and price.
There are a number of competing technologies for instruments that detect
explosives and narcotics, including makers of other chemical-detection
instruments as well as enhanced X-ray detectors. To date, the Federal Aviation
Administration (FAA) has not required that U.S. airports and airlines buy
advanced explosives-detection equipment. The Company believes that companies, if
any, whose devices are required by the FAA will have a substantial competitive
advantage in the United States.
The Company is a leading supplier of pulsed electromagnetic interference
testing equipment in the U.S., and believes that it is also among the leading
suppliers in Europe and the Pacific Rim, other than Japan. The Company competes
in this market primarily on the basis of performance, technical expertise, and
reputation.
The Company estimates that there are approximately 20 companies that
independently manufacture and market high-voltage power supply systems of the
general type manufactured and marketed by Thermo Voltek. Thermo Voltek competes
for both contracts and commercial sales primarily on the basis of technical
expertise, product performance, and reputation.
The Company's Coleman Research subsidiary has numerous public and private
competitors in its various market segments. Coleman Research competes primarily
on the basis of price, technological performance, technical expertise, and
reputation.
(xi) Research and Development
During 1995, 1994, and 1993, the Company expended $266,104,000,
$229,200,000, and $176,316,000, respectively, on research and development. Of
these amounts, $167,120,000, $149,645,000, and $116,733,000, respectively, were
sponsored by customers and $98,984,000, $79,555,000, and $59,583,000,
respectively, were Company-sponsored. Approximately 930 professional employees
were engaged full-time in research and development activities at December 30,
1995.
(xii) Environmental Protection Regulations
The Company believes that compliance 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
At December 30, 1995, the Company employed approximately 14,400 persons.
60
<PAGE> 67
(d) Financial Information about Exports by Domestic Operations and about Foreign
Operations
Financial information about exports by domestic operations and about
foreign operations is summarized in Note 15 to Consolidated Financial Statements
contained herein.
PROPERTIES
The location and general character of the Company's principal properties by
industry segment as of December 30, 1995, are as follows:
INSTRUMENTS
The Company owns approximately 1,446,000 square feet of office,
engineering, laboratory, and production space, principally in California,
Colorado, Wisconsin, Germany, and England, and leases approximately 1,596,000
square feet of office, engineering, laboratory, and production space principally
in California, Connecticut, Massachusetts, Ohio, Texas, Wisconsin, and England,
under leases expiring from 1996 to 2017.
ALTERNATIVE-ENERGY SYSTEMS
The Company owns approximately 358,000 square feet of office, engineering,
and production space, principally in Pennsylvania and England, and leases
approximately 320,000 square feet of office, engineering, laboratory, and
production space principally in Illinois and Michigan, under leases expiring
from 1996 to 2017. The Company operates four independent power plants in
California, Maine, and New Hampshire, under leases expiring from 2000 to 2010.
The Company owns three independent power plants in New Hampshire and California
and a waste-recycling facility in California.
PROCESS EQUIPMENT
The Company owns approximately 1,160,000 square feet of office, laboratory,
and production space, principally in Connecticut, Massachusetts, New York,
France, and England, and leases approximately 308,000 square feet of office,
engineering, and production space principally in Michigan and Wisconsin, under
leases expiring from 1996 to 2004.
BIOMEDICAL PRODUCTS
The Company owns approximately 248,000 square feet of office and production
space in California, Connecticut, and New Jersey, and leases approximately
587,000 square feet of office, engineering, laboratory, and production space in
California, Illinois, New York, and Texas, under leases expiring from 1996 to
2009.
ENVIRONMENTAL SERVICES
The Company owns approximately 835,000 square feet of office, laboratory,
and production space, principally in California, Pennsylvania, Minnesota, and
the Netherlands, and leases approximately 540,000 square feet of office,
engineering, laboratory, and production space principally in California,
Massachusetts, New Hampshire, New Mexico, and Pennsylvania, under leases
expiring from 1996 to 2008.
The Company owns approximately 16 acres of land from which it provides
soil-remediation and fluid-recycling services in Arizona and Washington and
leases approximately 96 acres of land from which it provides soil-recycling
services in Maryland and South Carolina.
ADVANCED TECHNOLOGIES AND CORPORATE HEADQUARTERS
The Company owns approximately 190,000 square feet of office space in
Massachusetts and New York, and leases approximately 1,119,000 square feet of
office, engineering, and laboratory space principally in Alabama, California,
Florida, Massachusetts, and Minnesota, under leases expiring from 1996 to 2008.
61
<PAGE> 68
The Company believes that its facilities are in good condition and are
suitable and adequate to meet its current needs, and that suitable replacements
are available on commercially reasonable terms for any leases that expire in
1996 in the event that the Company is unable to renew such leases on reasonable
terms.
LEGAL PROCEEDINGS
The Company has participated in the operation of the Dade County Downtown
Government Center cogeneration facility in Miami, Florida, through a 50/50 joint
venture of subsidiaries of the Company and Rolls-Royce, Inc. This facility and
the joint venture are involved in regulatory and other legal proceedings at the
Federal Energy Regulatory Commission, the Florida Public Service Commission and
in court. See the information pertaining to this matter in Note 7 to
Consolidated Financial Statements, and under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Thermo," contained herein.
Certain subsidiaries of the Company have been notified that the U.S.
Environmental Protection Agency (EPA) has determined that a release or a
substantial threat of a release of a hazardous substance, as defined in the
Comprehensive Environmental Response Compensation and Liability Act of 1980
(CERCLA or the Superfund law), occurred at sites to which chemical or other
wastes generated by the manufacturing operations of these companies may have
been sent. These notifications generally also allege that these companies may be
potentially responsible parties with respect to the remedial actions needed to
control or clean up any such releases. Under CERCLA, responsible parties can
include current and previous owners of the site, generators of hazardous
substances disposed of at the site, and transporters of hazardous substances to
the site. Each responsible party can be jointly and severally liable, without
regard to fault or negligence, for all costs associated with site remediation.
In each instance the Company believes that it is one of several companies that
received such notification and who may likewise be held liable for any such
remedial costs.
The Company is also involved in situations under state environmental laws
with respect to certain other sites where remediation may be required. The
Company is conducting investigative or remediation activities at these sites
pursuant to arrangements with state environmental agencies.
The Company evaluates its potential liability as a responsible party for
these environmental matters on an ongoing basis subject to factors such as the
estimated remediation costs, the nature and duration of the Company's
involvement with the site, the financial strength of other potentially
responsible parties, and the availability of indemnification from previous
owners of acquired businesses. Estimated liabilities are accrued in accordance
with Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies." To date, the Company has not incurred any significant liability
with respect to any of these sites and anticipates that future liabilities
related to sites where the Company is currently a potentially responsible party
or is otherwise conducting investigative or remediation activities, will not
have a material adverse effect on its business, results of operations, or
financial position.
62
<PAGE> 69
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THERMO
OVERVIEW
Thermo and its subsidiaries (the "Company") develop and manufacture a broad
range of products that are sold worldwide. The Company expands the product lines
and services it offers by developing and commercializing its own core
technologies and by making strategic acquisitions of complementary businesses.
The majority of the Company's businesses fall into four broad markets:
environmental, energy, process control, and selected health and safety
instrumentation.
An important component of the Company's strategy is to establish leading
positions in its markets through the application of proprietary technology,
whether developed internally or acquired. A key contribution to the growth of
the Company's segment income (as defined in the results of operations below),
particularly over the last three years, has been the ability to identify
attractive acquisition opportunities, complete those acquisitions, and derive a
growing income contribution from the newly acquired businesses as they are
integrated into the Company's business segments.
The Company seeks to minimize its dependence on any specific product or
market by maintaining and diversifying its portfolio of businesses and
technologies. Similarly, the Company's goal is to maintain a balance in its
businesses between those affected by various regulatory cycles and those more
dependent on the general level of economic activity. Although the Company is
diversified in terms of technology, product offerings, and geographic markets
served, the future financial performance of the Company as a whole is largely
affected by the strength of worldwide economies and the continued adoption and
diligent enforcement of environmental, health, and safety regulations, among
other factors.
The Company believes that maintaining an entrepreneurial atmosphere is
essential to its continued growth and development. In order to preserve this
atmosphere, 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 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 and are classified as "Gain on
issuance of stock by subsidiaries" in the accompanying statement of income.
These gains have represented a substantial portion of the net income reported by
the Company in recent years. 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.
Proposed Accounting Pronouncement
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" ("Proposed
Statement"). The Proposed Statement would establish new rules for determining
when entities should be consolidated and how consolidated financial statements
should be prepared. Under the Proposed Statement, it is possible that companies
would be required to consolidate entities in which their legal ownership is as
low as 40%. Companies involved with special purpose entities could be required
to include these entities in their consolidated financial statements in such
instances as when a company is the only general partner, although the company
may own only a very small percentage of the entity (e.g. 1%). This portion of
the Proposed Statement is expected to have little effect on the Company's
consolidated financial statements. The portion of the Proposed Statement
referred to as the Procedures portion, which describes how consolidated
financial statements should be prepared, could result in significant changes in
the way the
63
<PAGE> 70
Company records certain transactions once control, as newly defined, has been
reached. Under the Proposed Statement, the following accounting will result:
Decreases in a parent's ownership interest in a subsidiary -- Under the
Proposed Statement, any sale of the stock of a subsidiary that does not result
in loss of control would be accounted for as a transaction in the equity of the
consolidated entity with no gain or loss being recognized. This would occur even
when the sale is made by the parent, and even though such a sale would result in
a gain for corporate tax purposes. Under this provision, any sale of a
non-controlling interest, e.g. 49% of a wholly owned entity, whether the sale
results in an economic gain or loss, would be recorded only in the equity
section of the balance sheet.
Recording gains from the purchase of additional shares -- Under current
practice, a company that owns marketable equity securities of other issuers may
account for them as "available-for-sale" under Statement of Financial Accounting
Standards (SFAS) No. 115, with the fair value adjustment being recorded in
equity. Upon obtaining "significant influence" (current practice being twenty
percent or greater ownership), under the Proposed Statement the unrealized
holding gains and losses previously recorded in equity would be recorded in the
income statement. The same accounting would result if an entity increased its
ownership from an SFAS No. 115 investment directly to control and consolidation.
Under this accounting, the more the acquirer pays for the additional shares, the
greater the gain recorded.
Changes in a parent's ownership interest in a subsidiary and step
acquisitions -- Under the FASB's proposed economic unit model, once control is
obtained, any transactions in a subsidiary's stock between the controlling and
noncontrolling shareholders are considered equity transactions and, therefore,
only the equity accounts of the reporting entity are impacted. Under the
Proposed Statement, after control is obtained, the cost of any subsequent
purchase is recorded as a reduction of equity. As a result, no additional
goodwill is recorded on these subsequent purchases, but the charge to equity
would reduce the book value of the acquirer. This charge to equity would not
become part of the "cost" of acquiring the entity and, therefore, it would be
possible to sell the entity at a later date and record a "gain" on the
transaction, even though the seller actually sold it for less than what the
seller paid to acquire it.
The FASB conducted a hearing concerning the Proposed Statement in February
1996, at which the Company, along with other major companies and many of the
major accounting firms and accounting associations, expressed their disagreement
with various parts of the Proposed Statement. The FASB expects to issue a final
Statement which could become effective for fiscal years beginning after December
15, 1996.
RESULTS OF OPERATIONS
First Quarter 1996 Compared With First Quarter 1995
Sales for the first quarter of 1996 were a record $635.1 million, an
increase of $156.5 million, or 33%, over the first quarter of 1995. Segment
income was $59.0 million, compared with $52.7 million in 1995, an increase of
12%. (Segment income is income before corporate general and administrative
expenses, other income and expense, minority interest expense, and income
taxes.) Operating income was $51.9 million, compared with $45.9 million in 1995,
an increase of 13%.
Sales from the Instruments segment were $225.6 million in 1996, an increase
of $52.6 million, or 30%, over 1995. Sales increased primarily due to
acquisitions made by Thermo Instrument, which added $40 million to sales in
1996. The remaining increase resulted from higher revenues from existing
businesses, primarily due to greater demand for the Company's analytical
instruments, offset in part by the unfavorable effects of currency translation
due to the strengthening of the U.S. dollar in 1996. Segment income margin
(segment income margin is segment income as a percentage of sales) was 10.6% in
1996, compared with 14.4% in 1995. Segment income margin declined due in part to
a $3.5 million purchase accounting write-off of acquired technology resulting
from the March 1996 acquisition of a substantial portion of the businesses
comprising the Scientific Instruments Division of Fisons plc, which was acquired
at the end of the first quarter of 1996, and due to lower margins at acquired
businesses. The acquisition of the businesses from Fisons is expected to
negatively impact segment income margins at Thermo Instrument due to lower
margins at these businesses.
64
<PAGE> 71
Sales from the Alternative-energy Systems segment were $81.5 million in
1996, an increase of $7.4 million, or 10%, over 1995. Within this segment,
revenues from Thermo Ecotek, which consist of revenues from biomass power plant
operations, were $33.5 million in 1996, compared with $31.0 million in 1995.
This increase results from higher contractual energy rates at all of the
Company's facilities, except the Hemphill plant, as well as fewer days of
scheduled and unscheduled outages at the Delano plants in California, offset in
part by higher curtailment of power output at the Mendota and Woodland plants,
also in California. Continued curtailment of power output at these plants is
expected during the remainder of 1996. Revenues from the Company's
waste-recycling facility in southern California were $4.9 million in 1996,
compared with $6.7 million in 1995. Although this facility ceased processing
waste and the Company wrote off its net investment in the facility in 1995, the
customer is continuing to pay a portion of its obligation under the service
agreement. The customer remains in default on the service agreement and
continues to pursue the purchase of the facility from the Company. Sales at
Peter Brotherhood increased to $13.4 million in 1996 from $11.5 million in 1995
as a result of increased demand for steam turbines and, to a lesser extent,
increased demand for special-purpose machinery. Sales from Thermo Power were
$29.8 million in 1996, compared with $24.9 million in 1995. This increase
resulted primarily from greater demand for gas-fueled cooling systems and
gasoline and natural gas TecoDrive engines and the inclusion of revenues from
lift-truck engines.
Segment income from the Alternative-energy Systems segment was $6.3 million
in 1996, compared with $6.1 million in 1995. Thermo Ecotek had segment income of
$4.5 million in 1996, compared with $3.4 million in 1995. This improvement
results from higher revenues and lower fuel and other operating costs at two of
Thermo Ecotek's California plants, offset in part by higher expenses for new
business development. Segment income from the Company's waste-recycling facility
was $2.3 million in 1996, compared with $1.2 million in 1995. This change
results from lower depreciation expense as a result of the write-down of the
Company's net investment in 1995. Results for this facility, net of related
interest expense, were at a breakeven level for the first quarter of 1996. Peter
Brotherhood incurred a segment loss of $0.5 million in 1996, compared with
income of $0.2 million in 1995. This decline results from increased costs to
complete jobs in process and competitive pricing pressures. Segment income at
Thermo Power declined by $1.3 million due to lower prices for industrial
refrigeration products resulting from competitive pricing pressures, lower
manufacturing efficiencies, including lost production time during severe winter
storms and, to a lesser extent, higher warranty expenses. Thermo Power expects
that a cost increase in one of the major components of its industrial
refrigeration packages will adversely affect the gross profit margin contributed
from this product starting in the second quarter of 1996.
Sales in the Process Equipment segment were $93.3 million in 1996, compared
with $57.5 million in 1995. Sales from Thermo Fibertek increased $5.2 million to
$49.0 million in 1996. This increase results primarily from an increase in
demand for papermaking accessory products. Sales of $35.0 million in 1996 and
$4.5 million in 1995 were recorded by a wholly owned subsidiary of the Company
for construction of an office wastepaper de-inking facility in Menominee,
Michigan. This facility is expected to be completed by the end of 1996. Sales of
Thermo TerraTech's thermal-processing equipment increased $2.5 million from
depressed 1995 levels, while sales from Napco's automated electroplating
equipment business declined $2.4 million. Segment income margin was 10.3% in
1996, compared with 10.8% in 1995. This decline results primarily from lower
margins on sales recorded by the Company on the Michigan project due to a higher
proportion of pass-through costs.
Sales in the Biomedical Products segment were $87.6 million in 1996, an
increase of $33.4 million, or 62%, over 1995, primarily due to the inclusion of
$26.1 million in sales from Bird Medical Technologies, Inc. and Bennett X-Ray
Corporation, which were acquired in the third quarter of 1995, and increased
demand for a number of the Company's biomedical products. Sales of ThermoTrex's
mammography and needle-biopsy systems increased 17% to $22.4 million; sales of
Thermo Cardiosystems' implantable left ventricular-assist system (LVAS)
increased 52% to $6.7 million; neurodiagnostic monitoring equipment sold by the
Company's wholly owned Nicolet Biomedical Inc. subsidiary increased 8% to $14.2
million; and sales of blood coagulation-monitoring products and skin-incision
devices sold by the Company's wholly owned International Technidyne Corporation
subsidiary increased 11% to $8.7 million. Segment income margin improved to
13.9%
65
<PAGE> 72
in 1996 from 12.0% in 1995 as a result of increased sales and, to a lesser
extent, price increases for Thermo Cardiosystems' air-driven LVAS.
Sales in the Environmental Services segment were $59.2 million in 1996, an
increase of $15.3 million, or 35%, over 1995, due to sales from acquired
businesses. Within this segment, sales from Thermo Remediation were $23.0
million in 1996, compared with $13.5 million in 1995. Thermo Remediation's
revenues increased due to the inclusion of revenues from acquired businesses,
offset in part by lower revenues from soil-remediation and fluids-recycling
services resulting from competitive pricing pressures and a decline in the
volume of soil processed as a result of ongoing regulatory uncertainties at two
sites. Thermo Remediation's nuclear service sales also declined primarily due to
a decline in radiochemistry laboratory work, reflecting reduced spending at the
U.S. Department of Energy and increased competition. Sales of metallurgical
services declined $1.8 million due to the impact of closing a small plant in
1995 and, to a lesser extent, competitive pricing pressures. Segment income was
$3.3 million in 1996, compared with $3.8 million in 1995. This decline primarily
results from a loss of $2.0 million incurred at Thermo TerraTech's EuroTech
operation. The loss at EuroTech resulted from the settlement of several contract
disputes, as well as severe winter weather, which impacted all phases of
EuroTech's business.
Sales from the Advanced Technologies segment were $89.4 million in 1996,
compared with $77.3 million in 1995. Sales increased $16.1 million due to the
inclusion of revenues from the former Orion laboratory products division of
Analytical Technology, Inc., which was acquired in December 1995, and Moisture
Systems Corporation and Rutter & Co., which were acquired in January 1996. Sales
at Thermo Voltek increased $3.3 million due to an increase of $1.7 million in
revenues at Comtest, primarily due to increased demand and the introduction of
new products. Thermo Voltek's revenues also increased $1.1 million due to the
acquisition in March 1995 of Kalmus Engineering Inc. Sales of Thermedics
Detection's process-detection instruments to the beverage industry declined $3.5
million to $2.9 million in 1996, primarily due to lower demand from its
principal customer, which has substantially completed its deployment of these
systems. Sales of Thermedics' EGIS explosives-detection systems increased $1.4
million to $2.9 million as a result of an order received from the U.S.
government to provide Israel with counter-terrorism support. Sales at Coleman
Research declined 10% to $35.9 million as a result of lower U.S. government
contract funding. Segment income margin declined to 4.2% in 1996 from 6.8% in
1995, primarily resulting from lower sales of Thermedics Detection's
process-detection instruments to the beverage industry and, to a lesser extent,
increased expenses incurred by ThermoLase to develop and commercialize its
laser-based hair-removal process.
The Company has adopted a strategy of spinning out certain of its
businesses into separate subsidiaries and having these subsidiaries sell a
minority interest to outside investors. The Company believes that this strategy
provides additional motivation and incentives for the management of the
subsidiary through the establishment of subsidiary-level stock option incentive
programs, as well as capital to support the subsidiary's growth. 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
recorded gains of $28.9 million in 1996 and $12.9 million in 1995 (Note 2 to
Interim Consolidated Financial Statements). Minority interest expense increased
to $12.6 million in 1996 from $7.4 million in 1995. Minority interest expense
includes $5.6 million in 1996 and $0.7 million in 1995 relating to gains
recorded by the Company's majority-owned subsidiaries as a result of the sale of
stock and the issuance of stock upon conversion of indebtedness by their
subsidiaries.
1995 Compared With 1994
Sales in 1995 were $2,207.4 million, an increase of $478.2 million, or 28%,
over 1994. Segment income, excluding restructuring and other nonrecurring costs
described below of $21.9 million in 1995 and $0.7 million in 1994, was $270.1
million, compared with $206.3 million in 1994, an increase of 31%. Operating
income, which includes restructuring and other nonrecurring costs, was $225.5
million, an increase of $43.4 million, or 24%, over 1994. Financial results for
1994 have been restated to include Coleman Research, which was acquired in a
pooling-of-interests transaction in March 1995 (Note 3 to Consolidated Financial
Statements).
66
<PAGE> 73
Sales from the Instruments segment were $782.7 million in 1995, an increase
of $132.5 million, or 20% over 1994. Sales increased primarily due to
acquisitions made by Thermo Instrument, which added $104 million to sales in
1995. The remaining sales increase was substantially due to the favorable
effects of currency translation due to a weaker U.S. dollar in 1995. Segment
income margin was 14.5% in 1995, compared with 16.2% in 1994. Segment income
margin declined due to lower margins at acquired businesses and reduced
shipments at Thermo Instrument's air-monitoring instruments subsidiary.
Sales from the Alternative-energy Systems segment were $325.9 million in
1995, an increase of $40.5 million, or 14%, over 1994. Within this segment,
revenues from Thermo Ecotek, which consist of revenues from biomass power plant
operations, were $141.4 million in 1995, compared with $134.3 million in 1994.
This increase results from a full year of revenues from the Whitefield, New
Hampshire, plant which did not operate for most of the first half of 1994 due to
major damage to the turbine-generator, as well as higher contractual energy
rates in 1995 at all of Thermo Ecotek's facilities, excluding the facility in
Hemphill, New Hampshire. These increases were offset largely by utility-imposed
curtailment of power at the Woodland and Mendota plants in California. The
utility that purchases the electrical output of these California plants has the
right to curtail the plants' power output up to 1,000 hours per year during
periods of low demand. The utility commonly experiences low demand following
periods of heavy rain or snow, when hydroelectric power is available. During
1995, these plants were each curtailed for 1,000 hours. During January and
February 1996, these plants each experienced approximately 200 hours of
curtailment and are likely to receive the contractual maximum during 1996.
Revenues from the Company's waste-recycling facility in southern California
declined by $0.8 million due to a reduction in the amounts paid by the
facility's customer. The facility ceased processing waste during 1995 and the
Company wrote off its net investment in this facility in the third quarter of
1995, as described below. Sales at Peter Brotherhood Ltd. increased $18.1
million to $56.2 million as a result of increased demand for steam turbines and,
to a lesser extent, increased demand for special purpose machinery over
depressed 1994 levels. Sales from Thermo Power increased $16.5 million to $108.4
million, due primarily to increased demand for refrigeration packages and marine
engine-related products and, to a lesser extent, the acquisition of NuTemp, Inc.
in May 1994.
Segment income from the Alternative-energy Systems segment, excluding
restructuring and other nonrecurring costs of $11.5 million in 1995, was $44.5
million in 1995, compared with $34.5 million in 1994. Thermo Ecotek had segment
income of $34.6 million in 1995, compared with $26.9 million in 1994. This
improvement results from lower fuel costs at two of the California plants and
higher contractual energy rates in 1995, offset in part by utility-imposed
curtailment of power at the Woodland and Mendota facilities. Segment income at
Thermo Power declined to $5.1 million in 1995 from $5.3 million in 1994,
reflecting an increase in expenditures for research and development. Peter
Brotherhood incurred a segment loss of $1.1 million in 1995, compared with a
loss of $0.8 million in 1994, as a result of increased costs to complete jobs in
process and competitive pricing pressures.
In 1995, the Company recorded restructuring and other nonrecurring costs of
$11.5 million for this segment. This amount represents the Company's net
investment in a waste-recycling facility in southern California that contracted
to process waste for San Diego County (the County). The County had previously
advised the Company that it was attempting to raise funds to purchase the
facility and had entered into discussions with the Company regarding termination
of the Company's long-term service agreement. Termination of the service
agreement would have required the County to pay the Company a termination fee
and reimburse the Company for certain other items connected with the facility.
To date, the County has been unable to raise the necessary funds on terms
acceptable to the County. During the third quarter of 1995, the County paid the
Company less than the amount due under the service agreement. In October 1995,
the Company notified the County that the County was in default of the service
agreement and that, pursuant to that agreement, the County had 45 days to cure
the default. To date, the County has not cured this default. The Company's
financing on this facility consists of tax-exempt obligations (Note 6 to
Consolidated Financial Statements), which are nonrecourse to the Company for
events of County default. The County is a party to these financing arrangements.
The County is in default of certain terms of its agreements with the bank group
that provided the financing and if the County does not cure these defaults, it
could be declared in default under the financing agreements. Based upon County
assertions, its financial obligation to the Company in a
67
<PAGE> 74
default situation would be limited to the funds it has available from the
day-to-day operation of the County's solid waste-disposal system, which would be
insufficient for the Company to recover any of its investment.
In a lawsuit relating to the waste-recycling facility discussed above, a
third party, from which the Company's subsidiary acquired certain development
rights, alleges that fees totaling $7.9 million plus interest and legal costs
are due and payable in connection with construction of the facility. The Company
contends that no additional fees are payable because the facility actually built
was substantially different from the one contemplated in the agreement with the
third-party developer. There can be no assurance as to the outcome of this
matter.
Certain of Thermo Ecotek's plants have power sales agreements with
utilities under which the rates paid for power will convert from fixed rates to
"avoided-cost" rates in the year 2000. Avoided-cost rates are currently
substantially less than the fixed rates. One of these plants, located in
Woodland, California, has conditions in its nonrecourse lease agreement that
require funding of a "power reserve" in years prior to 2000, based on
projections of operating cash flow shortfalls in the year 2000 and thereafter.
The power reserve represents funds available to make lease payments in the event
that revenues are not sufficient after the Woodland plant converts to
avoided-cost rates. Without sufficient increases in avoided-cost rates or
reductions in fuel costs and other operating expenses by the year 2000, Thermo
Ecotek expects to either renegotiate its nonrecourse lease agreement or forfeit
its interest in the Woodland plant. Beginning in the third quarter of 1996,
Thermo Ecotek will expense the funding of reserves required under the
nonrecourse lease agreement. As a result, the Company expects that the results
of the plant will be reduced to approximately breakeven at that time. During
1995, the plant contributed $6.3 million of operating income.
Sales in the Process Equipment segment were $318.0 million in 1995,
compared with $190.2 million in 1994. Sales from Thermo Fibertek increased $44.1
million to $206.7 million, due to an increase of $23.3 million in sales of
paper-recycling equipment, which included $14.7 million of sales under an
approximately $16 million subcontract with Thermo Electron to supply equipment
and services for an office wastepaper de-inking facility in Menominee, Michigan,
and due to increased demand at Thermo Fibertek's paper-recycling business in
France. Sales at Thermo Fibertek also increased $17.3 million due to greater
demand at its North American accessories business, and increased by $2.7 million
due to the favorable effects of currency translation. In addition to sales
recorded by Thermo Fibertek under the Michigan project, a wholly owned
subsidiary of the Company recorded revenues from the project of $77.0 million.
This facility is expected to be completed by the end of 1996. Sales of Thermo
TerraTech's (formerly Thermo Process Systems) thermal-processing equipment and
Napco's automated electroplating equipment increased $2.6 million and $4.2
million, respectively, from depressed 1994 levels. Segment income margin,
excluding restructuring and other nonrecurring costs of $7.5 million in 1995,
was 11.5% in 1995, compared with 10.9% in 1994. Thermo Fibertek's segment income
margin improved to 16.2% from 12.9% in 1994, primarily due to increased sales
and an improved sales mix. During 1995, the Process Equipment segment recorded
restructuring and other nonrecurring costs of $7.5 million to write off cost in
excess of net assets of acquired companies, of which $5.0 million was recorded
by Thermo TerraTech, and $2.5 million was recorded by the Company's Napco
subsidiary. Thermo TerraTech has decided to focus its resources on growing the
environmental infrastructure services part of its business and, therefore, no
longer expects to reinvest in its thermal-processing equipment business to the
extent necessary to recover this investment. Napco is appealing a jury verdict
rendered against it for approximately $11.0 million in a contract dispute
arising out of an allegedly defective waste-treatment system installed by Napco
in 1984. Because this verdict exceeds Napco's financial ability to pay, Napco
has filed a petition for bankruptcy. The Company believes that it will be unable
to recover its investment in Napco. Napco's sales and income are not significant
to the Company's consolidated results of operations.
Sales in the Biomedical Products segment were $255.8 million in 1995, an
increase of $75.4 million, or 42%, over 1994 due primarily to increased demand
for a number of the Company's biomedical products and the inclusion of $31.6
million in sales from Bird Medical Technologies, Inc. and Bennett X-Ray
Corporation, which were acquired in the third quarter of 1995. Sales of
ThermoTrex's mammography and needle-biopsy systems increased 38% to $74.9
million; Thermo Cardiosystems' implantable left ventricular-assist system (LVAS)
increased 98% to $20.6 million; ThermoLase's skin-care products increased 33% to
$24.9 million;
68
<PAGE> 75
neurodiagnostic monitoring equipment sold by the Company's wholly owned Nicolet
Biomedical Inc. subsidiary increased 12% to $53.1 million; and sales of blood
coagulation-monitoring products and skin-incision devices sold by the Company's
wholly owned International Technidyne Corporation subsidiary increased 13% to
$32.3 million. Segment income margin improved to 12.6% from 9.8% in 1994 as a
result of increased sales and, to a lesser extent, price increases for Thermo
Cardiosystems' air-driven LVAS.
Sales in the Environmental Services segment were $210.5 million in 1995, an
increase of $69.1 million, or 49%, over 1994. Within this segment, sales from
Thermo Remediation were $57.5 million in 1995, compared with $50.4 million in
1994. Sales from Thermo Remediation's soil-remediation and fluids-recycling
services increased due to acquisitions, offset in part by lower sales at
existing sites resulting from ongoing regulatory uncertainties, primarily at two
sites, as well as severe weather conditions at one site, and competitive pricing
pressures. Thermo Remediation's nuclear services sales from existing sites
increased primarily due to a long-term environmental restoration contract for
the U.S. Department of Energy's (DOE's) Hanford site, offset in part by a
decrease in radiochemistry laboratory work, reflecting a reduction in spending
at the DOE. Sales of analytical laboratory and environmental consulting services
increased $60.2 million, to $100.6 million, due to the inclusion of sales from
acquired businesses. Sales of metallurgical services declined $2.0 million to
$42.8 million, due to the effect of closing a small plant in 1995. Segment
income margin, excluding restructuring and other nonrecurring costs of $1.9
million in 1995, improved to 11.0% from 10.5% in 1994, due primarily to higher
sales, offset in part by higher legal expenses incurred within the environmental
consulting services operations. The restructuring and other nonrecurring costs
included $1.5 million as a result of the decision to close a metallurgical
services division located in Albuquerque, New Mexico. The costs primarily
represent severance costs and the write-off of cost in excess of net assets of
acquired companies and leasehold improvements. The facility was closed in the
second quarter of 1995.
Sales from the Advanced Technologies segment were $321.6 million in 1995,
compared with $286.5 million in 1994. Sales increased $22.3 million due to the
inclusion of a full year of sales from Thermo Sentron Inc. (formerly Ramsey
Technology Inc.), which was acquired in March 1994, and sales from the Orion
laboratory products division of Analytical Technology, Inc., which was acquired
in December 1995. Sales at Thermo Voltek increased $12.7 million to $36.3
million, due to the inclusion of $7.2 million in sales from acquired businesses
and, to a lesser extent, the introduction of a new product line and an increase
in demand. Sales at Coleman Research increased $20.7 million to $164.6 million
due to increased contract funding. Coleman Research has experienced a decline in
backlog, which could result in lower revenues in 1996. Sales of Thermedics
Detection's process-detection instruments declined $21.8 million to $16.2
million primarily due to lower demand from its principal customer, which has
substantially completed its deployment of these systems, and sales of EGIS(R)
explosives-detection systems declined $2.1 million to $8.0 million, due
primarily to lower demand as a result of the shipment of several large orders in
1994. Segment income, excluding restructuring and other nonrecurring costs of
$1.0 million in 1995 and $0.7 million in 1994, increased $6.7 million to $19.9
million as a result of improved margins at Coleman Research and Thermo Sentron,
due primarily to efforts to control costs. These improvements were offset in
part by a decline in segment income from Thermedics Detection, primarily as a
result of lower sales and, to a lesser extent, increased expenses incurred by
ThermoLase to develop and commercialize its laser-based hair-removal process.
Restructuring and other nonrecurring costs of $1.0 million in 1995 were recorded
by ThermoTrex as a result of the decision to close its East Coast division. The
costs included $0.6 million for the write-off of intangible assets.
As a result of the sale of stock by subsidiaries, the issuance of stock by
subsidiaries upon conversion of indebtedness, and similar transactions, the
Company recorded gains of $80.8 million in 1995 and $25.3 million in 1994. Such
gains represent the increase in the Company's proportionate share of the
subsidiaries' equity and are classified as gain on issuance of stock by
subsidiaries in the accompanying statement of income. See Notes 1 and 10 to
Consolidated Financial Statements for a more complete description of these
transactions. Minority interest expense increased to $60.5 million in 1995 from
$31.0 million in 1994. Minority interest expense includes $28.6 million in 1995
and $5.7 million in 1994 related to gains recorded by the Company's
majority-owned subsidiaries as a result of the sale of stock and the issuance of
stock upon conversion of indebtedness, by their subsidiaries.
69
<PAGE> 76
Other expense, net, in the accompanying statement of income includes a gain
of $14.7 million in 1994 resulting from the sale of the Peter Brotherhood
facility in the United Kingdom. Also included is equity in losses of
unconsolidated subsidiaries, which represents the Company's portion of results
from entities in which the Company's ownership is 50% or less, including the
operation of the Dade County cogeneration facility. The loss associated with the
Dade County facility was $1.6 million in 1995 and $5.7 million in 1994. Because
the demand for power and chilled water at the Dade County Downtown Government
Center complex has been substantially less than anticipated since the plant's
startup in 1987, and because the plant has had difficulty disposing of the
remainder of its output, the joint venture has experienced continuing losses. In
September 1994, the joint venture suspended operation of this plant for an
indefinite period of time, although it will continue to be responsible for lease
and fixed costs. In 1993, the Company established a reserve representing
management's estimate, discounted to present value, of the Company's share of
estimated negative cash flows of the joint venture. The Company is involved in
regulatory proceedings that could require additional reserves if the outcome of
one or more matters is adverse to the Company. See Note 7 to Consolidated
Financial Statements for a description of these and other legal proceedings
involving the Company.
1994 Compared With 1993
Sales in 1994 were $1,729.2 million, an increase of $374.7 million, or 28%,
over 1993. Segment income, excluding restructuring and other nonrecurring costs
described below, of $0.7 million in 1994 and $6.6 million in 1993, was $206.3
million, compared with $143.1 million in 1993, an increase of 44%. Operating
income was $182.1 million, compared with $119.2 million in 1993, an increase of
53%.
Sales from the Instruments segment were $650.1 million in 1994, an increase
of $133.4 million, or 26%, over 1993. Sales increased due to acquisitions made
by Thermo Instrument during 1993 and its acquisition of several businesses
within the EnviroTech Measurements & Controls group of Baker Hughes Incorporated
in March 1994. Segment income margin was 16.2%, compared with 17.7% in 1993.
Segment income margin declined principally due to lower margins at the acquired
businesses within the EnviroTech Measurements & Controls group.
Sales from the Alternative-energy Systems segment were $285.4 million, an
increase of $42.7 million, or 18%, over 1993. Within this segment, revenues from
Thermo Ecotek, which consist of revenues from biomass power plant operations,
were $134.3 million, compared with $117.7 million in 1993. This increase results
from an additional plant in operation in 1994 and, to a lesser extent, the
absence of utility-imposed curtailments of power output as well as improved
performance at two California plants and annual contractual energy rate
increases under certain power sales contracts. The 1993 period included $9.8
million of revenues recorded as a result of the termination of a power sales
contract and $3.1 million from the one-time sale of gas pipeline rights. Sales
from the Company's wholly owned Energy Systems division increased $10.7 million
as a result of a waste-recycling facility in San Diego County that commenced
operation in the first quarter of 1994. Sales from Thermo Power increased 19%,
to $91.9 million, as a result of the inclusion of $8.4 million in sales from
NuTemp, which was acquired in May 1994, and due to increased demand for
refrigeration packages at its FES division.
Segment income from the Alternative-energy Systems segment, excluding
restructuring and other nonrecurring costs of $1.5 million in 1993, was $34.5
million, compared with $14.4 million in 1993. Thermo Ecotek had segment income
of $26.9 million, compared with $13.2 million in 1993. This improvement results
from an additional power plant in operation during 1994, the absence of
utility-imposed curtailments of power output and improved performance at two
California plants, and annual contractual energy rate increases under certain
power sales contracts. Thermo Ecotek's segment income also improved as a result
of lower lease expense, offset in part by depreciation expense, resulting from
the December 1993 purchase of the Delano I facility in California. The 1993
period included $8.6 million of income from the termination of a power sales
contract and the one-time sale of gas pipeline rights. Segment income from the
Company's Energy Systems division, excluding restructuring and other
nonrecurring costs of $0.3 million in 1993, increased $3.4 million as a result
of the waste-recycling facility that commenced operation in the first quarter of
1994. Segment income increased at Thermo Power by $2.6 million as a result of
increased sales, as well as lower expenses at its
70
<PAGE> 77
Crusader Engines division. During 1993, the Company recorded restructuring and
other nonrecurring costs of $1.5 million for this segment, which primarily
represents a $1.2 million reserve for restructuring at the Company's steam
turbines and compressors business.
Sales in the Process Equipment segment were $189.9 million, compared with
$167.5 million in 1993. Within this segment, sales from Thermo Fibertek
increased to $162.6 million from $137.1 million in 1993 due to an increase of
$17.6 million in sales as a result of the acquisition of AES Engineered Systems
in June 1993, an increase of $7.9 million in sales from the Company's
paper-recycling equipment business as a result of three large contracts received
earlier in the year, and an increase of $4.1 million in sales from the Company's
U.S. accessories business due to greater demand. These increases were offset in
part by a decline of $4.4 million in sales of environmental-process systems sold
by the Company's U.K. subsidiary, to $1.3 million in 1994, as a result of
changes in U.K. environmental regulations that required modifications to that
subsidiary's equipment. Sales of Thermo TerraTech's thermal-processing
equipment, which remain depressed, declined $1.5 million in 1994, and sales of
automated electroplating equipment from Napco declined $1.5 million due to weak
demand. Segment income margin in the Process Equipment segment, excluding
restructuring and other nonrecurring costs of $0.5 million in 1993, was 10.9%,
compared with 8.3% in 1993. Thermo Fibertek's segment income margin, excluding
restructuring and other nonrecurring costs of $0.5 million in 1993, improved to
12.9% from 11.6% in 1993, primarily due to increased sales and an improved sales
mix. Thermal-processing equipment operations were just above the breakeven
level, while Napco operations resulted in a segment loss of $0.3 million due to
lower sales levels.
Sales in the Biomedical Products segment were $180.3 million, an increase
of $52.8 million, or 41%, over 1993. Sales increased $18.1 million due to the
inclusion for a full year of sales from CBI Laboratories, Inc., which was
acquired by ThermoLase in December 1993. Sales of a number of the Company's
biomedical products also contributed to the increase, including ThermoTrex's
mammography and needle-biopsy systems, which increased 45% to $54.4 million;
Thermo Cardiosystems' implantable LVAS, which increased $6.9 million; blood
coagulation-monitoring products and skin-incision devices sold by the Company's
wholly owned International Technidyne Corporation subsidiary, which increased
18% to $28.6 million; and Thermedics' Scent Seal fragrance samplers, which
increased $3.0 million, due primarily to increased demand. Segment income margin
improved to 9.8% from 4.5% in 1993 as a result of increased sales and efforts to
reduce costs.
Sales in the Environmental Services segment were $141.8 million, compared
with $122.0 million in 1993. Within this segment, sales from Thermo Remediation
increased $8.6 million, to $29.7 million, primarily due to an increase in the
volume of soil processed at its soil-remediation centers and, to a lesser
extent, the inclusion of revenues from businesses acquired during 1994 and late
1993. Sales of analytical laboratory and environmental consulting services
increased 10.9% to $61.2 million, due to the inclusion of sales from businesses
acquired during 1994 and, to a lesser extent, the addition of a long-term
environmental restoration contract for the DOE's Hanford site. Sales of
metallurgical services increased 9.1%, to $44.8 million, due to increased
demand. Segment income margin, excluding restructuring and other nonrecurring
costs of $4.6 million in 1993, improved to 10.5% from 7.6% in 1993, due to
increased sales and efforts to reduce costs. During 1993, the Company recorded
restructuring and other nonrecurring costs of $4.6 million for this segment,
which represents a $1.9 million reserve for the write-off of machinery and
equipment and costs to phase out a product line in the Company's
metal-fabrication services business and $2.7 million for the write-off of mobile
soil-remediation assets and related expenses.
Sales from the Advanced Technologies segment were $286.5 million, compared
with $181.1 million in 1993. Sales increased $54.7 million due to the inclusion
of sales from Thermo Sentron, which was acquired by Thermedics in March 1994,
and Comtest, which was acquired by Thermo Voltek in August 1993. Revenues from
Coleman Research's government-sponsored research and development contracts
increased $39.1 million, while revenues from ThermoTrex's government-sponsored
research and development contracts increased $1.8 million. Sales of Thermedics
Detection's EGIS explosives-detection systems increased $4.1 million, and sales
of Thermedics Detection's process-detection instruments, principally to one
customer, increased $3.6 million. Segment income margin, excluding restructuring
and other nonrecurring costs of $0.7 million in 1994, was 4.6% in both 1994 and
1993. Improved segment income margin at Coleman Research resulting from
increased revenues was offset by lower margins at ThermoTrex due to increased
research and development expenses to
71
<PAGE> 78
develop and commercialize new products and, to a lesser extent, lower margins at
newly acquired businesses. During 1994, the Company recorded restructuring and
other nonrecurring costs of $0.7 million for severance costs and, to a lesser
extent, the costs to write off leasehold improvements at ThermoTrex's East Coast
division.
The Company's Napco subsidiary is challenging a jury verdict rendered
against it during the third quarter of 1994 (Note 7 to Consolidated Financial
Statements). In the third quarter of 1994, the Company increased its reserve for
potential losses from pending litigation by approximately $4.0 million, which is
reflected in corporate general and administrative expenses.
As a result of the sale of stock by subsidiaries, the issuance of stock by
subsidiaries upon conversion of indebtedness, and similar transactions, the
Company recorded gains of $25.3 million in 1994 and $39.9 million in 1993. See
Notes 1 and 10 to Consolidated Financial Statements for a more complete
description of these transactions. Minority interest expense increased to $31.0
million in 1994 from $21.1 million in 1993. Minority interest expense includes
$5.7 million in 1994 and $1.3 million in 1993 relating to gains recorded by the
Company's majority-owned subsidiaries as a result of the sale of stock by their
subsidiaries.
Other expense, net, in the accompanying statement of income includes a gain
of $14.7 million resulting from the sale of the Peter Brotherhood facility in
the United Kingdom. Also included is equity in losses of unconsolidated
subsidiaries, which represents the Company's portion of results from entities in
which the Company's ownership is 50% or less, primarily the operation of the
Dade County cogeneration facility, and beginning in 1994, the Company's share of
the profit from a 50%-owned joint venture that is responsible for the operation
and maintenance of the Company's waste-recycling facility in San Diego. The loss
associated with the Dade County facility was $5.7 million in 1994 and 1993,
excluding a $15.0 million provision recorded in 1993 as management's estimate,
discounted to present value, of the Company's share of estimated future negative
cash flows of the venture.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital was $1,709.5 million at March 30, 1996,
compared with $1,306.4 million at December 30, 1995. Included in working capital
were cash, cash equivalents, and short-term available-for-sale investments of
$1,450.5 million at March 30, 1996, compared with $1,055.8 million at December
30, 1995. In addition, at March 30, 1996, the Company had $59.5 million of
long-term available-for-sale investments and $24.3 million of long-term
held-to-maturity investments, compared with $61.8 million of long-term
available-for-sale investments and $23.8 million of long-term held-to-maturity
investments at December 30, 1995. Proceeds from the issuance of Company and
subsidiary common stock totaled $44.7 million in the first three months of 1996.
In January 1996, the Company issued and sold $585 million principal amount of
4 1/4% subordinated convertible debentures due 2003 (Note 4 to Interim
Consolidated Financial Statements).
During the first three months of 1996, the Company expended $265.2 million
for acquisitions and $24.5 million for purchases of property, plant and
equipment. The Company has agreements or letters of intent to issue Thermo
Common Stock or expend approximately $101 million on the acquisition of new
businesses, including approximately $62 million for the acquisition of SMC.
These potential acquisitions of new businesses are subject to various conditions
to closing, and there can be no assurance that all of the transactions will be
consummated. The Company has no material commitments for purchases of property,
plant and equipment and expects that, for 1996, such expenditures will
approximate the 1995 level.
A substantial percentage of the Company's consolidated cash and investments
is held by subsidiaries that are not wholly owned by the Company. This
percentage may vary significantly over time. Pursuant to the Thermo Electron
Corporate Charter (the Charter), to which each of the majority-owned
subsidiaries of the Company is a party, the combined financial resources of
Thermo Electron and its subsidiaries allow the Company to provide banking,
credit, and other financial services to its subsidiaries so that each member of
the Thermo Electron group of companies may benefit from the financial strength
of the entire organization. Toward that end, the Charter states that each member
of the group may be required to provide certain credit support to the
consolidated entity. Nonetheless, the Company's ability to access assets held by
its majority-owned subsidiaries through dividends, loans, or other transactions
is subject in each instance to a fiduciary
72
<PAGE> 79
duty owed to the minority shareholders of the relevant subsidiary. In addition,
dividends received by Thermo Electron from a subsidiary that does not
consolidate with Thermo Electron for tax purposes are subject to tax. Therefore,
under certain circumstances, a portion of the Company's consolidated cash and
short-term investments may not be readily available to Thermo Electron or
certain of its subsidiaries.
The Company intends for the foreseeable future to maintain at least 80%
ownership of its Thermo Instrument, Thermo Fibertek, and Thermo Ecotek
subsidiaries, which is required in order to continue to file a consolidated
federal income tax return with these subsidiaries. In addition, the Company
intends to maintain greater than 50% ownership of its other majority-owned
subsidiaries so that the Company may continue to consolidate these subsidiaries
for financial reporting purposes. This may require the purchase by the Company
of additional shares or convertible debentures of these companies from time to
time as the number of outstanding shares issued by these companies increases,
either in the open market or directly from the subsidiaries. See Note 6 to
Consolidated Financial Statements for a description of outstanding convertible
debentures issued by Thermo Instrument. In addition, at March 30, 1996, Thermo
Instrument, Thermo Fibertek, and Thermo Ecotek had outstanding stock options for
3,122,000 shares, 2,423,000 shares, and 1,008,000 shares, respectively,
exercisable at various prices and subject to certain vesting schedules. The
Company's other majority-owned subsidiaries also have outstanding stock options
and/or convertible debentures.
During the first three months of 1996, the Company expended $12.8 million
to purchase the common stock of certain of its subsidiaries. The Company expects
that these purchases will continue, although the amount of purchases in a given
reporting period may vary significantly.
73
<PAGE> 80
BUSINESS OF SMC
SMC designs, manufactures, markets and services advanced diagnostic and
therapeutic products for the respiratory care market. SMC is a leading worldwide
supplier of pulmonary and metabolic exercise and nutrition diagnostic equipment.
In addition, SMC is a leader in the United States market for diagnostic
equipment used in the computerized analysis of sleep disorders, which frequently
result from serious pulmonary conditions. SMC also markets a High Frequency
Oscillatory Ventilator ("HFOV"), which incorporates patented technology for the
treatment of respiratory complications in newborn infants ("neonates") and
pediatric patients. The HFOV is SMC's initial product introduction into the
therapeutic segment of the respiratory care market. In addition, SMC
manufactures and sells non-invasive blood gas ("NIBG") monitoring equipment and
supplies, both as key components of its respiratory products as well as on an
original equipment manufacturer basis.
SMC's strategy is to enhance its market leadership position in the
pulmonary and metabolic diagnostic equipment markets, to expand its market
position in the sleep diagnostic market and to develop the significant market
opportunities for the HFOV. SMC expects to strengthen its presence in selected
respiratory diagnostic segments through product innovations stressing software
solutions, modularization, miniaturization and reduced manufacturing costs. In
the respiratory therapy market, SMC is actively promoting the HFOV as the
standard of care for the treatment of neonatal and pediatric respiratory
disorders and is continuing its development of the HFOV for adult applications.
As part of its strategy SMC intends to expand its direct sales organization.
Most of SMC's products are sold to the same group of medical practitioners
(e.g., pulmonologists and respiratory therapists) by its direct sales force. In
addition to its national account emphasis, SMC intends to pursue the growing
market for multi-specialty primary care physician offices.
SMC offers a full range of computerized pulmonary diagnostic products for
pediatric and adult applications which test spirometry (the flow rate and volume
of breathing), lung volume, lung diffusing capacity (the ability of the lung to
transfer oxygen) and airway resistance. SMC's exercise products are based on
proprietary software that analyzes changes in heart and lung functions in
response to changes in metabolism. The nutritional assessment products offered
by SMC measure the patient's oxygen consumption and carbon dioxide production
levels to determine the caloric burn rate. In March 1995, SMC commenced
shipments of its VMAX series ("VMAX") of pulmonary, metabolic and nutritional
assessment products. The products utilize new miniaturized hardware technology
and a Windows(TM) operating system platform to offer multiple applications in
one or more modular instruments. SMC also offers a full range of computerized
products to diagnose sleep disorders, including systems for hospital-based sleep
laboratories and a mobile system. SMC's NIBG monitors, which incorporate
enhanced digital signal processing, assess a patient's hemoglobin oxygen
saturation and carbon dioxide content.
SMC believes that, in certain applications, the HFOV provides the patient
with superior oxygenation and ventilation compared to either conventional
ventilators or other high frequency ventilators. The HFOV is the only high
frequency oscillatory ventilator approved by the FDA for use on neonates
immediately after birth, and such use has resulted in reduced time on
ventilatory support and shorter hospital stays. SMC received a premarket
approval supplement from the FDA in September 1995 for use of the HFOV in the
treatment of pediatric patients who are following conventional ventilation and
is currently testing the HFOV in clinical trials for the treatment of
respiratory conditions in adults.
SMC markets its products through its direct sales force in the United
States and selected European countries and through its established distributor
network internationally to hospitals, clinics and private physicians in the
pulmonary, cardiac and general practitioner fields.
74
<PAGE> 81
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF SMC
OVERVIEW
SMC's revenues are derived from sales of respiratory care products and
related supplies, as well as service revenues from equipment maintenance
contracts and services. Most respiratory care products are sold through a direct
sales force in the United States and selected European countries and through a
distributor network worldwide.
SMC generates substantial revenue from European customers invoiced in Dutch
guilders through its subsidiary in The Netherlands. Changes in the Dutch guilder
to the United States dollar exchange rate can have an effect on SMC's revenues
and operating expenses, although those effects have not been significant in
recent years. However, translation changes in dollar-denominated liabilities on
the books of SMC's Dutch subsidiary have led to major foreign exchange gains and
losses over the past few years. To the extent that these liabilities remain
outstanding, exchange rate fluctuations may continue to impact net income in the
future.
RESULTS OF OPERATIONS
Six Months Ended March 31, 1996 Compared With Six Months Ended March 31, 1995
Revenues increased 6.6% to $32.1 million for the first six months of fiscal
1996 from $30.1 million in the first six months of fiscal 1995. The increase in
revenues was primarily attributable to sales increases in the VMAX and HFOV
products. The growth in SMC's non-United States revenues accounted for more than
half of the total revenue growth. Service revenues were slightly lower in the
fiscal 1996 period due to revenues from new product servicing being insufficient
to offset the loss of higher revenues generated by older products which were
removed from service.
The gross profit margin increased to 55.4% for the first six months of
fiscal 1996 from 50.8% for the comparable fiscal 1995 period. The increase in
gross profit margin was due to the VMAX products having a significantly lower
cost than the products previously sold and due to the relatively higher mix of
HFOV products which enjoy higher margins than most other products.
Marketing, sales and service expenses increased 11.1% to $11.2 million in
the first six months of fiscal 1996 from $10.1 million in the first six months
of fiscal 1995 due primarily to the higher level of commissionable sales, an
increase in direct sales and sales support headcount for non-United States sales
and an increase in product literature and technical support expenses associated
with the VMAX product introduction.
General and administrative expenses increased 5.7% to $2.6 million for the
first six months of fiscal 1996 from $2.4 million for the first six months of
fiscal 1995 due primarily to headcount increases and accounting and
administrative expenses associated with the staffing of Critical Care in
preparation for a tax-free spin-off which was not pursued, partially offset by
lower legal expenses than the $0.5 million incurred in the first six months of
fiscal 1995.
Research and development expenses decreased 24.0% to $1.3 million for the
first six months of fiscal 1996 from $1.8 million for the comparable six months
of fiscal 1995 due to reduced project expenses associated with the VMAX product.
Interest expense remained unchanged at $0.5 million for the first six
months of fiscal 1996 and fiscal 1995.
Other income and expense changed from $0.5 million of other income for the
first six months of fiscal 1995 to $0.4 million of other expense in the first
six months of fiscal 1996 due primarily to the foreign exchange impact of the
appreciation of the U.S. dollar against the Dutch guilder.
75
<PAGE> 82
Fiscal 1995 Compared With Fiscal 1994
Revenues increased 13.3% to $62.9 million in fiscal 1995 from $55.5 million
in fiscal 1994. The revenue growth was attributable to the shipments of the VMAX
product which commenced in March 1995 and to growth in sleep and ventilator
product sales which increased 23.0% and 15.0%, respectively, over fiscal 1994.
The gross profit margin remained relatively unchanged at 50.8% in fiscal
1995, compared with 50.7% in fiscal 1994. The higher margins on the VMAX and
newer ventilator products were offset by lower margins on older products sold in
the months before the product transition as compared to the margins earned on
those products in the prior fiscal year.
Marketing, sales and service expenses increased 8.2% to $20.8 million for
fiscal 1995 from $19.2 million for fiscal 1994 due primarily to higher
commissionable sales, additional technical support and training expenses for the
newly launched VMAX product line and higher literature costs for VMAX.
General and administrative expenses increased 185.0% to $8.0 million in
fiscal 1995 from $2.8 million in fiscal 1994 due primarily to legal and
settlement expenses of $4.0 million as a result of a lawsuit settled and to
additional expenses incurred in connection with the formation of Critical Care.
Research and development expenses decreased 18.3% to $3.2 million in fiscal
1995 from $3.9 million in fiscal 1994 due to reduced project expenses associated
with the VMAX product line.
Interest expense remained essentially unchanged at $0.9 million for fiscal
1995 and fiscal 1994.
Other income increased to $0.3 million in fiscal 1995 primarily due to a
decline in the U.S. dollar against the Dutch guilder.
Fiscal 1994 Compared With Fiscal 1993
Revenues decreased 3.0% to $55.5 million in fiscal 1994 from $57.2 million
in fiscal 1993 primarily due to lower pulmonary and metabolic product revenues
as a result of a difficult environment for hospitals in the U.S. to whom these
products have been principally sold, offset in part by an increase in service
revenues due to an increase in the base of installed equipment with maintenance
contracts.
The gross profit margin decreased to 50.7% in fiscal 1994 from 51.5% in
fiscal 1993 primarily due to an increase in manufacturing overhead which was
absorbed by lower volumes.
Marketing, sales, and service expenses increased 7.1% to $19.2 million in
fiscal 1994 from $17.9 million in fiscal 1993 due primarily to an expansion of
direct selling and servicing activities in Europe, primarily France and Germany.
General and administrative expenses decreased 13.5% to $2.8 million from
$3.2 million due primarily to lower incentive compensation expense.
Research and development expense increased 5.4% to $3.9 million in fiscal
1994 from $3.7 million in fiscal 1993 due to VMAX project expenses.
Interest expense decreased 11.1% to $0.9 million in fiscal 1994 from $1.0
million in fiscal 1993 due to the repayment during fiscal 1993 of 12.0%
subordinated debt, offset in part by higher interest rates and average borrowing
levels in fiscal 1994.
Other income and expense improved from an expense of $0.9 million in fiscal
1993 due to favorable foreign exchange movements.
LIQUIDITY AND CAPITAL RESOURCES
SMC's working capital was $2.2 million as of September 30, 1993, $6.0
million as of September 30, 1994, $6.3 million as of September 30, 1995 and $7.0
million as of March 31, 1996. During the past three years, SMC has financed its
operations primarily through internally generated cash flow and bank borrowings.
76
<PAGE> 83
During fiscal 1995, SMC repurchased $3.0 million of SMC Series B Preferred
Stock at a discount. The repurchase was financed by a three year term loan
repayable in monthly installments. As of March 31, 1996, the remaining balance
on that loan was approximately $2.4 million.
In September 1991, SMC entered into a Loan and Security Agreement with its
senior lender (the "Loan Agreement") which has been renewed annually thereafter
and provides for a revolving credit facility, secured by SMC's assets, that is
equal to the lesser of $6.0 million or the amount permitted under the borrowing
base. The borrowing base is an amount equal to 80% of SMC's eligible accounts
receivable from United States customers plus certain non-United States customers
approved by the lender. The Loan Agreement contains significant financial and
operating covenants including limitations on the ability of SMC to incur
additional indebtedness and restrictions on, among other things, SMC's ability
to pay cash dividends or take certain other corporate actions. The Loan
Agreement also requires SMC to be in compliance with certain financial ratios.
SMC is currently in compliance with all such financial ratios and covenants,
with the exception of those which derive from the mandatory redemption
obligations under the SMC Series A Preferred Stock and SMC Series B Preferred
Stock, which obligations have not been satisfied and for which SMC is currently
in the process of obtaining a waiver from its senior lender.
In October 1995, SMC obtained a $1.0 million temporary advance from its
senior lender to supplement the financing of its working capital requirements.
Principal of this temporary advance is repayable at the rate of $0.1 million per
month. At March 31, 1996, borrowings under this temporary advance were $0.5
million.
Borrowings under the Loan Agreement bear interest at the bank's prime rate
plus 0.5% per annum. At March 31, 1996 borrowings under the Loan Agreement
totaled $4.2 million and the amount available for borrowing thereunder was $1.1
million. The Loan Agreement currently terminates on June 5, 1996. In connection
with the Merger, management of SMC has been in the process of extending the Loan
Agreement to July 5, 1996 and expects such extension to be approved shortly. In
the event that the Merger is not consummated, SMC intends to extend the Loan
Agreement to March 1997.
For the six months ended March 31, 1996, SMC's investment requirements were
relatively modest. As a result, there was not a substantial need for cash to be
provided by operating activities. However, rather than pay down bank debt, SMC
chose to reduce overdue payments to vendors, resulting in a $1.8 million
reduction in accounts payable. This reduction of accounts payable is expected to
continue for the remainder of the year. The collection of accounts receivable,
which decreased $1.3 million in the period, has been the primary source of funds
for this payables improvement. SMC expects this trend to continue.
77
<PAGE> 84
THERMO AND SMC MANAGEMENTS
EXECUTIVE OFFICERS AND DIRECTORS OF SMC
After the Merger, the executive officers and directors of SMC are expected
to be as follows:
<TABLE>
<S> <C>
George D. Holmes................... Chief Executive Officer and Director
Pierre Sice........................ Executive Vice President and Chief Financial Officer
William B. Ross.................... President -- SensorMedics Critical Care
Corporation
Steven Sidwell..................... Executive Vice President
L. Thomas Rauterkus................ Vice President -- Research and Development
Henry Endo......................... Vice President -- National Service and Supplies
John N. Hatsopoulos................ Director
John W. Wood Jr. .................. Director
</TABLE>
Each of the executive officers of SMC prior to the Merger will be executive
officers after the Merger.
Each Director of SMC is elected to hold office until the next annual
meeting of shareholders and until his successor is elected and qualified. The
term of office of each officer is one year or until a successor is chosen and
qualified. Directors of SMC do not receive compensation for services on the SMC
Board of Directors or any committee thereof, but are reimbursed for their
out-of-pocket expenses in serving on the SMC Board of Directors. There are no
family relationships among any of the SMC executive officers or Directors.
Mr. Holmes, 64, joined SMC in July 1987 as Chief Executive Officer and a
Director. Prior to that time, Mr. Holmes served as President and Chief Operating
Officer of Silicon General, Inc. a company specializing in electronic
components, and President of Squibb Vitatek, Inc., a company specializing in
portable patient monitors. Mr. Holmes has also held management positions with
both marketing and technical responsibilities with Spacelabs, Inc., the
Electronic Components Division of TRW Inc. and Texas Instruments, Inc. Mr.
Holmes also serves as a Director of Ansys, Inc., and St. Joseph's Hospital
Foundation. Mr. Holmes has a B.S. degree in Chemistry from Pittsburgh State
University.
Mr. Sice, 52, has served as Executive Vice President, Chief Financial
Officer and Secretary of SMC in charge of finance, sales, marketing,
international operations and regulatory affairs since November 1994. He joined
SMC in March 1988 as Vice President, Chief Financial Officer and Secretary. From
April 1986 to March 1988, he was Senior Vice President of Finance and Chief
Financial Officer of Data Line Service Company. Mr. Sice has a B.S. degree in
Mechanical Engineering from the Illinois Institute of Technology and a MBA
degree from the University of Michigan.
Mr. Ross, 46, has served as President of Critical Care since January 1995.
He joined SMC in 1989 as Vice President -- Marketing and Sales. From 1987 to
1989, he was Division Manager of the Advanced Marketing and Technology Division
of Silicon General, Inc. Prior to 1987, Mr. Ross held a variety of managerial
positions for ADAC Laboratories, including Vice President of Engineering,
Division Manager for the Nuclear Medicine Division, Director of Field Service,
and Project Engineer. Mr. Ross has a M.S. degree in Biomedical Engineering from
Washington University and a B.S. Degree in Electrical Engineering from the
University of Idaho.
Mr. Sidwell, 56, has served as Executive Vice President of SMC in charge of
manufacturing, service, engineering and human resources since November 1994. He
joined SMC in June 1990 as Director of Manufacturing and became Vice President
of Manufacturing in October 1991. From 1988 to 1990, Mr. Sidwell served as
General Manager of National Service Concepts, a company specializing in consumer
electronics. Prior to 1988, he was General Manager of International Packaging
Corporation. Mr. Sidwell has over 15 years of experience in the sale and
manufacture of complex electronic products. He holds a B.S. Degree in Chemical
Engineering from Purdue University and a MBA degree in Marketing and Finance
from the Wharton School of the University of Pennsylvania.
Mr. Rauterkus, 56, has served as Vice President -- Research and Development
of SMC since October 1987. From May 1984 until he joined SMC, he served as Vice
President of Operations and Engineering of the Cardiopulmonary Division of
Spectramed, Inc., which was acquired by SMC in August 1987. Mr. Rauterkus
78
<PAGE> 85
joined a predecessor to Spectramed, Inc. in 1981 and served in various positions
since that time, including Vice President of Operations, Director of Advanced
Programs, Senior Engineer and Technical Director. Mr. Rauterkus has a B.S. and a
M.S. degree in Electrical Engineering from Marquette University.
Mr. Endo, 56, has served as Vice President -- National Service and Supplies
of SMC since October 1989. Mr. Endo joined SMC in August 1987 as Director of
National Service upon the acquisition of the Cardiopulmonary Division of
Spectramed, Inc. Mr. Endo has been responsible for all sales support for the
Company's customer base, including field service, technical support, customer
support and supply procurement. Mr. Endo has over 20 years of experience in the
customer service aspects of the medical device industry.
John N. Hatsopoulos, 61, has been the Chief Financial Officer of Thermo
since 1988 and an Executive Vice President of Thermo since 1986. Mr. Hatsopoulos
is also a director of Lehman Brothers Funds, Inc., Thermedics Inc., Thermo
Ecotek Corporation, Thermo Fibertek Inc., Thermo Instrument Systems Inc., Thermo
Power Corporation, ThermoQuest Corporation, Thermo Sentron Inc., Thermo
TerraTech Inc. and ThermoTrex Corporation.
John W. Wood Jr., 52, has been a Senior Vice President of Thermo since
November 1995 and, before his promotion, was a Vice President of Thermo since
September 1994. Mr. Wood has also been President and Chief Executive Officer of
Thermedics Inc. since 1984. Mr. Wood is a director of Thermedics Inc., Thermo
Cardiosystems Inc., Thermo Sentron Inc. and Thermo Voltek Corp.
EXECUTIVE OFFICERS AND DIRECTORS OF THERMO
Directors
Thermo's Board of Directors is divided into three classes as nearly equal
in number as possible. Each class is elected for a three-year term at successive
annual meetings of stockholders. Directors hold office until their successors
have been elected and qualified, or until their earlier resignations, death or
removal.
George N. Hatsopoulos, 69, is the Chairman of the Board, President and
Chief Executive Officer of Thermo. He has served as a Director since he founded
Thermo in 1956. Dr. Hatsopoulos is also a director of Bolt, Beranek & Newman,
Inc., Thermedics Inc., Thermo Ecotek Corporation, Thermo Fibertek Inc., Thermo
Instrument Systems Inc., ThermoQuest Corporation and ThermoTrex Corporation. Dr.
Hatsopoulos is the brother of Mr. John N. Hatsopoulos, an Executive Vice
President and the Chief Financial Officer of Thermo. Dr. Hatsopoulos' term of
office will expire in 1999.
Robert A. McCabe, 61, has been a Director of Thermo since 1962. He has
served as President of Pilot Capital Corporation, which is engaged in private
investments and provides acquisition services, since 1987. Prior to that time
Mr. McCabe was a Managing Director of Lehman Brothers Inc., an investment
banking firm. Mr. McCabe is also a director of Borg-Warner Security Corporation,
Church & Dwight Company, Morrison-Knudsen Corporation and Thermo Instrument
Systems Inc. Mr. McCabe's term of office will expire in 1999.
Hutham S. Olayan, 42, has been a Director of Thermo since 1987. She has
served as President and a director of Olayan America Corporation since 1995 and
Competrol Real Estate Limited since 1986, members of the Olayan Group engaged in
advisory services and private real estate investments, respectively. Ms. Olayan
also served as President and a director of Crescent Diversified Limited, a
member of the Olayan Group engaged in private investments, from 1985 until 1994.
Ms. Olayan's term of office will expire in 1999.
Elias P. Gyftopoulos, 68, has been a Director of Thermo since 1976. Dr.
Gyftopoulos has been the Ford Professor of Mechanical Engineering and of Nuclear
Engineering at the Massachusetts Institute of Technology for more than five
years. Dr. Gyftopoulos is also a director of Thermo Cardiosystems Inc., Thermo
Instrument Systems Inc., Thermo Remediation Inc., Thermo Voltek Corp.,
ThermoLase Corporation and ThermoSpectra Corporation. Mr. Gyftopoulos' term of
office will expire in 1998.
Frank Jungers, 69, has been a Director of Thermo since 1978. Mr. Jungers
has been a consultant on business and energy matters since 1977. Mr. Jungers was
employed by the Arabian American Oil Company from 1974 through 1977 as Chairman
and Chief Executive Officer. Mr. Jungers is also a director of The AES
79
<PAGE> 86
Corporation, Donaldson, Lufkin & Jenrette, Dual Drilling Company,
Georgia-Pacific Corporation, Pacific Rehabilitation and Sports Medicine, Inc.,
Star Technologies Inc., Thermo Ecotek Corporation, Thermo Instrument Systems
Inc. and ThermoQuest Corporation. Mr. Junger's term of office will expire in
1998.
Frank E. Morris, 72, has been a Director of Thermo since 1989. Dr. Morris
served as the Peter Drucker Professor of Management at Boston College from 1989
to 1994. Dr. Morris also served as President of the Federal Reserve Bank of
Boston from 1968 until he retired in 1988. Dr. Morris is a trustee of SEI Liquid
Asset Trust, SEI Cash + Plus Trust, SEI Tax Exempt Trust, SEI Index Funds, SEI
International Trust, SEI Institutional Managed Trust, The Capitol Mutual Funds,
FFB Lexicon Funds and The Arbor Fund. Dr. Morris is also a director of Thermo
Remediation Inc. Mr. Morris' term of office will expire in 1998.
Donald E. Noble, 81, has been a Director of Thermo since 1983. For more
than 20 years, from 1959 to 1980, Mr. Noble served as the chief executive
officer of Rubbermaid, Incorporated, first with the title of President and then
as Chairman of the Board. Mr. Noble is also a director of Thermo Fibertek Inc.,
Thermo Power Corporation, Thermo Sentron Inc. and Thermo TerraTech Inc. Mr.
Noble's term of office will expire in 1998.
John M. Albertine, 51, has been a Director of Thermo since 1986. Dr.
Albertine serves as Chairman of the Board and Chief Executive Officer of
Albertine Enterprises, Inc., an economic and public policy consulting firm he
founded in 1990. He also serves as Chairman of The Jian Group Holdings, LLC, a
full-service mergers and acquisitions firm. Dr. Albertine is also a director of
American Precision Industries, Inc. and Bolt, Beranek & Newman, Inc. Dr.
Albertine served as Vice Chairman of Farley, Inc., principally a textile and
apparel manufacturer, from 1986 until 1990, Vice Chairman of Fruit of the Loom,
Inc. from 1987 to 1990, and Vice Chairman of Valley Fashions Corp. (formerly
West Point Acquisition Corp.) and its subsidiary, West Point-Pepperell Inc.,
from 1989 to 1990. In July 1991, an involuntary petition was filed against
Farley, Inc. under Chapter 7 of the federal bankruptcy laws. In September 1991,
Farley, Inc. converted the Chapter 7 proceeding into a Chapter 11 reorganization
and a plan of reorganization was confirmed in December 1992. In March 1992,
Valley Fashions Corp. filed a petition under Chapter 11 to effect a
"pre-packaged" bankruptcy reorganization. In September 1992, Valley Fashions'
plan of reorganization was confirmed by the bankruptcy court. Mr. Albertine's
term of office will expire in 1997.
Peter O. Crisp, 63, has been a Director of Thermo since 1974. Mr. Crisp has
been a General Partner of Venrock Associates, a venture capital investment firm,
for more than five years. Mr. Crisp is also a Director of American
Superconductor Corporation, Apple Computer, Inc., Evans & Sutherland Computer
Corporation, Long Island Lighting Company, Thermedics Inc., Thermo Power
Corporation, ThermoTrex Corporation and United States Trust Corporation. Mr.
Crisp's term of office will expire in 1997.
Roger D. Wellington, 69, has been a Director of Thermo since 1986. Mr.
Wellington serves as the President and Chief Executive Officer of Wellington
Consultants, Inc. and of Wellington Associates Inc., international business
consulting firms he founded in 1994 and 1989, respectively. Prior to 1989, Mr.
Wellington served as Chairman of the Board of Augat Inc., a manufacturer of
electromechanical components, for more than five years. Prior to 1988, he also
held the positions of President and Chief Executive Officer of Augat Inc. Mr.
Wellington is also a director of Bolt, Beranek & Newman, Inc. Mr. Wellington's
term of office will expire in 1997.
80
<PAGE> 87
Executive Officers
<TABLE>
<CAPTION>
PRESENT TITLE
NAME AGE (YEAR FIRST BECAME EXECUTIVE OFFICER)
- --------------------------------- --- ------------------------------------------------------
<S> <C> <C>
George N. Hatsopoulos(1)......... 69 Chairman of the Board, President, Chief Executive
Officer and Director (1956)
John N. Hatsopoulos(1)........... 61 Executive Vice President and Chief Financial Officer
(1968)
Robert C. Howard................. 65 Executive Vice President (1968)
Peter G. Pantazelos.............. 65 Executive Vice President (1968)
Arvin H. Smith................... 66 Executive Vice President (1983)
William A. Rainville............. 54 Senior Vice President (1993)
John W. Wood Jr.................. 52 Senior Vice President (1995)
Paul F. Kelleher................. 53 Vice President, Finance and Administration (1982)
</TABLE>
- ---------------
(1) George N. Hatsopoulos and John N. Hatsopoulos are brothers.
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. Rainville and Wood, have held comparable positions with
the Company for at least the last five years. Mr. Rainville has been a Senior
Vice President of the Company since 1993 and was a Vice President of the Company
from 1986 to 1993. Mr. Wood has been President and Chief Executive Officer of
Thermedics Inc. since 1984 and was a Vice President of the Company from 1994 to
1995, prior to becoming a Senior Vice President of the Company in 1995.
COMMITTEES OF THE THERMO BOARD OF DIRECTORS AND MEETINGS
The Board of Directors has established an Executive Committee, an Audit
Committee and a Human Resources Committee. The present members of the Executive
Committee are Dr. Hatsopoulos (Chairman), Mr. Crisp, Mr. Jungers and Mr. Noble.
The Executive Committee is empowered to act when it is impractical to call a
meeting of the entire Board of Directors and, with certain exceptions, has the
powers of the Board of Directors. The Audit Committee consists solely of outside
Directors, and its present members are Mr. Jungers (Chairman), Dr. Albertine,
Mr. McCabe and Dr. Morris. The Audit Committee reviews the scope of the audit
with Thermo's independent public accountants and meets with them for the purpose
of reviewing the results of the audit subsequent to its completion. The Human
Resources Committee consists solely of outside Directors and its present members
are Mr. Noble (Chairman), Dr. Gyftopoulos, Mr. Jungers, Ms. Olayan and Mr.
Wellington. The Human Resources Committee reviews corporate organization,
reviews the performance of senior members of management, recommends executive
compensation and administers Thermo's stock option and other stock-based
compensation plans. Thermo does not have a nominating committee of the Board of
Directors. The Board of Directors met 14 times, the Audit Committee met twice
and the Human Resources Committee met five times during fiscal 1995. Each
Director attended at least 75% of all meetings of the Board of Directors and
Committees on which he or she served held during fiscal 1995, except for Mr.
Crisp who attended 74% of such meetings.
COMPENSATION OF THERMO DIRECTORS
CASH COMPENSATION. Directors who are not employees of Thermo or any
companies affiliated with Thermo ("outside directors") receive an annual
retainer of $20,000 and a fee of $1,000 per day for attending regular meetings
of the Board of Directors or its committees and for each day of consulting for
the Board of Directors, and $500 per day for participating in meetings of the
Board of Directors or such committees held by means of conference telephone.
Payment of Directors' fees is made quarterly. Dr. G. Hatsopoulos, who is a
full-time employee of the Corporation, does not receive any cash compensation
from Thermo for his service as a Director. Directors are also reimbursed for
out-of-pocket expenses and in some instances for travel time incurred in
attending such meetings.
DEFERRED COMPENSATION PLAN FOR DIRECTORS. Under Thermo's Deferred
Compensation Plan for Directors (the "Deferred Compensation Plan"), a Director
has the right to defer receipt of his cash fees until he ceases
81
<PAGE> 88
to serve as a Director, dies or retires from his principal occupation. In the
event of a change in control or proposed change in control of Thermo that is not
approved by the Board of Directors, deferred amounts become payable immediately.
Either of the following is deemed to be a change of control: (a) the occurrence,
without the prior approval of the Board of Directors, of the acquisition,
directly or indirectly, by any person of 50% or more of the outstanding Thermo
Common Stock; or (b) the failure of the persons serving on the Board of
Directors immediately prior to any contested election of directors or any
exchange offer or tender offer for the Thermo Common Stock to constitute a
majority of the Board of Directors at any time within two years following any
such event. Amounts deferred pursuant to the Deferred Compensation Plan are
valued at the end of each quarter as units of Thermo Common Stock. When payable,
amounts deferred may be disbursed solely in shares of Thermo Common Stock
accumulated under the Deferred Compensation Plan. A total of 613,361 shares of
Thermo Common Stock has been reserved for issuance under the Deferred
Compensation Plan. As of January 1, 1996, deferred units equal to 80,427.96
shares of Thermo Common Stock were accumulated under the Deferred Compensation
Plan.
DIRECTORS STOCK OPTION PLAN. In 1993, Thermo adopted a directors stock
option plan (the "Directors Plan"), which was amended in 1995. The Directors
Plan provides for the grant of stock options to purchase shares of common stock
of Thermo and certain of its majority-owned subsidiaries to outside Directors as
additional compensation for their service as Directors. Under the Directors
Plan, outside Directors are automatically granted options to purchase 1,000
shares of Thermo Common Stock annually. In addition, the Directors Plan provides
for the automatic grant of options to purchase up to 1,500 shares of the common
stock of certain of Thermo's publicly traded, majority-owned subsidiaries and of
each majority-owned subsidiary of Thermo that is subsequently "spun out" to
outside investors. Pursuant to the Directors Plan, outside Directors receive an
annual grant of options to purchase 1,000 shares of Thermo Common Stock at the
close of business on the date of each Annual Meeting of the Stockholders of
Thermo. Options evidencing annual grants may be exercised at any time from and
after the six-month anniversary of the grant date of the option and prior to the
expiration of the option on the third anniversary of the grant date. Shares
acquired upon exercise of the options are subject to repurchase by Thermo at the
exercise price if the recipient ceases to serve as a Director of Thermo or any
other Thermo company prior to the first anniversary of the grant date.
In addition, under the Directors Plan, outside Directors are automatically
granted options to purchase shares of common stock of certain of Thermo's
publicly traded, majority-owned subsidiaries as described in the Directors Plan
and of each majority-owned subsidiary of Thermo that is subsequently "spun out"
to outside investors. Outside Directors receive options to purchase 1,500 shares
of common stock for majority-owned subsidiaries that are directly owned by
Thermo and 1,000 shares of common stock for majority-owned subsidiaries that are
indirectly owned by Thermo through one or more of its other majority-owned
subsidiaries. The grant of options with respect to the common stock of
subsidiaries that are spun out occurs on the close of business on the date of
the first Annual Meeting of the Stockholders next following the subsidiary's
spinout, which is the first to occur of either an initial public offering of the
subsidiary's common stock or a sale of such stock to third parties in an
arms-length transaction. The options granted vest and become exercisable on the
fourth anniversary of the date of grant, unless prior to such date the
subsidiary's common stock is registered under the Exchange Act ("Section 12
Registration"). In the event that the effective date of Section 12 Registration
occurs before the fourth anniversary of the grant date, the option will become
immediately exercisable and the shares acquired upon exercise will be subject to
restrictions on transfer and the right of Thermo to repurchase such shares at
the exercise price in the event the Director ceases to serve as a Director of
Thermo or any other Thermo company. In the event of Section 12 Registration, the
restrictions and repurchase rights shall lapse or be deemed to lapse at the rate
of 25% per year, starting with the first anniversary of the grant date. These
options expire after five years. At the Annual Meeting of Stockholders of Thermo
held in May 1996, each outside Director was granted options to purchase 1,500
shares of common stock of Thermo TerraTech Inc. and 1,000 shares of common stock
of each of (i) Trex Medical Corporation,
82
<PAGE> 89
a subsidiary of ThermoTrex Corporation that was spun out in November 1995, (ii)
ThermoQuest Corporation, a subsidiary of Thermo Instrument Systems Inc. that was
spun out in March 1996 and (iii) Thermo Sentron Inc., a subsidiary of Thermedics
Inc. that was spun out in March 1996.
The exercise price for options granted under the Directors Plan is the
average of the closing prices of the common stock as reported on the New York or
American Stock Exchange (or other principal market on which the common stock is
then traded) for the five trading days preceding and including the date of
grant, or, if the shares are not then traded, at the last price per share paid
by third parties in an arms-length transaction prior to the option grant. An
aggregate of 675,000 shares of Thermo Common Stock have been reserved for
issuance under the Directors Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Pursuant to an international distribution agreement, Thermedics Detection
Inc., a subsidiary of Thermedics Inc., which is, in turn, a subsidiary of
Thermo, has appointed Arabian Business Machines Co. ("ABM") as its exclusive
distributor of drug-and-explosives detection products in certain Middle East
countries. ABM is a member of the Olayan Group, and Hutham S. Olayan, a Director
of Thermo and a member of the Compensation Committee of the Thermo Board of
Directors, is the President and a Director of Olayan America Corporation and
Competrol Real Estate Limited, two other members of the Olayan Group, which is
controlled by Suliman S. Olayan, Ms. Olayan's father. During 1995, Thermedics
Detection, Inc. paid an aggregate of $50,000 pursuant to this distribution
agreement.
In March 1995, ThermoLyte Corporation ("TLC"), a subsidiary of Thermo,
completed a private placement of 1,845,000 shares primarily to outside investors
of minority investments in its common stock. Crescent International Holdings
Limited purchased 25,000 shares of the common stock of TLC in such private
placement at a purchase price of $10.00 per share, the same price paid by
unaffiliated buyers. Crescent International Holdings Limited is a wholly owned
subsidiary of Crescent Holding GmbH. Crescent Holding GmbH is indirectly
controlled by Suliman S. Olayan, the father of Hutham S. Olayan.
In November 1995 and January 1996, Trex Medical Corporation ("Trex
Medical"), a subsidiary of Thermo, completed private placements of an aggregate
of 1,962,000 shares primarily to outside investors of minority investments in
its common stock. Crescent International Holdings Limited purchased 200,000
shares of the common stock of Trex Medical in such private placements at a
purchase price of $10.25 per share in the November 1995 private placement and
$10.75 per share in the January 1996 private placement, the same price paid by
unaffiliated buyers. Crescent International Holdings Limited is a wholly owned
subsidiary of Crescent Holding GmbH. Crescent Holding GmbH is indirectly
controlled by Suliman S. Olayan, the father of Hutham S. Olayan.
83
<PAGE> 90
EXECUTIVE COMPENSATION OF THERMO
NOTE: All share amounts reported below have, in all cases, been adjusted as
applicable to reflect three-for-two stock splits effected in May 1995 and in
September 1995 with respect to the Thermo Common Stock and the common stock of
Thermo Fibertek Inc., respectively, a two-for-one stock split effected in May
1995 with respect to the common stock of ThermoLase Corporation, a five-for-four
stock split effected in December 1995 with respect to the common stock of Thermo
Instrument Systems Inc., a three-for-two stock split effected in May 1996 with
respect to the common stock of Thermo Cardiosystems Inc. and a three-for-two
stock split effected June 5, 1996 with respect to the Thermo Common Stock.
SUMMARY COMPENSATION TABLE
The following table summarizes compensation for services to Thermo in all
capacities awarded to, earned by or paid to Thermo's chief executive officer and
its four other most highly compensated executive officers for the last three
fiscal years.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
--------------
SECURITIES
UNDERLYING
OPTIONS (NO.
FISCAL OF SHARES AND ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPANY)(1)(2) COMPENSATION(3)
- ----------------------------- ------ -------- -------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
George N. Hatsopoulos........ 1995 $485,000 $550,000 -- $ 6,750
President and Chief 1994 450,000 500,000 20,000 (THS) 6,750
Executive Officer 1993 417,000 450,000 967,500 (TMO) 10,118
50,000 (TMD)
10,000 (TCK)
30,000 (TFT)
93,750 (THI)
40,000 (THP)
7,500 (THN)
40,000 (TTT)
72,000 (TLZ)
30,000 (TKN)
John N. Hatsopoulos.......... 1995 $300,000 $500,000 7,800 (TMO) $ 6,750
Executive Vice President 25,000 (TLZ)
and Chief Financial Officer 1994 280,000 450,000 144,900 (TMO) 6,750
20,000 (THS)
1993 256,000 375,000 199,350 (TMO) 10,118
50,000 (TMD)
10,000 (TCK)
30,000 (TFT)
93,750 (THI)
40,000 (THP)
22,500 (THN)
40,000 (TTT)
72,000 (TLZ)
30,000 (TKN)
Arvin H. Smith............... 1995 $262,000 $256,200 9,000 (TMO) $ 6,750
Executive Vice President 10,000 (TLZ)
6,000 (TLT)
1994 255,000 280,500 13,500 (TMO) 6,750
20,000 (THS)
1993 240,000 304,000 69,412 (TMO) 10,023
30,000 (TMD)
234,375 (THI)
2,400 (THN)
</TABLE>
84
<PAGE> 91
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
--------------
SECURITIES
UNDERLYING
OPTIONS (NO.
FISCAL OF SHARES AND ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPANY)(1)(2) COMPENSATION(3)
- ----------------------------- ------ -------- -------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
William A. Rainville......... 1995 $195,000 $220,000 6,150 (TMO) $15,870
Senior Vice President 6,000 (TBA)
10,000 (TLZ)
6,000 (TLT)
1994 182,000 173,000 96,750 (TMO) 16,269
10,000 (THS)
1993 170,800 105,000 51,750 (TMO) 14,717
60,000 (TFT)
22,500 (THN)
60,000 (TTT)
John W. Wood Jr.(4).......... 1995 $180,000 $160,000 40,350 (TMO) $ 6,750
Senior Vice President 4,900 (TMD)
1,000 (TBA)
3,450 (TCA)
900 (TVL)
10,000 (TLZ)
1,000 (TLT)
</TABLE>
- ---------------
(1) In addition to grants of options to purchase Common Stock of Thermo
(designated in the table as TMO), executive officers of Thermo have been
granted options to purchase common stock of subsidiaries of Thermo, either
as compensation for their services to Thermo or to its subsidiaries.
Options were granted during the last three fiscal years to the chief
executive officer and the other named executive officers in their
capacities as executive officers of Thermo or Directors or executive
officers of the following subsidiaries of Thermo: Thermedics Inc.
(designated in the table as TMD), Thermo BioAnalysis Corporation
(designated in the table as TBA), Thermo Cardiosystems Inc. (designated in
the table as TCA), Thermo Ecotek Corporation (designated in the table as
TCK), Thermo Fibertek Inc. (designated in the table as TFT), Thermo
Instrument Systems Inc. (designated in the table as THI), ThermoLase
Corporation (designated in the table as TLZ), ThermoLyte Corporation
(designated in the table as TLT), Thermo Power Corporation (designated in
the table as THP), Thermo TerraTech Inc. (designated in the table as TTT),
Thermo Remediation Inc. (designated in the table as THN), ThermoSpectra
Corporation (designated in the table as THS) and ThermoTrex Corporation
(designated in the table as TKN).
(2) No awards of restricted stock of Thermo were made to the chief executive
officer or other named executive officers during the last three fiscal
years. As of December 31, 1995, the amount and value of each executive
officer's restricted stock holdings were as follows: Dr. G.
Hatsopoulos -- 20,250 shares valued at $702,000; Mr. Smith -- 10,125 shares
valued at $351,000; Mr. Wood -- 2,025 shares valued at $70,200; and Mr.
Rainville -- 2,025 shares valued at $70,200.
(3) For all executive officers except Mr. Rainville, this amount represents
matching contributions made on behalf of the executive officer by Thermo
pursuant to Thermo's 401(k) plan. As to Mr. Rainville, this amount
represents employer contributions to his account under the profit sharing
plan of Thermo Electron Web Systems Inc., a subsidiary of Thermo.
(4) Mr. Wood did not meet the definition of "highly compensated" within the
meaning of the Securities and Exchange Commission's executive compensation
disclosure rules in fiscal 1993 and 1994.
85
<PAGE> 92
STOCK OPTIONS GRANTED DURING FISCAL 1995
The following table sets forth information concerning individual grants of
stock options made during fiscal 1995 to Thermo's chief executive officer and
the other named executive officers. During fiscal 1995, no options were granted
to Thermo's chief executive officer, Dr. G. Hatsopoulos. It has not been
Thermo's policy in the past to grant stock appreciation rights, and no such
rights were granted during fiscal 1995.
OPTION GRANTS IN FISCAL 1995
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ----------------------
NAME GRANTED(1) FISCAL YEAR SHARE DATE 5% 10%
- ---------------------- ------------- ------------ --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
John N. Hatsopoulos... 7,800 (TMO) 0.6% $ 24.85 5/23/98 $ 30,524 $ 64,168
25,000 (TLZ) 2.5% 22.75 11/28/07 452,750 1,216,250
Arvin H. Smith........ 9,000 (TMO) 0.7% $ 24.85 5/23/98 $ 35,220 $ 74,040
10,000 (TLZ) 1.0% 22.75 11/28/07 181,100 486,500
6,000 (TLT) 20.3% 10.00 9/22/07 47,760 128,280
William A.
Rainville........... 6,150 (TMO) 0.5% $ 24.85 5/23/98 $ 24,067 $ 50,594
6,000 (TBA) 7.7% 10.00 9/22/07 47,760 128,280
10,000 (TLZ) 1.0% 22.75 11/28/07 181,100 486,500
6,000 (TLT) 20.3% 10.00 9/22/07 47,760 128,280
John W. Wood Jr. ..... 2,850 (TMO) 0.2% $ 24.85 5/23/98 $ 11,153 $ 23,446
37,500 (TMO) 2.9% 32.60 11/28/07 973,000 2,614,250
4,900 (TMD) 17.7% 15.52 3/14/02 30,968 72,128
1,000 (TBA) 1.3% 10.00 9/22/05 6,290 15,940
3,450 (TCA) 2.9% 17.40 3/20/02 24,449 56,948
10,000 (TLZ) 1.0% 22.75 11/28/07 181,100 486,500
1,000 (TLT) 3.4% 10.00 9/22/05 6,290 15,940
900 (TVL) 0.8% 11.00 3/20/02 4,032 9,396
</TABLE>
- ---------------
(1) In addition to grants of options to purchase Common Stock of Thermo
(designated in the table as TMO), executive officers of Thermo have been
granted options to purchase common stock of Thermedics Inc. (designated in
the table as TMD), ThermoLase Corporation (designated in the table as TLZ),
ThermoLyte Corporation (designated in the table as TLT), Thermo BioAnalysis
Corporation (designated in the table as TBA), Thermo Cardiosystems Inc.
(designated in the table as TCA) and Thermo Voltek Corp. (designated in the
table as TVL), as part of Thermo's stock option program. All of the options
reported are immediately exercisable at the date of grant, except options to
purchase the common stock of ThermoLyte Corporation and Thermo BioAnalysis
Corporation, which generally are not exercisable until that company's stock
is publicly traded. However, the shares acquired upon exercise are subject
to repurchase by the granting corporation at the exercise price if the
optionee ceases to be employed by the granting corporation or another Thermo
company. The granting corporation may exercise its repurchase rights within
six months after the termination of the optionee's employment. For publicly
traded companies, the repurchase rights lapse ratably over a five- to
ten-year period, depending on the option term, which may vary from seven to
twelve years, provided that the optionee continues to be employed by the
granting corporation or another Thermo company. Certain options granted as a
part of Thermo's stock option program have three-year terms, and the
repurchase rights lapse in their entirety on the second anniversary of the
grant date. For companies whose shares are not publicly traded, the
repurchase rights lapse in their entirety on the ninth anniversary of the
grant date. The granting corporation may permit the holders of such options
to exercise options and to satisfy tax withholding obligations by
surrendering shares equal in fair market value to the exercise price or
withholding obligation.
86
<PAGE> 93
STOCK OPTIONS EXERCISED DURING FISCAL 1995
The following table reports certain information regarding stock option
exercises during fiscal 1995 and outstanding stock options held at the end of
fiscal 1995 by Thermo's chief executive officer and the other named executive
officers. No stock appreciation rights were exercised or were outstanding during
fiscal 1995.
AGGREGATED OPTION EXERCISES IN FISCAL 1995 AND FISCAL 1995 YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NO. OF UNEXERCISED VALUE OF
SHARES OPTIONS AT FISCAL UNEXERCISED
ACQUIRED ON VALUE YEAR-END (EXERCISABLE/ IN-THE-MONEY
NAME COMPANY(1) EXERCISE REALIZED UNEXERCISABLE)(2) OPTIONS
- ------------------------ ---------- ----------- ---------- ---------------------- --------------
<S> <C> <C> <C> <C> <C>
George N. Hatsopoulos... TMO 8,424 $152,008 1,642,500/0 $31,834,650/--
TMD -- -- 50,000/0 561,000/--
TCK -- -- 36,000/0 364,500/--
TFT 44,727 398,831 117,273/0 1,969,315/--
THI -- -- 93,750/0 967,500/--
THP -- -- 40,000/0 151,000/--
THN -- -- 7,500/0 47,400/--
TTT -- -- 40,000/0 83,800/--
TLZ 28,800 406,800 43,200/0 1,042,200/--
THS -- -- 20,000/0 112,500/--
TKN -- -- 36,600/0 1,337,130/--
John N. Hatsopoulos..... TMO 79,110 $1,029,188 446,820/0(3) $7,626,906/--
TMD -- -- 50,000/0 561,000/--
TCA 8,083 138,201 -- --
TCK -- -- 36,000/0 364,500/--
TFT 36,000 297,165 126,000/0 2,126,400/--
THI -- -- 93,750/0 967,500/--
THP -- -- 40,000/0 151,000/--
THN -- -- 22,500/0 142,200/--
TTT -- -- 40,000/0 83,800/--
TVL -- -- 4,999/0 54,339/--
TLZ 28,800 302,588 68,200/0 1,120,325/--
THS -- -- 20,000/0 112,500/--
TKN 6,000 118,050 24,000/0 829,200/--
Arvin H. Smith.......... TMO 117,112 $1,595,351 274,162/0 $5,986,561/--
TMD -- -- 82,500/0 1,517,850/--
TCA -- -- 30,000/0 1,340,000/--
TCK -- -- 4,000/0 43,000/--
TFT -- -- 60,000/0 1,080,000/--
THI -- -- 234,375/0 2,418,750/--
THN -- -- 2,400/0 15,168/--
TTT -- -- 35,000/0 112,875/--
TLZ -- -- 10,000/0 31,250/--
TLT -- -- 0/6,000 --(4)
THS -- -- 20,000/0 112,500/--
TKN -- -- 2,700/0 122,985/--
William A. Rainville.... TMO 23,625 $297,313 204,262/0(3) $3,628,301/--
TBA -- -- 0/6,000 --(4)
TCK -- -- 4,000/0 43,000/--
TFT -- -- 330,000/0 5,656,800/--
THN -- -- 22,500/0 142,200/--
TTT -- -- 60,000/0 115,200/--
TLZ -- -- 10,000/0 31,250/--
TLT -- -- 0/6,000 --(4)
THS -- -- 10,000/0 56,250/--
TKN -- -- 2,700/0 122,985/--
</TABLE>
87
<PAGE> 94
<TABLE>
<CAPTION>
NO. OF UNEXERCISED VALUE OF
SHARES OPTIONS AT FISCAL UNEXERCISED
ACQUIRED ON VALUE YEAR-END (EXERCISABLE/ IN-THE-MONEY
NAME COMPANY(1) EXERCISE REALIZED UNEXERCISABLE)(2) OPTIONS
- ------------------------ ---------- ----------- ---------- ---------------------- --------------
<S> <C> <C> <C> <C> <C>
John W. Wood Jr. ....... TMO 7,425 $90,712 200,997/0(3) $2,851,460/--
TMD -- -- 120,100/0 1,645,924/--
TDI -- -- 0/35,000 --(4)
TBA -- -- 0/1,000 --(4)
TCA 40,225 646,425 59,224/0 2,824,905/--
TCK -- -- 3,000/0 32,250/--
TFT -- -- 6,000/0 108,000/--
TVL -- -- 56,649/0 345,830/--
TLZ -- -- 10,000/0 31,250/--
TLT -- -- 0/1,000 --(4)
THS -- -- 3,000/0 16,875/--
TKN 3,600 120,780 900/0 40,995/--
</TABLE>
- ---------------
(1) Options to purchase shares of the following subsidiaries of Thermo have been
granted to the chief executive officer and the other named executive
officers: Thermedics Inc. (designated in the table as TMD), Thermo
BioAnalysis Corporation (designated in the table as TBA), Thermo
Cardiosystems Inc. (designated in the table as TCA), Thermedics Detection
Inc. (designated in the table as TDI), Thermo Ecotek Corporation (designated
in the table as TCK), Thermo Fibertek Inc. (designated in the table as TFT),
Thermo Instrument Systems Inc. (designated in the table as THI), Thermo
Power Corporation (designated in the table as THP), Thermo TerraTech Inc.
(designated in the table as TTT), Thermo Remediation Inc. (designated in the
table as THN), ThermoLase Corporation (designated in the table as TLZ),
ThermoLyte Corporation (designated in the table as TLT), ThermoSpectra
Corporation (designated in the table as THN), Thermo Voltek Corporation
(designated in the table as TVL) and ThermoTrex Corporation (designated in
the table as TKN).
(2) All of the options reported outstanding at the end of the fiscal year were
immediately exercisable as of fiscal year-end, except options to purchase
the common stock of Thermo BioAnalysis Corporation, ThermoLyte Corporation
and Thermedics Detection Inc., which generally are not exercisable until
that company's stock is publicly traded. However, the shares acquired upon
exercise of the options are subject to repurchase by the granting
corporation at the exercise price if the optionee ceases to be employed by
such corporation or another Thermo company. The granting corporation may
exercise its repurchase rights within six months after the termination of
the optionee's employment. For publicly traded companies, the repurchase
rights generally lapse ratably over a five-to ten-year period, depending on
the option term, which may vary from seven to twelve years, provided that
the optionee continues to be employed by the granting corporation or another
Thermo company. Certain options granted as a part of Thermo's stock option
program have three-year terms, and the repurchase rights lapse in their
entirety on the second anniversary of the grant date. For companies whose
shares are not publicly traded, the repurchase rights lapse in their
entirety on the ninth anniversary of the grant date.
(3) Options to purchase 135,000, 90,000 and 90,000 shares of Thermo Common Stock
granted to Messrs. J. Hatsopoulos, Rainville and Wood, respectively, are
subject to the same terms as described in footnote (1), except that the
repurchase rights of the granting corporation generally do not lapse until
the tenth anniversary of the grant date. In the event of the employee's
death or involuntary termination prior to the tenth anniversary of the grant
date, the repurchase rights of the granting corporation shall be deemed to
have lapsed ratably over a five-year period commencing with the fifth
anniversary of the grant date.
(4) No public market for the shares underlying these options existed at fiscal
year-end. Accordingly, no value in excess of exercise price has been
attributed to these options.
DEFINED BENEFIT RETIREMENT PLAN
Thermo Electron Web Systems Inc., a wholly owned subsidiary of Thermo
Fibertek Inc., maintains a defined benefit retirement plan (the "Retirement
Plan") for eligible U.S. employees. Mr. Rainville is the chief executive officer
of Thermo Fibertek Inc. and the only executive officer of Thermo who
participates in the
88
<PAGE> 95
Retirement Plan. The following table sets forth the estimated annual benefits
payable under the Retirement Plan upon retirement to employees of the subsidiary
in specified compensation and years-of-service classifications. The estimated
benefits at certain compensation levels reflect the statutory limits on
compensation that can be recognized for plan purposes. This limit is currently
$150,000 per year.
<TABLE>
<CAPTION>
YEARS OF SERVICE
-------------------------------------------------------
ANNUAL COMPENSATION 15 20 25 30 35
- ----------------------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$100,000................................. $26,250 $35,000 $43,750 $48,125 $48,125
125,000................................. 32,813 43,750 54,688 60,156 60,156
150,000................................. 39,375 52,500 65,625 72,188 72,188
</TABLE>
Each eligible employee receives a monthly retirement benefit, beginning at
normal retirement age (65), based on a percentage (1.75%) of the average monthly
compensation of such employee before retirement, multiplied by his years of
service (up to a maximum of 30 years). Full credit is given for the first 25
years of service, and half credit is given for years over 25 and less than 30.
Benefits are reduced for retirement before normal retirement age. Average
monthly compensation is generally defined as average monthly base salary over
the five years of highest compensation in the ten-year period preceding
retirement. For 1995, the annual compensation of Mr. Rainville recognized for
plan purposes was $150,000. The estimated credited years of service recognized
under the Retirement Plan for Mr. Rainville is 30, assuming retirement at age
65. No benefits under the Retirement Plan vest for an employee until after five
years of participation, at which time they become fully vested. The benefits
shown in the above table are subject to reduction for Social Security benefits.
The plan benefits shown are payable during the employee's lifetime unless the
employee elects another form of benefit that provides death benefit protection.
SEVERANCE AGREEMENTS
The executive officers and certain key employees of Thermo have entered
into contracts with Thermo that provide severance benefits if there is a change
of control of Thermo that is not approved by the Board of Directors and their
employment is terminated, for whatever reason, within one year thereafter. For
purposes of these agreements a change of control exists upon (i) the acquisition
of 50% or more of the outstanding Thermo Common Stock by any person without the
prior approval of the Board of Directors, (ii) the failure of the Board of
Directors, within two years after any contested election of directors or tender
or exchange offer not approved by the Board of Directors, to be constituted of a
majority of directors holding office prior to such event or (iii) any other
event that the Board of Directors determines constitutes an effective change of
control of Thermo.
In 1983, Thermo entered into severance agreements with all of the named
executive officers, except Mr. Rainville and Mr. Wood. For these severance
agreements, the benefit is stated as an initial percentage which was established
by the Board of Directors and was generally based upon the employee's age and
length of service with Thermo. Benefits are to be paid over a five-year period.
The benefit to be paid in the first year is determined by applying this
percentage to the employee's highest annual total cash remuneration in any
12-month period during the preceding three years. This benefit is reduced 10% in
each of the succeeding four years in which benefits are paid. The initial
percentage to be so applied to Dr. G. Hatsopoulos, Mr. J. Hatsopoulos and Mr.
Smith is 98.1%, 76.1% and 59.1%, respectively. Assuming that severance benefits
would have been payable under such agreements as of January 1, 1996, the
payments thereunder for the first year thereof to Dr. G. Hatsopoulos, Mr. J.
Hatsopoulos and Mr. Smith would have been approximately $1,015,000, $609,000 and
$316,000, respectively. Payments under these agreements are not subject to the
so-called "excess parachute payment" provisions under applicable provisions of
the Internal Revenue Code of 1986, as amended.
During 1988, Mr. Rainville and Mr. Wood each entered into a severance
agreement with Thermo pursuant to which he will receive a lump sum benefit at
the time of a qualifying severance equal to the highest total cash compensation
paid to him in any twelve-month period during the three years preceding the
severance event. A qualifying severance exists if (i) the officer's employment
is terminated for any reason within one year after a change in control of Thermo
or (ii) a group of directors of Thermo consisting of
89
<PAGE> 96
directors of Thermo on the date of the severance agreement or, if an election
contest or tender or exchange offer for Thermo Common Stock has occurred, the
directors of Thermo immediately prior to such election contest or tender or
exchange offer, and any future directors who are nominated or elected by such
directors, determines that any other termination of the officer's employment
should be treated as a qualifying severance. The benefits under this agreement
are limited in such a manner that the payments will not constitute "excess
parachute payments" under applicable provisions of the Internal Revenue Code of
1986, as amended. Assuming that severance benefits would have been payable as of
January 1, 1996, the payment under such agreement to Mr. Rainville and Mr. Wood
would have been approximately $415,000 and $340,000, respectively.
EXECUTIVE COMPENSATION OF SMC
The following table sets forth the aggregate compensation paid by SMC to
the Chief Executive Officer and to each of the four additional most highly
compensated executive officers for each of the fiscal years in the three year
period ended September 30, 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
FISCAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) COMPENSATION(3)
- ----------------------------------------------------- ------ --------- -------- ---------------
<S> <C> <C> <C> <C>
George D. Holmes..................................... 1995 $ 252,000 $75,400 $37,883
Chief Executive Officer 1994 240,000 39,743 32,727
1993 215,004 86,000 34,931
Pierre Sice.......................................... 1995 176,400 42,336 15,972
Executive Vice President, Chief Financial 1994 168,000 22,415 15,972
Officer and Secretary 1993 152,500 48,800 15,948
William B. Ross...................................... 1995 176,400 42,336 15,972
President, SensorMedics 1994 168,000 22,415 15,972
Critical Care Corporation 1993 152,500 48,800 15,948
Steven Sidwell....................................... 1995 165,000 39,600 11,172
Executive Vice 1994 138,000 18,393 10,932
President 1993 125,000 50,000 10,598
L. Thomas Rauterkus.................................. 1995 147,700 35,448 15,926
Vice President -- Research 1994 144,000 19,395 15,852
and Development 1993 133,000 42,560 15,558
</TABLE>
- ---------------
(1) Includes amounts deferred by the named executive under the SensorMedics
Corporation Supplemental Retirement Plan.
(2) Includes bonuses paid in accordance with SMC's Management Incentive
Compensation Plan. See "-- Management Incentive Compensation Plan."
(3) For Mr. Holmes, 1995 amount includes: (i) $5,772 matching contributions to
SMC's 401(k) plan and (ii) $10,200 automobile allowance and (iii) $21,911
interest foregone by SMC on the non-interest bearing loan made to Mr. Holmes
in connection with his purchase of shares of SMC Common Stock pursuant to
the SensorMedics Corporation Employee Restricted Stock Purchase Plan.
Interest was computed using a discount rate equal to the applicable federal
rate as required by Section 1274 of the Code. For Mr. Sice, 1995 amount
includes: (i) $5,772 matching contributions to SMC's 401(k) plan and (ii)
$10,200 automobile allowance. For Mr. Ross, 1995 amount includes: (i) $5,772
matching contributions to SMC's 401(k) plan and (ii) $10,200 automobile
allowance. For Mr. Sidwell, 1995 amount includes: (i) $5,772 matching
contribution to SMC's 401(k) plan and (ii) $5,400 automobile allowance. For
Mr. Rauterkus, 1995 amount includes: (i) $5,726 matching contributions to
SMC's 401(k) plan, and
90
<PAGE> 97
(ii) $10,200 automobile allowance. Itemized disclosure of amounts of other
compensation in fiscal 1994 and fiscal 1993 is not required.
During each fiscal year in the three year period ended September 30, 1995,
no executive officer named above received other compensation in excess of the
lesser of $50,000 or 10% of such officer's compensation nor did any such officer
receive any restricted stock award, option, stock appreciation right or payment
under any long term incentive plan.
There are no employment agreements between SMC and any of its executive
officers.
In connection with his purchase of 106,500 shares of SMC Common Stock under
the SensorMedics Corporation Employee Restricted Stock Purchase Plan, Mr. Holmes
paid for such shares by delivery of a secured promissory note in the amount of
$383,400. Such note does not bear interest and is payable in full on July 6,
1997. The note is secured by the shares of SMC Common Stock purchased under the
Purchase Plan. Upon the sale or other disposition of any of the shares of SMC
Common Stock purchased by him under the Purchase Plan, Mr. Holmes is required to
repay a pro rata portion of the note equal to the number of shares sold or
otherwise disposed of by him divided by the total number of shares originally
purchased by him.
MANAGEMENT INCENTIVE COMPENSATION PLAN
SMC maintains a management incentive compensation plan (the "Bonus Plan")
for all executive officers of SMC and its subsidiaries pursuant to which
participants are awarded cash bonuses based on the financial performance of SMC
and its subsidiaries and the individual participant's performance measured
against objectives set by the Board of Directors at the beginning of each fiscal
year. For fiscal 1996, maximum awards range from 80% to 100% of a participant's
annual salary. For each participant, the award ranges from the maximum award if
SMC achieves 110% of its approved consolidated business plan, to 60% of the
maximum if SMC achieves its approved consolidated business plan, to no award if
SMC achieves below 70% of its approved consolidated business plan. Payments
under the Bonus Plan are made after the end of each fiscal quarter. An amount
equal to 20% of each of the first three quarterly payments is withheld and paid,
subject to the participant being employed on September 30, with the
participant's final quarterly payment following the audit of SMC's financial
results. The Board of Directors retains the discretion to modify the terms of
the Bonus Plan as in effect for the current or any future fiscal year as it may
determine to be in the best interests of SMC.
STOCK OPTIONS
No options were granted to any of the named executive officers during any
of the last three fiscal years.
The following table sets forth information concerning the aggregate number
of options exercised during the period from October 1, 1994 to September 30,
1995 by each of the named executive officers of SMC and outstanding options held
by each such officer at September 30, 1995.
91
<PAGE> 98
AGGREGATED OPTION AND FISCAL YEAR-END OPTION VALUE TABLE
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES VALUE SEPTEMBER 30, 1995 SEPTEMBER 30, 1995
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) ($) UNEXERCISABLE (#) UNEXERCISABLE ($)(1)
- --------------------------------------- ------------ -------- -------------------- --------------------
<S> <C> <C> <C> <C>
George D. Holmes....................... -- -- 43,500/0 370,620/0
Chief Executive Officer
Pierre Sice............................ -- -- 75,000/0 639,000/0
Executive Vice President, Chief
Financial Officer and Secretary
William B. Ross........................ -- -- 75,000/0 639,000/0
President, SensorMedics Critical Care
Corporation
Steven Sidwell......................... -- -- 28,000/12,000 238,560/102,240
Executive Vice President
L. Thomas Rauterkus.................... -- -- 24,500/10,500 208,740/89,460
Vice President Research and Development
</TABLE>
- ---------------
(1) Value is determined by subtracting the exercise price from the imputed price
of shares of SMC Common Stock from the Merger (assumed to be $12.12 per
share) and multiplying the resulting number by the number of underlying
shares of SMC Common Stock.
MEDICAL REIMBURSEMENT PLAN
The Exec-U-Care Medical Reimbursement Insurance Plan (the "Medical Plan"),
which was established for the benefit of SMC's executive officers, reimburses
participants, their spouses and covered children for medical expenses not
covered by SMC's regular group medical plan up to $50,000 per individual per
year. In effect, the Medical Plan provides participants with 100% medical
coverage for all allowable medical expenses. In addition, executive officers
receive $100,000 of Accidental Death and Dismemberment insurance as part of the
Medical Plan. During fiscal 1993, 1994 and 1995, premiums totalling
approximately $33,900, $26,300 and $32,100, respectively, were paid by SMC in
connection with the Medical Plan.
92
<PAGE> 99
OWNERSHIP OF THERMO COMMON STOCK AND SMC COMMON STOCK AND
SMC SERIES B PREFERRED STOCK
OWNERSHIP OF THERMO STOCK
The following table sets forth, as of January 1, 1996, the beneficial
ownership of Thermo Common Stock, as well as the beneficial ownership of the
common stock of: (i) Thermedics Inc., Thermo Ecotek Corporation, Thermo Fibertek
Inc., Thermo Instrument Systems Inc., Thermo Power Corporation, Thermo TerraTech
Inc., and ThermoTrex Corporation, all publicly traded, majority-owned
subsidiaries of Thermo; (ii) Thermo Cardiosystems Inc. and Thermo Voltek Corp.,
publicly traded, majority-owned subsidiaries of Thermedics Inc.; (iii) Thermo
Remediation Inc., a publicly traded, majority-owned subsidiary of Thermo
TerraTech Inc.; (iv) ThermoLase Corporation, a publicly traded, majority-owned
subsidiary of ThermoTrex Corporation, and Trex Medical Corporation, a privately
held, majority-owned subsidiary of ThermoTrex Corporation; (v) ThermoLyte
Corporation, a privately held, majority-owned subsidiary of Thermo Power
Corporation; and (vi) ThermoSpectra Corporation, a publicly traded,
majority-owned subsidiary of Thermo Instrument Systems Inc. and Thermo
BioAnalysis Corporation, a privately held, majority-owned subsidiary of Thermo
Instrument Systems Inc., by (x) each Director, (y) each of Thermo's executive
officers named in the summary compensation table set forth below under the
heading "Executive Compensation," and (z) all Directors and current executive
officers as a group. As of January 1, 1996, no Director or executive officer
beneficially owned any shares of any of the following companies: ThermoQuest
Corporation, a publicly traded, majority-owned subsidiary of Thermo Instrument
Systems Inc., Thermo Optek, a privately held, majority-owned subsidiary of
Thermo Instrument Systems Inc., and Thermo Sentron Inc., a publicly traded,
majority-owned subsidiary of Thermedics Inc. None of the persons nor the group
included in the table will receive any shares of Thermo Common Stock in the
Merger. The issuance of such shares will result in a slight decrease in the
percentage of the outstanding Thermo Common Stock owned by such persons and
group.
<TABLE>
<CAPTION>
PUBLICLY-HELD SUBSIDIARIES
------------------------------------------------------------------------------------------
THERMO THERMO
THERMO ECOTEK THERMO INSTRUMENT THERMO
ELECTRON THERMEDICS CORPOR- FIBERTEK SYSTEMS POWER
NAME(1) CORP.(2) INC.(3) ATION(4) INC.(5) INC.(6) CORP.(7)
- ----------------------------- --------- ---------- ----------- ---------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
John M. Albertine............ 37,065 4,500 1,500 4,500 1,875 3,000
Peter O. Crisp............... 96,651 44,653 3,461 4,500 17,693 32,151
Elias P. Gyftopoulos......... 69,570 4,500 1,500 4,500 47,018 3,000
George N. Hatsopoulos........ 3,493,917 65,369 36,024 153,529 143,300 63,482
John N. Hatsopoulos.......... 717,532 76,392 38,040 145,873 118,913 40,753
Frank Jungers................ 244,254 9,050 26,900 5,250 52,374 3,000
Robert A. McCabe............. 46,015 6,998 1,500 4,500 39,804 11,209
Frank E. Morris.............. 21,192 4,500 1,500 4,500 1,875 3,000
Donald E. Noble.............. 52,248 14,173 1,500 75,599 54,688 18,485
Hutham S. Olayan............. 21,630 4,500 1,500 4,500 1,875 3,000
William A. Rainville......... 301,570 0 4,000 337,809 0 0
Arvin H. Smith............... 545,367 91,164 4,000 60,000 431,653 7,969
Roger D. Wellington.......... 31,815 4,500 1,500 10,500 5,625 6,425
John W. Wood Jr.............. 232,011 188,488 3,000 6,000 416 0
All Directors and current
executive officers as a
group (17 persons).......... 6,775,687 580,854 204,186 969,807 1,011,227 298,709
<CAPTION>
THERMO THERMO
THERMO CARDIO- THERMO REMEDI-
TERRATECH THERMOTREX SYSTEMS VOLTEK ATION THERMOSPECTRA THERMOLASE
NAME(1) INC.(8) CORP.(9) INC.(10) CORP.(11) INC.(12) CORP.(14) CORP.(13)
- ----------------------------- ----------- ----------- ------------- --------- ----------- ------------- -----------
<S> <<C> <C> <C>
John M. Albertine............ 0 4,500 11,250 1,000 4,500 1,000 2,000
Peter O. Crisp............... 2,160 41,897 24,750 2,500 4,500 1,000 57,443
Elias P. Gyftopoulos......... 0 4,500 13,500 1,500 27,600 20,000 61,400
George N. Hatsopoulos........ 57,473 48,746 11,599 0 7,500 20,000 46,720
John N. Hatsopoulos.......... 60,259 33,194 1,932 7,749 40,182 20,000 81,902
Frank Jungers................ 0 11,000 11,250 4,000 15,450 5,500 3,300
Robert A. McCabe............. 2,160 10,000 11,250 1,000 4,500 1,500 4,100
Frank E. Morris.............. 0 4,500 11,250 1,000 25,938 1,000 2,000
Donald E. Noble.............. 46,405 4,500 11,250 1,000 10,500 1,000 6,000
Hutham S. Olayan............. 0 4,500 11,250 1,000 4,500 1,000 2,000
William A. Rainville......... 60,000 2,700 0 0 24,000 10,000 10,000
Arvin H. Smith............... 36,950 2,700 30,000 0 2,400 20,000 10,000
Roger D. Wellington.......... 1,000 4,500 11,250 1,000 4,500 1,000 2,000
John W. Wood Jr.............. 206 900 65,926 60,648 0 5,000 10,000
All Directors and current
executive officers as a
group (17 persons).......... 310,163 241,241 265,212 82,397 219,186 132,500 481,146
<CAPTION>
PRIVATELY-HELD SUBSIDIARIES
---------------------------------------------------
THERMO
BIOANALYSIS THERMOLYTE TREX MEDICAL
CORPOR- CORPOR- CORPOR-
NAME(1) ATION(15) ATION(16) ATION(17)
- ----------------------------- --------------- --------------- ---------------
John M. Albertine............ 0 0 0
Peter O. Crisp............... 0 0 10,000
Elias P. Gyftopoulos......... 0 0 0
George N. Hatsopoulos........ 0 0 0
John N. Hatsopoulos.......... 0 0 0
Frank Jungers................ 4,000 1,500 2,000
Robert A. McCabe............. 0 0 5,000
Frank E. Morris.............. 0 0 0
Donald E. Noble.............. 2,000 1,000 0
Hutham S. Olayan............. 0 0 0
William A. Rainville......... 0 0 0
Arvin H. Smith............... 9,000 0 0
Roger D. Wellington.......... 0 0 0
John W. Wood Jr.............. 0 0 0
All Directors and current
executive officers as a
group (17 persons).......... 17,500 5,000 19,500
</TABLE>
93
<PAGE> 100
- ---------------
(1) Except as reflected in the footnotes to this table, shares of Thermo Common
Stock and of the common stock of each of Thermo's subsidiaries beneficially
owned consist of shares owned by the indicated person or by that person for
the benefit of minor children, and all share ownership includes sole voting
and investment power.
(2) The number of shares of Thermo Common Stock reported in the table reflects
a three-for-two split of such stock effected in May 1995 in the form of a
50% stock dividend, and a three-for-two split of such stock to be effected
on June 5, 1996 in the form of a 50% stock dividend. Shares of Thermo
Common Stock beneficially owned by Dr. Albertine, Mr. Crisp, Dr.
Gyftopoulos, Dr. G. Hatsopoulos, Mr. J. Hatsopoulos, Mr. Jungers, Mr.
McCabe, Dr. Morris, Mr. Noble, Ms. Olayan, Mr. Rainville, Mr. Smith, Mr.
Wellington, Mr. Wood and all Directors and current executive officers as a
group include 7,875, 7,875, 7,875, 1,653,300, 446,820, 7,875, 7,875, 7,875,
7,875, 7,875, 204,262, 274,162, 7,875, 200,997 and 3,196,219 shares,
respectively, that such person or members of the group have the right to
acquire within 60 days of January 1, 1996, through the exercise of stock
options. Shares beneficially owned by Dr. G. Hatsopoulos, Mr. J.
Hatsopoulos, Mr. Smith, Mr. Wood and all Directors and current executive
officers as a group include 2,221, 1,837, 1,621, 1,578 and 13,884 full
shares, respectively, allocated to their respective accounts maintained
pursuant to Thermo's employee stock ownership plan, of which the trustees,
who have investment power over its assets, were as of January 1, 1996,
executive officers of Thermo (the "ESOP"). Shares beneficially owned by Dr.
Albertine, Mr. Crisp, Mr. Jungers, Mr. McCabe, Dr. Morris, Mr. Noble, Ms.
Olayan, Mr. Wellington and all Directors and current executive officers as
a group include 29,190, 44,131, 80,427, 34,725, 9,901, 40,957, 13,755,
21,409 and 274,497 shares, respectively, allocated to accounts maintained
pursuant to Thermo's Deferred Compensation Plan for Directors. Shares
beneficially owned by Dr. G. Hatsopoulos include 89,601 shares held by Dr.
Hatsopoulos' spouse, 168,750 shares held by a QTIP trust (the "Hatsopoulos
QTIP Trust") of which Dr. G. Hatsopoulos' spouse is a trustee, 1,305 shares
held in a trust of which Dr. G. Hatsopoulos is the trustee and 39,937
shares held by a family trust of which Dr. G. Hatsopoulos' spouse is the
trustee. Shares beneficially owned by Mr. J. Hatsopoulos include 168,750
shares held by the Hatsopoulos QTIP Trust of which Mr. J. Hatsopoulos is a
trustee. Shares beneficially owned by Mr. Jungers include 4,500 shares held
by Mr. Jungers' spouse. Shares beneficially owned by Mr. Morris include
3,415 shares held by Mr. Morris' spouse. Shares beneficially owned by Ms.
Olayan do not include 4,899,600 shares owned by Crescent Holding GmbH, a
member of the Olayan Group. Crescent Holding GmbH is indirectly controlled
by Suliman S. Olayan, Ms. Olayan's father. Ms. Olayan disclaims beneficial
ownership of the shares owned by Crescent Holding GmbH. Except for Dr. G.
Hatsopoulos, who beneficially owned 2.6% of Thermo Common Stock outstanding
as of January 1, 1996, no Director or executive officer beneficially owned
more than 1% of the Thermo Common Stock outstanding as of such date; all
Directors and current executive officers as a group beneficially owned 4.8%
of the Thermo Common Stock outstanding as of January 1, 1996.
(3) Shares of the common stock of Thermedics Inc. beneficially owned by Dr.
Albertine, Mr. Crisp, Dr. Gyftopoulos, Dr. G. Hatsopoulos, Mr. J.
Hatsopoulos, Mr. Jungers, Mr. McCabe, Dr. Morris, Mr. Noble, Ms. Olayan,
Mr. Smith, Mr. Wellington, Mr. Wood and all Directors and current executive
officers as a group include 4,500, 8,050, 4,500, 50,000, 50,000, 4,500,
4,500, 4,500, 4,500, 4,500, 82,500, 4,500, 120,100 and 388,150 shares,
respectively, that such person or members of the group have the right to
acquire within 60 days of January 1, 1996, through the exercise of stock
options. Shares beneficially owned by Dr. G. Hatsopoulos, Mr. J.
Hatsopoulos, Mr. Smith, Mr. Wood and all Directors and current executive
officers as a group include 1,465, 1,476, 1,319, 1,218 and 14,680 full
shares, respectively, allocated to their respective accounts maintained
pursuant to Thermo's ESOP. Shares beneficially owned by Mr. Crisp and all
Directors and current executive officers as a group include 6,308 shares
allocated to Mr. Crisp's account maintained pursuant to that corporation's
deferred compensation plan for directors. Shares beneficially owned by Dr.
G. Hatsopoulos include 562 shares held by Dr. G. Hatsopoulos' spouse.
Shares beneficially owned by Mr. Jungers include 1,550 shares held by Mr.
Jungers' spouse. No Director or executive officer beneficially owned more
than 1% of the common
94
<PAGE> 101
stock of Thermedics Inc. outstanding as of January 1, 1996; all Directors
and current executive officers as a group beneficially owned 1.7% of the
Thermedics Inc. common stock outstanding as of such date.
(4) Shares of the common stock of Thermo Ecotek Corporation beneficially owned
by Dr. Albertine, Mr. Crisp, Dr. Gyftopoulos, Dr. G. Hatsopoulos, Mr. J.
Hatsopoulos, Mr. Jungers, Mr. McCabe, Dr. Morris, Mr. Noble, Ms. Olayan,
Mr. Rainville, Mr. Smith, Mr. Wellington, Mr. Wood and all Directors and
current executive officers as a group include 1,500, 1,500, 1,500, 36,000,
36,000, 24,000, 1,500, 1,500, 1,500, 1,500, 4,000, 4,000, 1,500, 3,000 and
196,000 shares, respectively, that such person or members of the group have
the right to acquire within 60 days of January 1, 1996, through the
exercise of stock options. Shares beneficially owned by Dr. G. Hatsopoulos
include 24 shares held in trusts of which Dr. G. Hatsopoulos is a trustee.
Shares beneficially owned by Mr. Jungers include 200 shares held by Mr.
Jungers' spouse. No Director or executive officer beneficially owned more
than 1% of the common stock of Thermo Ecotek Corporation outstanding as of
January 1, 1996; all Directors and current executive officers as a group
beneficially owned 1.2% of the Thermo Ecotek Corporation common stock
outstanding as of such date.
(5) The number of shares of common stock of Thermo Fibertek Inc. reported in
the table reflects a three-for-two split of such stock effected in
September 1995 in the form of a 50% stock dividend. Shares of the common
stock of Thermo Fibertek Inc. beneficially owned by Dr. Albertine, Mr.
Crisp, Dr. Gyftopoulos, Dr. G. Hatsopoulos, Mr. J. Hatsopoulos, Mr.
Jungers, Mr. McCabe, Dr. Morris, Mr. Noble, Ms. Olayan, Mr. Rainville, Mr.
Smith, Mr. Wellington, Mr. Wood and all Directors and current executive
officers as a group include 4,500, 4,500, 4,500, 117,273, 126,000, 4,500,
4,500, 4,500 63,900, 4,500, 330,000, 60,000, 4,500, 6,000 and 881,973
shares, respectively, that such person or members of the group have the
right to acquire within 60 days of January 1, 1996, through the exercise of
stock options. Shares beneficially owned by Mr. Noble and all Directors and
current executive officers as a group include 3,242 shares allocated to Mr.
Noble's account maintained pursuant to that corporation's deferred
compensation plan for directors. Shares beneficially owned by Mr. Jungers
include 750 shares held by Mr. Jungers' spouse. No Director or executive
officer beneficially owned more than 1% of the Thermo Fibertek Inc. common
stock outstanding as of January 1, 1996; all Directors and current
executive officers as a group beneficially owned 2.3% of the Thermo
Fibertek Inc. common stock outstanding as of such date.
(6) The number of shares of common stock of Thermo Instrument Systems Inc.
reported in the table reflects a five-for-four split of such stock effected
in December 1995 in the form of a 25% stock dividend. Shares of the common
stock of Thermo Instrument Systems Inc. beneficially owned by Dr.
Albertine, Mr. Crisp, Dr. Gyftopoulos, Dr. G. Hatsopoulos, Mr. J.
Hatsopoulos, Mr. Jungers, Mr. McCabe, Dr. Morris, Mr. Noble, Ms. Olayan,
Mr. Smith, Mr. Wellington and all Directors and current executive officers
as a group include 1,875, 1,875, 14,465, 93,750, 93,750, 13,809, 10,995,
1,875, 6,093, 1,875, 234,375, 1,875 and 496,299 shares, respectively, that
such person or members of the group have the right to acquire within 60
days of January 1, 1996, through the exercise of stock options. Shares
beneficially owned by Dr. G. Hatsopoulos, Mr. J. Hatsopoulos, Mr. Smith,
Mr. Wood and all Directors and current executive officers as a group
include 515, 515, 516, 416 and 5,142 full shares, respectively, allocated
to accounts maintained pursuant to Thermo's ESOP. Shares beneficially owned
by Mr. Jungers, Mr. McCabe and all Directors and current executive officers
as a group include 12,006, 7,126 and 19,132 shares, respectively, allocated
to accounts maintained pursuant to that corporation's deferred compensation
plan for directors. Shares beneficially owned by Dr. G. Hatsopoulos include
21,368 shares held by Dr. Hatsopoulos' spouse. Shares beneficially owned by
Mr. Jungers include 543 shares held by Mr. Jungers' spouse. No Director or
executive officer beneficially owned more than 1% of the Thermo Instrument
Systems Inc. common stock outstanding as of January 1, 1996; all Directors
and current executive officers as a group beneficially owned 1.1% of the
Thermo Instrument Systems Inc. common stock outstanding as of such date.
(7) Shares of the common stock of Thermo Power Corporation beneficially owned
by Dr. Albertine, Mr. Crisp, Dr. Gyftopoulos, Dr. G. Hatsopoulos, Mr. J.
Hatsopoulos, Mr. Jungers, Mr. McCabe, Dr. Morris, Mr. Noble, Ms. Olayan,
Mr. Wellington and all Directors and current executive officers as a group
include 3,000, 5,600, 3,000, 40,000, 40,000, 3,000, 3,000, 3,000, 6,200,
3,000, 3,000 and 169,800
95
<PAGE> 102
shares, respectively, that such person or members of the group have the
right to acquire within 60 days of January 1, 1996, through the exercise of
stock options. Shares beneficially owned by Mr. Crisp, Mr. Noble and all
Directors and current executive officers as a group include 8,458, 4,860
and 13, 318 shares, respectively, allocated to their respective accounts
maintained pursuant to that corporation's deferred compensation plan for
directors. Shares beneficially owned by Dr. G. Hatsopoulos include 114
shares held by Dr. G. Hatsopoulos' spouse and 2,000 shares each held by two
trusts of which Dr. G. Hatsopoulos' spouse is the trustee. No Director or
executive officer beneficially owned more than 1% of the Thermo Power
Corporation common stock outstanding as of January 1, 1996; all Directors
and current executive officers as a group beneficially owned 2.3% of the
Thermo Power Corporation common stock outstanding as of such date.
(8) Shares of the common stock of Thermo TerraTech Inc. beneficially owned by
Dr. G. Hatsopoulos, Mr. J. Hatsopoulos, Mr. Noble, Mr. Rainville, Mr. Smith
and all Directors and current executive officers as a group include 40,000,
40,000, 6,200, 60,000, 35,000 and 196,200 shares, respectively, that such
person or members of the group have the right to acquire within 60 days of
January 1, 1996, through the exercise of stock options. Shares beneficially
owned by Dr. G. Hatsopoulos, Mr. J. Hatsopoulos, Mr. Smith, Mr. Wood and
all Directors and current executive officers as a group include 214, 217,
218, 206 and 2,253 full shares, respectively, allocated to their respective
accounts maintained pursuant to Thermo's ESOP. Shares beneficially owned by
Mr. Noble and all Directors and current executive officers as a group
include 17,165 shares allocated to Mr. Noble's account maintained pursuant
to that corporation's deferred compensation plan for directors. Shares
beneficially owned by Mr. J. Hatsopoulos and all Directors and current
executive officers as a group include 12,500 shares that Mr. J. Hatsopoulos
has the right to acquire within 60 days of January 1, 1996, through the
exercise of stock purchase warrants acquired in connection with private
placements of securities by Thermo TerraTech Inc. and one or more of that
corporation's subsidiaries on terms identical to terms granted to outside
investors. Shares beneficially owned by Dr. G. Hatsopoulos include 93
shares held by Dr. G. Hatsopoulos' spouse and 2,000 shares held in a trust
of which Dr. G. Hatsopoulos is a trustee. No Director or executive officer
beneficially owned more than 1% of the Thermo TerraTech Inc. common stock
outstanding as of January 1, 1996; all Directors and current executive
officers as a group beneficially owned 1.7% of the Thermo TerraTech Inc.
common stock as of such date.
(9) Shares of the common stock of ThermoTrex Corporation beneficially owned by
Dr. Albertine, Mr. Crisp, Dr. Gyftopoulos, Dr. G. Hatsopoulos, Mr. J.
Hatsopoulos, Mr. Jungers, Mr. McCabe, Dr. Morris, Mr. Noble, Ms. Olayan,
Mr. Rainville, Mr. Smith, Mr. Wellington, Mr. Wood and all Directors and
current executive officers as a group include 4,500, 26,800, 4,500, 36,870,
24,000, 4,500, 4,500, 4,500, 4,500, 4,500, 2,700, 2,700, 4,500, 900 and
181,290 shares, respectively, that such person or members of the group have
the right to acquire within 60 days of January 1, 1996, through the
exercise of stock options. Shares beneficially owned by Mr. Crisp and all
Directors and current executive officers as a group include 1,653 shares
allocated to Mr. Crisp's account maintained pursuant to that corporation's
deferred compensation plan for directors. Shares beneficially owned by Dr.
G. Hatsopoulos include 160 shares held by Dr. G. Hatsopoulos' spouse. No
Director or executive officer beneficially owned more than 1% of the
ThermoTrex Corporation common stock outstanding as of January 1, 1996; all
Directors and current executive officers as a group beneficially owned 1.2%
of the ThermoTrex Corporation common stock outstanding as of such date.
(10) The number of shares of common stock of Thermo Cardiosystems Inc. reported
in the table reflects a three-for-two split of such stock effected in May
1996 in the form of a 50% stock dividend. Shares of the common stock of
Thermo Cardiosystems Inc. beneficially owned by Dr. Albertine, Mr. Crisp,
Dr. Gyftopoulos, Mr. Jungers, Mr. McCabe, Dr. Morris, Mr. Noble, Ms.
Olayan, Mr. Smith, Mr. Wellington, Mr. Wood and all Directors and current
executive officers as a group include 11,250, 24,750, 13,500, 11,250,
11,250, 11,250, 11,250, 11,250, 30,000, 11,250, 59,224 and 225,724 shares,
respectively, that such person or members of the group have the right to
acquire within 60 days of January 1, 1996, through the exercise of stock
options. The Directors and executive officers of Thermo
96
<PAGE> 103
Electron did not individually or as a group beneficially own more than 1%
of the Thermo Cardiosystems Inc. common stock outstanding as of January 1,
1996.
(11) Shares of the common stock of Thermo Voltek Corp. beneficially owned by Dr.
Albertine, Mr. Crisp, Dr. Gyftopoulos, Mr. J. Hatsopoulos, Mr. Jungers, Mr.
McCabe, Dr. Morris, Mr. Noble, Ms. Olayan, Mr. Wellington, Mr. Wood and all
Directors and current executive officers as a group include 1,000, 2,500,
1,500, 4,999, 1,000, 1,000, 1,000, 1,000, 1,000, 1,000, 56,649 and 72,648
shares, respectively, that such persons or members of the group have the
right to acquire within 60 days of January 1, 1996, through the exercise of
stock options. The Directors and executive officers of Thermo Electron did
not individually or as a group beneficially own more than 1% of the Thermo
Voltek Corp. common stock outstanding as of January 1, 1996.
(12) Shares of the common stock of Thermo Remediation Inc. beneficially owned by
Dr. Albertine, Mr. Crisp, Dr. Gyftopoulos, Dr. G. Hatsopoulos, Mr. J.
Hatsopoulos, Mr. Jungers, Mr. McCabe, Dr. Morris, Mr. Noble, Ms. Olayan,
Mr. Rainville, Mr. Smith, Mr. Wellington and all Directors and current
executive officers as a group include 4,500, 4,500, 27,600, 7,500, 22,500,
4,500, 4,500, 24,450, 6,000, 4,500, 22,500, 2,400, 4,500 and 167,250
shares, respectively, that such person or members of the group have the
right to acquire within 60 days of January 1, 1996, through the exercise of
stock options. Shares beneficially owned by Dr. Morris and all Directors
and current executive officers as a group include 1,488 shares allocated to
Dr. Morris' account maintained pursuant to that corporation's deferred
compensation plan for directors. No Director or executive officer
beneficially owned more than 1% of the Thermo Remediation Inc. common stock
outstanding as of January 1, 1996; all Directors and current executive
officers as a group beneficially owned 1.7% of the Thermo Remediation Inc.
common stock outstanding as of such date.
(13) The number of shares of common stock of ThermoLase Corporation reported in
the table reflects a two-for-one split of such stock effected in May 1995
in the form of a 100% stock dividend. Shares of the common stock of
ThermoLase Corporation beneficially owned by Dr. Albertine, Mr. Crisp, Dr.
Gyftopoulos, Dr. G. Hatsopoulos, Mr. J. Hatsopoulos, Mr. Jungers, Mr.
McCabe, Dr. Morris, Mr. Noble, Ms. Olayan, Mr. Rainville, Mr. Smith, Mr.
Wellington, Mr. Wood and all Directors and current executive officers as a
group include 2,000, 22,508, 61,400, 43,200, 68,200, 2,000, 2,000, 2,000,
2,000, 2,000, 10,000, 10,000, 2,000, 10,000 and 376,308 shares,
respectively, that such person or members of the group have the right to
acquire within 60 days of January 1, 1996, through the exercise of stock
options. Shares beneficially owned by Mr. Crisp do not include 11,446
shares held by Mr. Crisp's spouse, as to which shares Mr. Crisp disclaims
beneficial ownership. Shares beneficially owned by Dr. G. Hatsopoulos
include 32 shares held by Dr. G. Hatsopoulos' spouse. No Director or
executive officer beneficially owned more than 1% of the ThermoLase
Corporation common stock outstanding as of January 1, 1996; all Directors
and current executive officers as a group beneficially owned 1.1% of the
ThermoLase Corporation common stock outstanding as of such date.
(14) Shares of the common stock of ThermoSpectra Corporation beneficially owned
by Dr. Albertine, Mr. Crisp, Dr. Gyftopoulos, Dr. G. Hatsopoulos, Mr. J.
Hatsopoulos, Mr. Jungers, Mr. McCabe, Dr. Morris, Mr. Noble, Ms. Olayan,
Mr. Rainville, Mr. Smith, Mr. Wellington, Mr. Wood and all Directors and
current executive officers as a group include 1,000, 1,000, 20,000, 20,000,
20,000, 1,500, 1,500, 1,000, 1,000, 1,000, 10,000, 20,000, 1,000, 3,000 and
124,500 shares, respectively, that such person or members of the group have
the right to acquire within 60 days of January 1, 1996, through the
exercise of stock options. Shares beneficially owned by Mr. Crisp do not
include 160,000 shares owned in the aggregate by entities affiliated with
Venrock Associates, of which Mr. Crisp is both a general and limited
partner and for which Mr. Crisp disclaims beneficial ownership. No director
or executive officer beneficially owned more than 1% of the common stock of
ThermoSpectra Corporation outstanding as of January 1, 1996; all Directors
and current executive officers as a group beneficially owned 1.0% of the
ThermoSpectra Corporation common stock outstanding as of such date.
(15) The Directors and executive officers of Thermo did not individually or as a
group beneficially own more than 1% of the Thermo BioAnalysis Corporation
common stock outstanding as of January 1, 1996.
97
<PAGE> 104
(16) Shares beneficially owned by Mr. Crisp do not include 100,000 shares owned
in the aggregate by entities affiliated with Venrock Associates, of which
Mr. Crisp is both a general and limited partner and for which Mr. Crisp
disclaims beneficial ownership. Shares beneficially owned by Ms. Olayan do
not include 25,000 shares owned by Crescent International Holdings Limited,
a member of the Olayan Group. Crescent International Holdings Limited is
indirectly controlled by Suliman S. Olayan, Ms. Olayan's father. Ms. Olayan
disclaims beneficial ownership of the shares owned by Crescent
International Holdings Limited. The Directors and executive officers of
Thermo did not individually or as a group beneficially own more than 1% of
the ThermoLyte Corporation common stock outstanding as of January 1, 1996.
(17) Shares beneficially owned by Ms. Olayan do not include 100,000 shares owned
by Crescent International Holdings Limited, a member of the Olayan Group.
Crescent International Holdings Limited is indirectly controlled by Suliman
S. Olayan, Ms. Olayan's father. Ms. Olayan disclaims beneficial ownership
of the shares owned by Crescent International Holdings Limited. The
Directors and executive officers of Thermo did not individually or as a
group beneficially own more than 1% of the Trex Medical Corporation common
stock outstanding as of January 1, 1996.
After giving effect to the Merger, assuming no shareholders exercise
dissenters' rights, no SMC Options or SMC Warrants are exercised prior to the
Effective Time, all holders of SMC Series A Preferred Stock elect to receive
Thermo Common Stock and all shares of SMC Series B Preferred Stock are converted
prior to the Effective Time, there will be approximately 139,645,805 shares of
Thermo Common Stock outstanding. After giving effect to the Merger, SMC
shareholders would own in the aggregate approximately 0.8% of the issued and
outstanding shares of Thermo Common Stock.
98
<PAGE> 105
OWNERSHIP OF SMC COMMON STOCK AND SMC SERIES B PREFERRED STOCK
The following table sets forth, as of May 28, 1996, the beneficial
ownership of SMC Common Stock and SMC Series B Preferred Stock by (i) all
persons known to SMC to own beneficially five percent or more of the outstanding
SMC Common Stock or SMC Series B Preferred Stock, (ii) each of the directors of
SMC, (iii) each of the executive officers of SMC and (iv) all directors and
executive officers of SMC together as a group. The address of each of the
directors, executive officers and other employees of SMC is 22705 Savi Ranch
Parkway, Yorba Linda, California 92687. The addresses of other persons are
listed on the table below.
<TABLE>
<CAPTION>
OWNERSHIP OF SMC COMMON OWNERSHIP OF SMC SERIES B
STOCK PREFERRED STOCK
--------------------------- ---------------------------
NUMBER OF NUMBER OF
SHARES SHARES
NAME OF BENEFICIALLY PERCENTAGE BENEFICIALLY PERCENTAGE
BENEFICIAL OWNER(1) OWNED(2) OF CLASS OWNED OF CLASS
- ----------------------------------------------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Hall Capital Management(3)..................... 441,870 21.1% 104,312 8.8%
Menlo Ventures III(4).......................... 354,003 16.9% 104,312 8.8%
Michigan Investment Fund(5).................... 387,478 18.9% 69,541 5.9%
BG Services Limited(6)......................... 454,780 18.8% 382,475 32.2%
ABS Ventures(7)................................ 122,623 6.2% 13,039 1.1%
ABS Ventures II(8)............................. 225,434 10.8% 91,273 7.7%
State of Michigan(9)........................... 223,831 10.9% 69,541 5.9%
Jupiter National Corporation(10)............... 141,244 6.8% 90,404 7.6%
Mutual Benefit Life(11)........................ 82,687 4.0% 69,541 5.9%
Warburg, Pincus (FBO Leeway)(12)............... 82,687 4.0% 69,541 5.9%
Abbott Capital (FBO Pace)(13).................. 82,687 4.0% 69,541 5.9%
American Health Care Systems(14)............... 290,000 12.2% -- --
Robert Denham(15).............................. 106,500 5.4% -- --
Ron Hall(16)................................... 441,870 21.1% 104,312 8.8%
Rick Magnuson(17).............................. 354,003 16.9% 104,312 8.8%
William Nydam(18).............................. 290,000 12.2% -- --
Bruns Grayson(19).............................. 348,057 16.6% 104,312 8.8%
James R. Weersing(20).......................... 531,262 25.9% 69,541 5.9%
George D. Holmes(21)........................... 161,815 8.0% -- --
Pierre Sice(22)................................ 80,653 3.9% -- --
William B. Ross(23)............................ 75,000 3.7% -- --
Steven Sidwell(24)............................. 34,000 1.7% -- --
L. Thomas Rauterkus(25)........................ 40,343 2.0% -- --
Henry Endo(26)................................. 18,000 0.9% -- --
All Directors and Executive Officers together
as a group (11 persons)(27).................. 2,375,003 82.0% 382,477 32.2%
</TABLE>
- ---------------
(1) Shares of SMC Common Stock and SMC Series B Preferred Stock beneficially
owned include shares owned by the indicated person and, if the person is an
individual, by that individual's spouse, by that individual and his spouse
and by that individual and his spouse (or either of them) for the benefit
of minor children. Except as reflected in the footnotes to this table, all
share ownership involves sole voting and investment power.
(2) The number of shares of SMC Common Stock beneficially owned includes shares
subject to conversion from shares of SMC Series B Preferred Stock and any
accrued and unpaid dividends thereon. Based on a conversion ratio described
in the SMC Articles, one share of SMC Series B Preferred Stock is
convertible into 0.6835 share of SMC Common Stock and one dollar of an
accrued dividend of SMC Series B Preferred Stock is convertible into 0.0951
share of SMC Common Stock.
99
<PAGE> 106
(3) Includes 124,032 shares that may be acquired through a conversion of
104,312 shares of SMC Series B Preferred Stock and $554,809 of accrued
dividends on SMC Series B Preferred Stock. The address of Hall Capital
Management is 26161 La Paz Road, Suite E, Mission Viejo, CA 92691.
(4) Includes 124,032 shares that may be acquired through a conversion of
104,312 shares of SMC Series B Preferred Stock and $554,809 of accrued
dividends on SMC Series B Preferred Stock. The address of Menlo Ventures
III is 3000 Sand Hill Road, Building 4, Suite 100, Menlo Park, CA 94025.
(5) Includes 82,687 shares that may be acquired through a conversion of 69,541
shares of SMC Series B Preferred Stock and $369,871 of accrued dividends on
SMC Series B Preferred Stock. The address of Michigan Investment Fund is
365 South Street, Morristown, NJ 07961, c/o MBW Management.
(6) Includes 454,780 shares that may be that may be acquired through a
conversion of 382,475 shares of SMC Series B Preferred Stock and $2,034,289
of accrued dividends on SMC Series B Preferred Stock. The address of BG
Services Limited is 6 Minden House, St. Helier, Jersey, Channel Islands,
c/o Minden House.
(7) Includes 15,504 shares that may be acquired through a conversion of 13,039
shares of SMC Series B Preferred Stock and $69,351 of accrued dividends on
SMC Series B Preferred Stock. The address of ABS Ventures is 10 North
Calvert Street, Suite 735, Baltimore, MD 21202.
(8) Includes 108,528 shares that may be that may be acquired through a
conversion of 91,273 shares of SMC Series B Preferred Stock and $485,458 of
accrued dividends on SMC Series B Preferred Stock. The address of ABS
Ventures II is 10 North Calvert Street, Suite 735, Baltimore, MD 21202.
(9) Includes 82,687 shares that may be that may be acquired through a
conversion of 69,541 shares of SMC Series B Preferred Stock and $369,871 of
accrued dividends on SMC Series B Preferred Stock. The address of State of
Michigan is Michigan Department of Treasury, P.O. Box 15128, Lansing, MI
48901, c/o Venture Capital Division.
(10) Includes 107,494 shares that may be that may be acquired through a
conversion of 90,404 shares of SMC Series B Preferred Stock and $480,836 of
accrued dividends on SMC Series B Preferred Stock. The address of Jupiter
National Corporation is 39 West Montgomery, Rockville, MD 20850.
(11) Includes 82,687 shares that may be that may be acquired through a
conversion of 69,541 shares of SMC Series B Preferred Stock and $369,871 of
accrued dividends on SMC Series B Preferred Stock. The address of Mutual
Benefit Life is 520 Broad Street, Newark, NJ 07101.
(12) Includes 82,687 shares that may be that may be acquired through a
conversion of 69,541 shares of SMC Series B Preferred Stock and $369,871 of
accrued dividends on SMC Series B Preferred Stock. The address of Warburg,
Pincus (FBO Leeway) is 466 Lexington Avenue, New York, NY 10017-3147.
(13) Includes 82,687 shares that may be that may be acquired through a
conversion of 69,541 shares of SMC Series B Preferred Stock and $369,871 of
accrued dividends on SMC Series B Preferred Stock. The address of Abbott
Capital (FBO Pace) is 1330 Avenue of the Americas, 28th Floor, New York, NY
10019-5422.
(14) Includes 195,000 shares that American Health Care Systems has the right to
acquire through the exercise of stock warrants. The address of American
Health Care Systems is 12730 High Bluff Drive, Suite 300, San Diego, CA
92130-2099.
(15) Mr. Denham's address is 5761 Sierra Cielo Road, Irvine, California 92715.
(16) Includes 441,870 shares of SMC Common Stock (including shares that may be
acquired through a conversion of SMC Series B Preferred Stock, along with
accrued dividends, into SMC Common Stock (see footnote 1)) beneficially
owned by an affiliate, Hall Capital Management.
(17) Includes 354,003 shares of SMC Common Stock (including shares that may be
acquired through a conversion of SMC Series B Preferred Stock, along with
accrued dividends, into SMC Common Stock (see footnote 2)) beneficially
owned by an affiliate, Menlo Ventures III.
(18) Includes 290,000 shares of SMC Common Stock (including shares that may be
acquired through an exercise of SMC Warrants (see footnote 14))
beneficially owned by an affiliate, American Health Care Systems.
100
<PAGE> 107
(19) Includes 348,057 shares of SMC Common Stock (including shares that may be
acquired through a conversion of SMC Series B Preferred Stock, along with
accrued dividends, into SMC Common Stock (see footnote 7)) and 104,312
shares of SMC Series B Preferred Stock owned by affiliates, ABS Ventures
and ABS Ventures II.
(20) Includes 143,784 shares of SMC Common Stock beneficially owned by the
Weersing Family Trust U/D/T dated April 24, 1991, James R. Weersing and
Mary H. Weersing, as trustees and 387,478 shares of SMC Common Stock
(including shares that may be acquired through a conversion of SMC Series B
Preferred Stock, along with accrued dividends, into SMC Common Stock (see
footnote 5)) and 69,541 shares of SMC Series B Preferred Stock beneficially
owned by an affiliate, Michigan Investment Fund.
(21) Includes 43,500 shares that Mr. Holmes has the right to acquire through the
exercise of stock options exercisable within 60 days of May 28, 1996.
(22) Includes 75,000 shares that Mr. Sice has the right to acquire through the
exercise of stock options exercisable within 60 days of May 28, 1996.
(23) Includes 75,000 shares that Mr. Ross has the right to acquire through the
exercise of stock options exercisable within 60 days of May 28, 1996.
(24) Includes 34,000 shares that Mr. Sidwell has the right to acquire through
the exercise of stock options exercisable within 60 days of May 28, 1996.
(25) Includes 30,000 shares that Mr. Rauterkus has the right to acquire through
the exercise of stock options exercisable within 60 days of May 28, 1996.
(26) Includes 18,000 shares that Mr. Endo has the right to acquire through the
exercise of stock options exercisable within 60 days of May 28, 1996.
(27) Includes (i) 275,500 shares of SMC Common Stock that certain directors and
executive officers have the right to acquire through the exercise of stock
options exercisable within 60 days of May 28, 1996 (see footnotes 21 - 26),
(ii) 1,821,408 shares of SMC Common Stock beneficially owned by affiliates
of certain directors (including, (a) 454,783 shares that may be acquired
through a conversion of SMC Series B Preferred Stock, along with accrued
dividends (see footnotes, 3, 4, 5, 7 and 8) and (b) 195,000 shares that may
be acquired through the exercise of stock warrants (see footnote 14) and
(iii) 382,477 shares of SMC Series B Preferred Stock beneficially owned by
affiliates of certain directors (see footnotes 3, 4, 5, 7 and 8).
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Thermo has adopted a strategy of selling a minority interest in subsidiary
companies to outside investors as an important tool in its future development.
As part of this strategy, Thermo has created Thermedics Inc., Thermo Ecotek
Corporation, Thermo Fibertek Inc., Thermo Instrument Systems Inc., Thermo Power
Corporation, Thermo TerraTech Inc. and ThermoTrex Corporation, all of which are
publicly traded, majority subsidiaries of Thermo; Thermedics Inc. has created
Thermo Cardiosystems Inc. and Thermo Sentron Inc. as publicly traded,
majority-owned subsidiaries and has acquired the majority interest in a
previously unaffiliated public company, Thermo Voltek Corp.; Thermo TerraTech
Inc. has created Thermo Remediation Inc. as a publicly traded, majority-owned
subsidiary; Thermo Instrument Systems Inc. has created ThermoQuest as a publicly
traded, majority-owned subsidiary, and ThermoTrex Corporation has created
ThermoLase Corporation as a publicly traded, majority-owned subsidiary. From
time to time, Thermo and its subsidiaries will create other majority-owned
subsidiaries as part of its spinout strategy. (Thermo and such other majority-
owned Thermo subsidiaries are hereinafter referred to as the "Thermo
Subsidiaries.")
Thermo and each of the Thermo Subsidiaries recognize that the benefits and
support that derive from their affiliation are essential elements of their
individual performance. Accordingly, Thermo and each of the Thermo Subsidiaries
have adopted the Thermo Electron Corporate Charter (the "Charter") to define the
relationships and delineate the nature of such cooperation among themselves. The
purpose of the Charter is to ensure that (1) all of the companies and their
stockholders are treated consistently and fairly, (2) the scope and nature of
the cooperation among the companies, and each company's responsibilities, are
adequately
101
<PAGE> 108
defined, (3) each company has access to the combined resources and financial,
managerial and technological strengths of the others, and (4) Thermo and the
Thermo Subsidiaries, in the aggregate, are able to obtain the most favorable
terms from outside parties.
To achieve these ends, the Charter identifies the general principles to be
followed by the companies, addresses the role and responsibilities of the
management of each company, provides for the sharing of group resources by the
companies and provides for centralized administrative, banking and credit
services to be performed by Thermo. The services provided by Thermo include
collecting and managing cash generated by members, coordinating the access of
Thermo and the Thermo Subsidiaries (the "Thermo Group") to external financing
sources, ensuring compliance with external financial covenants and internal
financial policies, assisting in the formulation of long-range financial
planning and providing other banking and credit services. Pursuant to the
Charter, Thermo may also provide guarantees of debt or other obligations of the
Thermo Subsidiaries or may obtain external financing at the parent level for the
benefit of the Thermo Subsidiaries. In certain instances, the Thermo
Subsidiaries may provide credit support to, or on behalf of, the consolidated
entity or may obtain financing directly from external financing sources. Under
the Charter, Thermo is responsible for determining that the Thermo Group remains
in compliance with all covenants imposed by external financing sources,
including covenants related to borrowings of Thermo or other members of the
Thermo Group, and for apportioning such constraints within the Thermo Group. In
addition, Thermo establishes certain internal policies and procedures applicable
to members of the Thermo Group. The cost of the services provided by Thermo to
the Thermo Subsidiaries is covered under existing corporate services agreements
between Thermo and each of the Thermo Subsidiaries.
The Charter presently provides that it shall continue in effect so long as
Thermo and at least one Thermo Subsidiary participate. The Charter may be
amended at any time by agreement of the participants. Any Thermo Subsidiary,
including Thermo, can withdraw from participation in the Charter upon 30 days'
prior notice. In addition, Thermo may terminate a subsidiary's participation in
the Charter in the event the subsidiary ceases to be controlled by Thermo or
ceases to comply with the Charter or the policies and procedures applicable to
the Thermo Group. A withdrawal from the Charter automatically terminates the
corporate services agreement and tax allocation agreement (if any) in effect
between the withdrawing company and Thermo. The withdrawal from participation
does not terminate outstanding commitments to third parties made by the
withdrawing company, or by Thermo or other members of the Thermo Group, prior to
the withdrawal. However, a withdrawing company is required to continue to comply
with all policies and procedures applicable to the Thermo Group and to provide
certain administrative functions mandated by Thermo so long as the withdrawing
company is controlled by or affiliated with Thermo.
In general, under the corporate services agreements between Thermo and each
of the Thermo Subsidiaries, Thermo's corporate staff provides each of the Thermo
Subsidiaries with certain administrative services, including certain legal
advice and services, risk management, employee benefit administration, tax
advice and preparation of tax returns, centralized cash management and financial
and other services. For the fiscal year ended December 31, 1995, Thermo assessed
each Thermo Subsidiary an annual fee equal to 1.2% of such subsidiary's revenues
for these services. Effective January 1, 1996, the fee has been reduced to 1.0%
of a subsidiary's revenues. The fee is reviewed annually and may be changed by
mutual agreement of any Thermo Subsidiary and Thermo. For items such as employee
benefit plans, insurance coverage and other identifiable costs, Thermo charges
each of the Thermo Subsidiaries based on charges attributable to the respective
subsidiary. Each corporate services agreement automatically renews for
successive one-year terms, unless canceled by the subsidiary upon 30 days' prior
notice. In addition, each corporate services agreement terminates automatically
in the event the subsidiary ceases to be a member of the Thermo Group or ceases
to be a participant in the Charter. In the event of a termination of a corporate
services agreement, the subsidiary will be required to pay a termination fee
equal to the fee that was paid by such subsidiary for services under the
corporate services agreement for the nine-month period prior to termination.
Following termination, Thermo may provide certain administrative services on an
as-requested basis by the subsidiary or as required in order to meet such
subsidiary's obligations under Thermo's policies and procedures. Thermo will
charge a subsidiary a fee equal to the market rate for comparable services if
such services are provided to such subsidiary following termination.
102
<PAGE> 109
Pursuant to an international distribution agreement, Thermedics Detection
Inc., a subsidiary of Thermedics Inc., which is, in turn, a subsidiary of
Thermo, has appointed Arabian Business Machines Co. ("ABM") as its exclusive
distributor of drug-and-explosives detection products in certain Middle East
countries. ABM is a member of the Olayan Group, and Hutham S. Olayan, a Director
of the Corporation, is the President and a Director of Olayan America
Corporation and Competrol Real Estate Limited, two other members of the Olayan
Group, which is controlled by Suliman S. Olayan, Ms. Olayan's father. During
1995, Thermedics Detection Inc. paid an aggregate of $50,000 pursuant to this
distribution agreement.
In March 1995, ThermoLyte Corporation ("TLC"), a subsidiary of Thermo,
completed a private placement of 1,845,000 shares primarily to outside investors
of minority investments in its common stock. Venrock Associates and Crescent
International Holdings Limited purchased 100,000 and 25,000 shares,
respectively, of the common stock of TLC in such private placement at a purchase
price of $10.00 per share, the same price paid by unaffiliated buyers. Peter O.
Crisp, a Director of Thermo, is both a general and a limited partner of Venrock
Associates. Crescent International Holdings Limited is a wholly owned subsidiary
of Crescent Holding GmbH. Crescent Holding GmbH is indirectly controlled by
Suliman S. Olayan, the father of Hutham S. Olayan, a Director of Thermo.
In March 1995, Thermo BioAnalysis Corporation ("Thermo BioAnalysis"), a
subsidiary of Thermo, completed a private placement of 1,601,500 shares
primarily to outside investors of minority investments in its common stock.
Arvin Smith, an executive vice president of Thermo, purchased 9,000 shares of
the common stock of Thermo BioAnalysis in such private placement at a purchase
price of $10.00 per share, the same price paid by unaffiliated buyers.
In November 1995 and January 1996, Trex Medical Corporation ("Trex
Medical"), a subsidiary of the Corporation, completed private placements of an
aggregate of 1,962,000 shares primarily to outside investors of minority
investments in its common stock. Peter O. Crisp, a Director of Thermo, and
Crescent International Holdings Limited purchased 10,000 and 200,000 shares,
respectively, of the common stock of Trex Medical in such private placements at
a purchase price of $10.25 per share, the same price paid by unaffiliated
buyers. Crescent International Holdings Limited is a wholly owned subsidiary of
Crescent Holding GmbH. Crescent Holding GmbH is indirectly controlled by Suliman
S. Olayan, the father of Hutham S. Olayan, a Director of Thermo.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the principal federal income tax consequences
of the Merger and is based upon the applicable provisions of the Code,
regulations thereunder, and published rulings and court decisions. Neither SMC
nor Thermo intend to seek a ruling from the Internal Revenue Service with regard
to the tax consequences of the Merger.
SMC and Thermo have received an opinion from Riordan & McKinzie, counsel
for SMC, that under present law, and based upon the representations contained in
the representation letter provided to such counsel by SMC, the Merger and the
conversion of each share of SMC Common Stock and SMC Series A Preferred Stock
(with respect to which an applicable election has been made) into Thermo Common
Stock should have the following consequences for federal income tax purposes:
1. The Merger will qualify as a "reorganization" as defined in Code
Sections 368(a)(1)(A) and 368(a)(2)(E).
2. No gain or loss will be recognized by SMC as a result of the
Merger.
3. No gain or loss will be recognized by SMC shareholders who exchange
all of their shares of SMC Common Stock or SMC Series A Preferred Stock
solely for Thermo Common Stock in the Merger. Holders of shares of SMC
Series A Preferred Stock who elect to receive cash, holders of SMC Series B
Preferred Stock who have not converted such shares into SMC Common Stock
prior to the Effective Time and shareholders who exercise dissenters'
rights will recognize gain or loss upon the receipt of cash
103
<PAGE> 110
for their shares measured by the difference between the cash received and
the basis of their stock, provided they own no shares of Thermo Common
Stock.
4. The aggregate basis of the Thermo Common Stock received by an SMC
shareholder will be the same as the aggregate basis of such shareholder in
the SMC Capital Stock converted in the Merger.
5. The holding period of the Thermo Common Stock received by an SMC
shareholder will include the period during which such shareholder held the
SMC Capital Stock converted in the Merger, provided that such stock was
held as a capital asset at the Effective Time.
6. An SMC shareholder who receives a cash payment in lieu of a
fractional share of Thermo Common Stock will be treated as if such
fractional share were distributed in the Merger and then redeemed by
Thermo, and should recognize capital gain or loss measured by the
difference between the amount of cash received and the shareholder's basis
in the fractional share (which will be a pro rata portion of the
shareholder's basis in the Thermo Common Stock received in the Merger),
provided that such shareholder's SMC Capital Stock is held as a capital
asset at the Effective Time.
7. No gain or loss for federal income tax purposes will be recognized
by the holder of an SMC Option or SMC Warrant solely as a result of the
conversion of such options and warrants into options and warrants, as the
case may be, to purchase Thermo Common Stock.
In order for the Merger to qualify as a tax-free reorganization, the SMC
shareholders must have the requisite "continuity of interest" through ownership
of the Thermo Common Stock. It is the ruling position of the Internal Revenue
Service that the "continuity of interest" requirement is satisfied if there is a
continuing interest through stock ownership in the acquiring corporation on the
part of the former shareholders of the acquired corporation, without any plan or
intention by the former shareholders of the acquired corporation to sell,
exchange or otherwise dispose of stock of the acquiring corporation, that is
equal in value, as of the effective date of the reorganization, to at least 50%
of the value of all the formerly outstanding stock of the acquired corporation
as of the same date. Riordan & McKinzie, has concluded as part of their opinion,
based upon the representations referred to above, that the "continuity of
interest" requirement will be satisfied in connection with the Merger. There can
be no assurance, however, that the former shareholders of SMC will not, pursuant
to a present plan or intention, sell or otherwise dispose of the Thermo Common
Stock in a sufficient amount to violate this requirement.
Holders of SMC Capital Stock are urged to consult with their tax advisers
as to the effect under state, local and foreign income and other tax laws of the
Merger.
EXPERTS
The consolidated financial statements and schedules of Thermo included and
incorporated by reference in this Proxy Statement/Prospectus and the
Registration Statement have been audited by Arthur Andersen LLP, independent
certified public accountants, to the extent and for the periods as indicated in
their reports with respect thereto, and are included herein or incorporated
herein in reliance upon the authority of said firm as experts in giving said
reports. Reference is made to said report with respect to Thermo's financial
statements which includes an explanatory fourth paragraph with respect to the
change in method of accounting for investments in debt and marketable equity
securities in 1994 as discussed in Note 2 to the financial statements.
The financial statements of SMC included in this Proxy Statement/Prospectus
and the Registration Statement have been audited by Arthur Andersen LLP,
independent certified public accountants, to the extent and for the periods as
indicated in their report with respect thereto, and is included herein in
reliance upon the authority of said firm as experts in giving said reports.
Reference is made to said report with respect to SMC's financial statements
which includes an explanatory fourth paragraph with respect to the adoption of
Statement of Financial Accounting Standards Nos. 106 and 109, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" and "Accounting for
Income Taxes", effective October 1, 1993, as discussed in Notes 1 and 6 to the
financial statements.
104
<PAGE> 111
LEGAL OPINIONS
The validity of the Thermo Common Stock to be issued pursuant to the Merger
will be passed upon for Thermo by Seth H. Hoogasian, Esq., General Counsel to
Thermo. Mr. Hoogasian owns or has the right to acquire through the exercise of
stock options 115,327 shares of Thermo Common Stock and 129,037 shares of the
common stock of certain of Thermo's subsidiaries. In addition, Riordan &
McKinzie has rendered the tax opinion described under "Certain Federal Income
Tax Consequences."
OTHER MATTERS
SMC is not aware of any other matters to be presented at the Special
Meeting of Shareholders other than as specified in the notice of such meeting
and this Proxy Statement/Prospectus.
PROPOSALS OF STOCKHOLDERS
The deadline for the submission of proposals of stockholders of Thermo for
inclusion in the proxy statement and form of proxy relating to the 1997 annual
meeting of stockholders is December 25, 1996.
105
<PAGE> 112
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THERMO ELECTRON CORPORATION
Report of Independent Public Accountants............................................ F-3
Consolidated Statement of Income for the Years Ended December 30, 1995, December 31,
1994 and January 1, 1994......................................................... F-4
Consolidated Balance Sheet at December 30, 1995 and December 31, 1994............... F-5
Consolidated Statement of Cash Flows for the Years Ended December 30, 1995, December
31, 1994 and January 1, 1994..................................................... F-6
Consolidated Statement of Shareholders' Investment for the Years Ended December 30,
1995, December 31, 1994 and January 1, 1994...................................... F-7
Notes to Consolidated Financial Statements.......................................... F-8
Interim Consolidated Statement of Income for the Three Months Ended March 30, 1996
and April 1, 1995................................................................ F-32
Interim Consolidated Balance Sheet at March 30, 1996 and December 30, 1995.......... F-33
Interim Consolidated Statement of Cash Flows for the Three Months Ended March 30,
1996 and April 1, 1995........................................................... F-34
Notes to Interim Consolidated Financial Statements.................................. F-35
SENSORMEDICS CORPORATION
Report of Independent Public Accountants............................................ F-38
Consolidated Statements of Operations for the Years Ended September 30, 1995, 1994
and 1993......................................................................... F-39
Consolidated Balance Sheets as of September 30, 1995 and 1994....................... F-40
Consolidated Statements of Cash Flows for the Years Ended September 30, 1995, 1994
and 1993......................................................................... F-42
Consolidated Statements of Stockholders' Deficit for the Years Ended September 30,
1995, 1994 and 1993.............................................................. F-43
Notes to Consolidated Financial Statements.......................................... F-44
Interim Consolidated Statements of Operations for the Six Months Ended March 31,
1996 and 1995.................................................................... F-58
Interim Consolidated Balance Sheets at March 31, 1996 and September 30, 1995........ F-59
Interim Consolidated Statements of Cash Flows for the Six Months Ended March 31,
1996 and 1995.................................................................... F-61
Notes to Interim Consolidated Financial Statements.................................. F-62
</TABLE>
F-1
<PAGE> 113
THERMO ELECTRON CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 1995
F-2
<PAGE> 114
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
of Thermo Electron Corporation:
We have audited the accompanying consolidated balance sheet of Thermo
Electron Corporation (a Delaware corporation) and subsidiaries as of December
30, 1995 and December 31, 1994, and the related consolidated statements of
income, shareholders' investment, and cash flows for each of the three years in
the period ended December 30, 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Thermo
Electron Corporation and subsidiaries as of December 30, 1995 and December 31,
1994, and the results of their operations and their cash flows for each of the
three years in the period ended December 30, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, effective
January 2, 1994, the Company changed its method of accounting for investments in
debt and marketable equity securities.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 15, 1996 (except with
respect to certain matters discussed
in Note 16 as to which the date
is May 22, 1996)
F-3
<PAGE> 115
THERMO ELECTRON CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Product revenues..................................... $1,802,371 $1,418,306 $1,103,558
Service revenues..................................... 210,503 141,438 121,987
Research and development contract revenues........... 194,543 169,447 128,963
---------- ---------- ----------
2,207,417 1,729,191 1,354,508
---------- ---------- ----------
Costs and Expenses:
Cost of products..................................... 1,064,775 824,845 664,201
Cost of services..................................... 144,864 103,800 91,292
Expenses for research and development and new lines
of business(a).................................... 269,584 233,099 183,965
Selling, general and administrative expenses......... 480,774 384,715 289,282
Restructuring and other nonrecurring costs (Note
12)............................................... 21,938 650 6,616
---------- ---------- ----------
1,981,935 1,547,109 1,235,356
---------- ---------- ----------
Operating Income....................................... 225,482 182,082 119,152
Gain on Issuance of Stock by Subsidiaries (Note 10).... 80,815 25,283 39,863
Other Expense, Net (Note 11)........................... (6,802) (989) (27,548)
---------- ---------- ----------
Income Before Income Taxes and Minority Interest....... 299,495 206,376 131,467
Provision for Income Taxes (Note 9).................... 98,900 70,703 33,513
Minority Interest Expense.............................. 60,515 30,962 21,086
---------- ---------- ----------
Net Income............................................. $ 140,080 $ 104,711 $ 76,868
========== ========== ==========
Earnings per Share:
Primary.............................................. $ 1.12 $ .90 $ .74
========== ========== ==========
Fully diluted........................................ $ .98 $ .80 $ .67
========== ========== ==========
Weighted Average Shares:
Primary.............................................. 125,483 116,500 104,203
========== ========== ==========
Fully diluted........................................ 158,103 151,229 130,618
========== ========== ==========
(a) Includes costs of:
Research and development contracts.............. $ 167,120 $ 149,645 $ 116,733
Internally funded research and development...... 98,984 79,555 59,583
Other expenses for new lines of business........ 3,480 3,899 7,649
---------- ---------- ----------
$ 269,584 $ 233,099 $ 183,965
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 116
THERMO ELECTRON CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................................. $ 461,983 $ 383,005
Short-term available-for-sale investments, at quoted market value
(amortized cost of $588,471 and $617,837) (Note 2)...................... 593,802 614,915
Accounts receivable, less allowances of $28,021 and $21,664................ 476,479 347,444
Unbilled contract costs and fees........................................... 74,941 59,906
Inventories................................................................ 318,182 233,382
Prepaid income taxes (Note 9).............................................. 72,993 57,824
Prepaid expenses........................................................... 22,846 15,148
---------- ----------
2,021,226 1,711,624
---------- ----------
Property, Plant and Equipment, at Cost, Net.................................. 712,845 624,888
---------- ----------
Long-term Available-for-sale Investments, at Quoted Market Value (amortized
cost of $60,780 and $65,218) (Note 2)...................................... 61,845 62,451
---------- ----------
Long-term Held-to-Maturity Investments (quoted market value of $24,942) (Note
2)......................................................................... 23,819 --
---------- ----------
Other Assets................................................................. 98,102 85,338
---------- ----------
Cost in Excess of Net Assets of Acquired Companies (Notes 3 and 9)........... 827,071 577,634
---------- ----------
$3,744,908 $3,061,935
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Notes payable and current maturities of long-term obligations (Note 6)..... $ 106,248 $ 94,003
Accounts payable........................................................... 164,605 116,768
Accrued payroll and employee benefits...................................... 91,393 79,849
Accrued income taxes....................................................... 51,807 35,845
Accrued installation and warranty costs.................................... 40,699 33,442
Other accrued expenses (Note 3)............................................ 260,084 200,985
---------- ----------
714,836 560,892
---------- ----------
Deferred Income Taxes (Note 9)............................................... 59,188 58,250
---------- ----------
Other Deferred Items......................................................... 65,878 57,723
---------- ----------
Long-term Obligations (Note 6):
Senior convertible obligations............................................. 458,925 620,000
Subordinated convertible obligations....................................... 343,076 186,661
Tax-exempt obligations..................................................... 128,567 130,985
Nonrecourse tax-exempt obligations......................................... 94,700 95,300
Other...................................................................... 90,743 16,904
---------- ----------
1,116,011 1,049,850
---------- ----------
Minority Interest............................................................ 471,648 327,734
---------- ----------
Commitments and Contingencies (Note 7)
Common Stock of Subsidiary Subject to Redemption ($18,450 redemption
value)..................................................................... 17,513 --
---------- ----------
Shareholders' Investment (Notes 4 and 5):
Preferred stock, $100 par value, 50,000 shares authorized; none issued
Common stock, $1 par value, 350,000,000 shares authorized; 87,863,315 and
53,558,248 shares issued................................................ 87,863 53,558
Capital in excess of par value............................................. 597,678 493,058
Retained earnings.......................................................... 612,476 472,396
Treasury stock at cost, 11,574 and 38,318 shares........................... (536) (1,631)
Cumulative translation adjustment.......................................... 561 (3,557)
Deferred compensation (Note 8)............................................. (2,271) (2,657)
Net unrealized gain (loss) on available-for-sale investments (Note 2)...... 4,063 (3,681)
---------- ----------
1,299,834 1,007,486
---------- ----------
$3,744,908 $3,061,935
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 117
THERMO ELECTRON CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Operating Activities:
Net income............................................ $ 140,080 $ 104,711 $ 76,868
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 84,979 65,028 44,192
Restructuring and other nonrecurring costs (Note
12)........................................... 21,938 650 6,616
Equity in losses of unconsolidated
subsidiaries.................................. 203 4,019 22,721
Provision for losses on accounts receivable...... 5,473 4,225 2,720
Increase in deferred income taxes................ 4,562 9,403 14,134
Gain on sale of property, plant and equipment.... (547) (15,025) (198)
Gain on sale of investments...................... (9,305) (4,851) (2,469)
Gain on issuance of stock by subsidiaries (Note
10)........................................... (80,815) (25,283) (39,863)
Minority interest expense........................ 60,515 30,962 21,086
Other noncash expenses........................... 15,642 9,809 7,850
Changes in current accounts, excluding the
effects of acquisitions:
Accounts receivable.............................. (49,442) (8,526) (45,034)
Inventories...................................... (31,805) 10,017 (6,525)
Other current assets............................. (8,868) (9,713) (8,319)
Accounts payable................................. 16,341 804 13,865
Other current liabilities........................ 25,613 16,295 (6,319)
-------- -------- --------
Net cash provided by operating activities.......... 194,564 192,525 101,325
-------- -------- --------
Investing Activities:
Acquisitions, net of cash acquired (Note 3)........... (330,698) (173,764) (142,962)
Purchases of available-for-sale investments........... (570,064) (748,879) --
Purchases of long-term held-to-maturity investments... (22,300) -- --
Proceeds from sale and maturities of
available-for-sale investments..................... 617,145 495,361 --
Purchases of property, plant and equipment............ (62,907) (65,525) (62,704)
Proceeds from sale of property, plant and equipment... 5,643 21,391 5,224
Purchases of long-term investments.................... -- -- (20,573)
Proceeds from sale of long-term investments........... -- -- 16,651
Increase in short-term investments.................... -- -- (193,894)
Decrease in net restricted funds...................... -- 23,420 --
Other................................................. (18,858) (7,662) (7,297)
-------- -------- --------
Net cash used in investing activities.............. (382,039) (455,658) (405,555)
-------- -------- --------
Financing Activities:
Proceeds from issuance of long-term obligations....... 201,891 368,620 102,282
Repayment and repurchase of long-term obligations..... (16,826) (27,176) (11,732)
Proceeds from issuance of Company and subsidiary
common stock....................................... 173,326 60,601 378,790
Purchases of Company and subsidiary common stock...... (97,789) (101,481) (57,198)
Increase in short-term notes payable, net............. 1,588 16,683 27,343
Other................................................. 962 987 3,096
-------- -------- --------
Net cash provided by financing activities.......... 263,152 318,234 442,581
-------- -------- --------
Exchange Rate Effect on Cash............................ 3,301 1,915 (3,374)
-------- -------- --------
Increase in Cash and Cash Equivalents................... 78,978 57,016 134,977
Cash and Cash Equivalents at Beginning of Year.......... 383,005 325,989 191,012
-------- -------- --------
Cash and Cash Equivalents at End of Year................ $ 461,983 $ 383,005 $ 325,989
======== ======== ========
</TABLE>
See Note 13 for supplemental cash flow information.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 118
THERMO ELECTRON CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
CAPITAL
COMMON IN NET UNREALIZED
STOCK, EXCESS CUMULATIVE GAIN (LOSS) ON
$1 PAR OF PAR RETAINED TREASURY TRANSLATION DEFERRED AVAILABLE-FOR-SALE
VALUE VALUE EARNINGS STOCK ADJUSTMENT COMPENSATION INVESTMENTS
------- -------- -------- -------- ----------- ------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 2, 1993.............. $29,633 $260,185 $290,817 $(3,810 ) $(7,949) $ (5,050) $ --
Net income........................... -- -- 76,868 -- -- -- --
Public offering of Company common
stock.............................. 4,500 241,505 -- -- -- -- --
Issuance of stock under employees'
and directors' stock plans......... 216 763 -- 2,598 -- -- --
Conversion of convertible
obligations........................ 285 6,619 -- -- -- -- --
Effect of majority-owned
subsidiaries' equity
transactions....................... -- (19,029) -- -- -- -- --
Effect of three-for-two stock
split.............................. 15,850 (15,850) -- -- -- -- --
Translation adjustment............... -- -- -- -- (5,642) -- --
Amortization of deferred
compensation....................... -- -- -- -- -- 1,211 --
------ ------- ------- ------- ------- ------- -------
BALANCE JANUARY 1, 1994.............. 50,484 474,193 367,685 (1,212 ) (13,591) (3,839) --
Net income........................... -- -- 104,711 -- -- -- --
Issuance of stock under employees'
and directors' stock plans......... 153 2,429 -- (419 ) -- -- --
Conversion of convertible
obligations........................ 2,921 63,013 -- -- -- -- --
Effect of majority-owned
subsidiaries' equity
transactions....................... -- (46,577) -- -- -- -- --
Translation adjustment............... -- -- -- -- 10,034 -- --
Amortization of deferred
compensation....................... -- -- -- -- -- 1,182 --
Effect of change in accounting
principle (Note 2)................. -- -- -- -- -- -- 2,868
Change in net unrealized gain (loss)
on available-for-sale investments
(Note 2)........................... -- -- -- -- -- -- (6,549)
------ ------- ------- ------- ------- ------- -------
BALANCE DECEMBER 31, 1994............ 53,558 493,058 472,396 (1,631 ) (3,557) (2,657) (3,681)
Net income........................... -- -- 140,080 -- -- -- --
Issuance of stock under employees'
and directors' stock plans......... 571 5,293 -- 1,095 -- -- --
Tax benefit related to employees' and
directors' stock plans............. -- 9,666 -- -- -- -- --
Conversion of convertible
obligations........................ 6,047 150,787 -- -- -- -- --
Effect of majority-owned
subsidiaries' equity
transactions....................... -- (33,439) -- -- -- -- --
Effect of three-for-two stock
split.............................. 27,687 (27,687) -- -- -- -- --
Translation adjustment............... -- -- -- -- 4,118 -- --
Amortization of deferred
compensation....................... -- -- -- -- -- 386 --
Change in net unrealized gain (loss)
on available-for-sale investments
(Note 2)........................... -- -- -- -- -- -- 7,744
------- ------- ------- ------- ------- -------
BALANCE DECEMBER 30, 1995............ $87,863 $597,678 $612,476 $ (536 ) $ 561 $ (2,271) $ 4,063
====== ======= ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 119
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Thermo Electron Corporation and its subsidiaries develop, manufacture, and
market environmental monitoring and analysis instruments; biomedical products
including heart-assist devices, respiratory care equipment, and mammography
systems; paper-recycling and papermaking equipment; alternative-energy systems;
industrial process equipment; and other specialized products. The Company also
provides environmental, laboratory, and metallurgical services and conducts
advanced-technology research and development.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Thermo Electron Corporation and its majority-and wholly owned subsidiaries (the
Company). All material intercompany accounts and transactions have been
eliminated. Majority-owned public subsidiaries include Thermedics Inc., Thermo
Instrument Systems Inc., Thermo TerraTech Inc. (formerly Thermo Process Systems
Inc.), Thermo Power Corporation, ThermoTrex Corporation, Thermo Fibertek Inc.,
and Thermo Ecotek Corporation. Thermo Cardiosystems Inc. and Thermo Voltek Corp.
are majority-owned, public subsidiaries of Thermedics. Thermo Remediation Inc.
is a majority-owned public subsidiary of Thermo TerraTech. ThermoLase
Corporation is a majority-owned, public subsidiary of ThermoTrex. ThermoSpectra
Corporation is a majority-owned, public subsidiary of Thermo Instrument. Thermo
BioAnalysis Corporation is a majority-owned, privately held subsidiary of Thermo
Instrument. ThermoQuest Corporation and Thermo Optek Corporation are wholly
owned subsidiaries of Thermo Instrument, which have privately sold debentures
that will be convertible into shares of common stock of these subsidiaries upon
completion of their initial public offerings. Thermo EuroTech N.V. is a
majority-owned, privately held subsidiary of Thermo TerraTech. ThermoLyte
Corporation is a majority-owned, privately held subsidiary of Thermo Power. Trex
Medical Corporation is a majority-owned, privately held subsidiary of
ThermoTrex. The Company accounts for investments in businesses in which it owns
between 20% and 50% using the equity method.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest December
31. References to 1995, 1994, and 1993 are for the fiscal years ended December
30, 1995, December 31, 1994, and January 1, 1994, respectively.
Revenue Recognition
For the majority of its operations, the Company recognizes revenues upon
shipment of its products or upon completion of services it renders. The Company
provides a reserve for its estimate of warranty and installation 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 $472.0 million in 1995, $319.8 million
in 1994, and $281.4 million in 1993. 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 billing of customers upon the attainment of certain
milestones specified in each contract. Revenues earned on contracts in process
in excess of billings are classified as unbilled contract costs and fees in the
accompanying balance sheet. There are no significant amounts included in the
accompanying balance sheet that are not expected to be recovered from existing
contracts at current contract values, or that are not expected to be collected
within one year, including amounts that are billed but not paid under retainage
provisions.
F-8
<PAGE> 120
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In August 1993, the Company agreed, in exchange for a cash settlement, to
terminate a power sales agreement between a subsidiary of the Company and a
utility. The power sales agreement required the utility to purchase output of a
cogeneration facility that had been under development. Under the termination
agreement, the Company received $15.3 million through 1995, with subsequent
payments of $2.7 million to be made through 1997. The Company will be obligated
to return $8.2 million of this settlement if the Company elects to proceed with
the facility and it achieves commercial operation before January 1, 2000.
Accordingly, the Company has deferred recognition of $8.2 million of revenues,
pending final determination of the project's status. During 1993, the Company
recorded revenues of $9.8 million and operating income of $5.4 million from the
termination of the power sales agreement.
Gain on Issuance of Stock by Subsidiaries
At the time a subsidiary sells its stock to unrelated parties at a price in
excess of its book value, the Company's net investment in that subsidiary
increases. If at that time the subsidiary is an operating entity and not engaged
principally in research and development, the Company records the increase as a
gain.
If gains have been recognized on issuances of a subsidiary's stock and
shares of the subsidiary are subsequently repurchased by the subsidiary or by
the Company, gain recognition does not occur on issuances subsequent to the date
of a repurchase until such time as shares have been issued in an amount
equivalent to the number of repurchased shares. Such transactions are reflected
as equity transactions, and the net effect of these transactions is reflected in
the accompanying statement of shareholders' investment as the effect of
majority-owned subsidiaries' equity transactions.
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
Primary earnings per share have been computed based on the weighted average
number of common shares outstanding during the year. Because the effect of
common stock equivalents was not material, they have been excluded from the
primary earnings per share calculation. Fully diluted earnings per share assumes
the exercise of stock options and the conversion of the Company's dilutive
convertible obligations and elimination of the related interest expense.
Stock Split
All share and per share information has been restated to reflect a
three-for-two stock split, effected in the form of a 50% stock dividend, which
was distributed in May 1995 (Note 16).
Cash and Cash Equivalents
Cash equivalents consist principally of U.S. government agency securities,
corporate notes, commercial paper, money market funds, and other marketable
securities purchased with an original maturity of three months or less. These
investments are carried at cost, which approximates market value.
F-9
<PAGE> 121
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Available-for-sale and Held-to-maturity Investments
Pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," short-and long-term debt and marketable equity securities
that the Company considers available-for-sale are accounted for at market value.
Debt securities that the Company intends to hold to maturity are accounted for
at amortized cost (Note 2). Prior to 1994, short- and long-term marketable
equity securities were carried at the lower of cost or market value.
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out or
weighted average basis) or market value and include materials, labor, and
manufacturing overhead. The components of inventories are as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and supplies............................. $172,742 $128,876
Work in process........................................ 72,087 44,711
Finished goods......................................... 73,353 59,795
-------- --------
$318,182 $233,382
======== ========
</TABLE>
Property, Plant and Equipment
The costs of additions and improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. The Company provides for
depreciation and amortization using the straight-line method over the estimated
useful lives of the property as follows: buildings and improvements -- 5 to 40
years, alternative-energy and waste-recycling facilities -- 5 to 25 years,
machinery and equipment -- 3 to 20 years, and leasehold improvements -- the
shorter of the term of the lease or the life of the asset. Property, plant and
equipment consist of the following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land................................................... $ 47,848 $ 43,990
Buildings.............................................. 175,165 143,727
Alternative-energy and waste-recycling facilities...... 382,257 335,064
Machinery, equipment and leasehold improvements........ 361,799 288,544
-------- --------
967,069 811,325
Less: Accumulated depreciation and amortization........ 254,224 186,437
-------- --------
$712,845 $624,888
======== ========
</TABLE>
Other Assets
Other assets in the accompanying balance sheet include the costs of
acquired trademarks, patents, and other specifically identifiable intangible
assets, as well as capitalized costs associated with the Company's operation of
certain alternative-energy facilities. These assets are being amortized using
the straight-line method over their estimated useful lives, which range from 5
to 20 years. These assets were $44.5 million and $39.7 million, net of
accumulated amortization of $27.4 million and $21.7 million, at year-end 1995
and 1994, respectively.
F-10
<PAGE> 122
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cost in Excess of Net Assets of Acquired Companies
The excess of cost over the fair value of net assets of acquired companies
is amortized using the straight-line method principally over 40 years.
Accumulated amortization was $65.3 million and $47.3 million at year-end 1995
and 1994, 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.
Common Stock of Subsidiary Subject to Redemption
In March 1995, ThermoLyte sold 1,845,000 units, each unit consisting of one
share of ThermoLyte common stock and one redemption right, at $10.00 per unit,
for net proceeds of $17.3 million. Holders of the common stock purchased in the
offering will have the option to require ThermoLyte to redeem in December 1998
or 1999 any or all of their shares at $10.00 per share. The difference between
the redemption value and the original carrying amount of common stock of
subsidiary subject to redemption is accreted over the period ending December
1998, which corresponds to the first redemption period. The accretion is charged
to minority interest expense in the accompanying statement of income.
Foreign Currency
All assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates, and revenues and expenses are translated
at average exchange rates for the year in accordance with SFAS No. 52, "Foreign
Currency Translation." Resulting translation adjustments are reflected as a
separate component of shareholders' investment titled "Cumulative translation
adjustment." Foreign currency transaction gains and losses are included in the
accompanying statement of income and are not material for the three years
presented.
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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Presentation
The historical financial information presented has been restated to reflect
the March 1995 acquisition of Coleman Research Corporation, which has been
accounted for under the pooling-of-interests method (Note 3).
2. AVAILABLE-FOR-SALE AND HELD-TO-MATURITY INVESTMENTS
Effective January 2, 1994, the Company adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." In accordance with SFAS
No. 115, certain of the Company's debt and marketable equity securities are
considered available-for-sale investments in the accompanying balance sheet and
are carried at market value, with the difference between cost and market value,
net of related tax effects, recorded currently as a component of shareholders'
investment titled "Net unrealized gain (loss) on available-for-sale
investments." Effect of change in accounting principle in the accompanying 1994
statement of shareholders' investment represents the unrealized gain, net of
related tax effects, pertaining to available-for-sale investments held by the
Company on January 2, 1994.
F-11
<PAGE> 123
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The aggregate market value, cost basis, and gross unrealized gains and
losses of short- and long-term availablefor-sale investments by major security
type, at year-end 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
MARKET COST UNREALIZED UNREALIZED
1995 VALUE BASIS GAINS LOSSES
-------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Government agency securities.................... $367,208 $366,659 $ 574 $ (25)
Corporate bonds................................. 194,628 192,422 2,223 (17)
Tax-exempt securities........................... 16,275 16,247 28 --
Other........................................... 77,536 73,923 3,885 (272)
-------- -------- ------ -------
$655,647 $649,251 $6,710 $ (314)
======== ======== ====== =======
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
MARKET COST UNREALIZED UNREALIZED
1994 VALUE BASIS GAINS LOSSES
-------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Government agency securities.................... $287,418 $291,342 $ -- $ (3,924)
Corporate bonds................................. 298,799 301,103 74 (2,378)
Tax-exempt securities........................... 33,588 33,882 -- (294)
Other........................................... 57,561 56,728 2,783 (1,950)
-------- -------- ------ -------
$677,366 $683,055 $2,857 $ (8,546)
======== ======== ====== =======
</TABLE>
Short- and long-term available-for-sale investments in the accompanying
1995 balance sheet include equity securities of $22.9 million, debt securities
of $280.9 million with contractual maturities of one year or less, debt
securities of $321.0 million with contractual maturities of more than one year
through five years, and debt securities of $30.8 million with contractual
maturities of more than five years. Actual maturities may differ from
contractual maturities as a result of the Company's intent to sell these
securities prior to maturity and as a result of put and call options that enable
either the Company and/or the issuer to redeem these securities at an earlier
date.
The cost of available-for-sale investments that were sold was based on
specific identification in determining realized gains and losses recorded in the
accompanying statement of income. Gain on sale of investments in 1995 resulted
from gross realized gains of $9.8 million and gross realized losses of $0.5
million relating to the sale of available-for-sale investments. Gain on sale of
investments in 1994 resulted from gross realized gains of $6.7 million and gross
realized losses of $1.8 million relating to the sale of available-for-sale
investments.
Held-to-maturity investments in the accompanying 1995 balance sheet
represent investments in U.S. treasury bonds that mature in February and May
1998. It is the Company's intent to hold these securities to maturity.
3. ACQUISITIONS
In March 1995, the Company acquired Coleman Research Corporation in
exchange for 4,002,224 shares of the Company's common stock, including 202,861
shares reserved for issuance upon exercise of stock options assumed upon the
acquisition of Coleman Research. Coleman Research provides systems integration,
systems engineering, and analytical services to government and commercial
customers in fields of information technology, energy and the environment,
software engineering, launch systems, advanced radar imaging, and health
systems. The acquisition has been accounted for under the pooling-of-interests
method.
F-12
<PAGE> 124
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Accordingly, all historical financial information presented has been
restated to include the acquisition of Coleman Research. Revenues and net income
for 1994 and 1993, as previously reported by the separate entities prior to the
acquisition and as restated for the combined Company, are as follows:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Previously reported................................. $1,585,348 $1,249,718
Coleman Research.................................... 143,843 104,790
---------- ----------
$1,729,191 $1,354,508
========= =========
Net Income:
Previously reported................................. $ 103,410 $ 76,633
Coleman Research.................................... 1,301 235
---------- ----------
$ 104,711 $ 76,868
========= =========
</TABLE>
In addition, in 1995, the Company and its majority-owned subsidiaries made
several acquisitions for an aggregate of $339.1 million in cash, the issuance of
common stock and stock options of the Company's majority-owned subsidiaries
valued at $19.0 million, and the issuance of $22.3 million in debt. In 1994, the
Company and its majority-owned subsidiaries made several acquisitions for an
aggregate of $174.3 million in cash.
These acquisitions have been accounted for using the purchase method of
accounting, and the acquired companies' results of operations have been included
in the accompanying financial statements from their respective dates of
acquisition. The aggregate cost of the acquisitions in 1994 and 1995 exceeded
the estimated fair value of the acquired net assets by $385.6 million, which is
being amortized principally over 40 years. Allocation of the purchase price for
these acquisitions was based on estimates of the fair value of the net assets
acquired and, for acquisitions completed in 1995, is subject to adjustment upon
finalization of the purchase price allocation. Pro forma data is not presented
since the acquisitions were not material to the Company's results of operations.
Other accrued expenses in the accompanying balance sheet includes
approximately $33 million and $26 million at year-end 1995 and 1994,
respectively, for estimated severance, relocation, and other reserves associated
with acquisitions.
4. COMMON STOCK
At December 30, 1995, the Company had reserved 45,344,851 unissued shares
of its common stock for possible issuance under stock-based compensation plans,
for possible conversion of the Company's convertible debentures, and for
possible exchange of subsidiaries' convertible obligations into common stock of
the Company. Substantially all of the subsidiaries' obligations are exchangeable
into common stock of the Company in the event of a change in control (as defined
in the related fiscal agency agreement) that has not been approved by the
continuing members of Company's Board of Directors (Note 6). The exchange price
would be equal to 50% of the average price of the Company's common stock for the
30 trading days preceding the change in control.
In January 1996, the Company redeemed the share purchase rights outstanding
under its previously existing shareholder rights plan for $.01 per right, or
$.006 per share of the Company's common stock outstanding. Simultaneous with
this redemption, the Company distributed rights under a new shareholder rights
plan adopted by the Company's Board of Directors to holders of outstanding
shares of the Company's common stock. Each right entitles the holder to purchase
one ten-thousandth of a share of Series B Junior Participating Preferred Stock,
$100 par value, at a purchase price of $250 per share, subject to adjustment.
F-13
<PAGE> 125
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The rights will not be exercisable until the earlier of (i) 10 days following a
public announcement that a person or group of affiliated or associated persons
(an Acquiring Person) has acquired, or obtained the right to acquire, beneficial
ownership of 15% or more of the outstanding shares of common stock (the Stock
Acquisition Date), or (ii) 10 business days following the commencement of a
tender offer or exchange offer for 15% or more of the outstanding shares of
common stock.
In the event that a person becomes the beneficial owner of 15% or more of
the outstanding shares of common stock, except pursuant to an offer for all
outstanding shares of common stock approved by the outside Directors, each
holder of a right (except for the Acquiring Person) will thereafter have the
right to receive, upon exercise, that number of shares of common stock that
equals the exercise price of the right divided by one half of the current market
price of the common stock. In the event that, at any time after any person has
become an Acquiring Person, (i) the Company is acquired in a merger or other
business combination transaction in which the Company is not the surviving
corporation or its common stock is changed or exchanged (other than a merger
that follows an offer approved by the outside Directors), or (ii) 50% or more of
the Company's assets or earning power is sold or transferred, each holder of a
right (except for the Acquiring Person) shall thereafter have the right to
receive, upon exercise, the number of shares of common stock of the acquiring
company that equals the exercise price of the right divided by one half of the
current market price of such common stock.
At any time until 10 days following the Stock Acquisition Date, the Company
may redeem the rights in whole, but not in part, at a price of $.01 per right
(payable in cash or stock). The rights expire on January 29, 2006, unless
earlier redeemed or exchanged.
5. STOCK-BASED COMPENSATION PLANS
The Company has several stock-based compensation plans for its key
employees, directors, and others, which permit the award of stock-based
incentives in the stock of the Company and its majority-owned subsidiaries. The
Company has a nonqualified stock option plan, adopted in 1974, and an incentive
stock option plan, adopted in 1981, which permit the award of stock options to
key employees. The incentive stock option plan expired in 1991, and no grants
were made after that date. An equity incentive plan, adopted in 1989, permits
the grant of a variety of stock and stock-based awards as determined by the
human resources committee of the Company's Board of Directors (the Board
Committee), including restricted stock, stock options, stock bonus shares or
performance-based shares. To date, only nonqualified stock options have been
awarded under this plan. The option recipients and the terms of options granted
under these plans are determined by the Board Committee. Generally, options
presently outstanding under these plans 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 periods ranging from two to ten years after the first anniversary
of the grant date, depending on the term of the option, which may range from
three to twelve years. In addition, under certain options, shares acquired upon
exercise are restricted from resale until retirement or other events.
Nonqualified options may be granted at any price determined by the Board
Committee, while incentive stock options must be granted at not less than the
fair market value of the Company's stock on the date of grant. Generally, stock
options have been granted at fair market value. The Company also has a
directors' stock option plan, adopted in 1993, that provides for the annual
grant of stock options of the Company and its majority-owned subsidiaries 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 to 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 the Company's
majority-owned subsidiaries.
F-14
<PAGE> 126
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In connection with the acquisition of Coleman Research in 1995, the Company
assumed certain outstanding options granted under Coleman Research's
nonqualified stock option plan. Such options were converted into options to
purchase shares of the Company's common stock, in accordance with the original
terms of the options. On the date of acquisition, 25% of the nonvested options
being converted became exercisable immediately. The remaining options become
exercisable commencing two or three years after the date of grant, and expire
three or four years from the date of grant.
No accounting recognition is given to options granted at fair market value
until they are exercised. Upon exercise, net proceeds, including tax benefits
realized, are credited to equity.
A summary of the Company's stock option information is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------------------- ---------------------- ----------------------
NUMBER RANGE OF NUMBER RANGE OF NUMBER RANGE OF
OF OPTION PRICES OF OPTION PRICES OF OPTION PRICES
SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE
------ ------------- ------ ------------- ------ -------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year........ 7,878 $ 3.23-$20.05 6,663 $ 3.23-$18.81 4,666 $ 3.23-$13.91
Assumed upon
acquisition of
Coleman............. 304 3.47- 6.97 -- -- -- --
Granted............... 1,330 21.45- 32.60 1,641 17.19- 20.05 2,757 17.43- 18.81
Exercised............. (1,099) 3.23- 18.39 (315) 4.10- 13.91 (714) 3.23- 12.90
Lapsed or canceled.... (111) 5.55- 24.85 (111) 5.13- 18.39 (46) 4.77- 16.47
------ ----- -----
Options outstanding, end of
year..................... 8,302 $ 4.24-$32.60 7,878 $ 3.23-$20.05 6,663 $ 3.23-$18.81
------ ----- -----
Options exercisable........ 8,262 $ 4.24-$32.60 7,878 $ 3.23-$20.05 6,663 $ 3.23-$18.81
====== ===== =====
Options available for
grant.................... 2,397 3,627 657
====== ===== =====
</TABLE>
F-15
<PAGE> 127
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM OBLIGATIONS AND OTHER FINANCING ARRANGEMENTS
Long-term obligations of the Company are as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
5% Senior convertible debentures, due 2001, convertible at $21.00
per share......................................................... $ 309,000 $ 345,000
4 5/8% Senior convertible debentures, due 1997, convertible at
$14.33 per share.................................................. 82,325 205,000
4 7/8% Subordinated convertible debentures, due 1997, convertible at
$14.33 per share.................................................. 55,000 55,000
3 3/4% Senior convertible debentures, due 2000, convertible into
shares of Thermo Instrument at $16.93 per share................... 67,600 70,000
6 5/8% Subordinated convertible debentures, due 2001, convertible
into shares of Thermo Instrument at $9.38 per share............... 22,275 36,862
5% Subordinated convertible debentures, due 2000, convertible into
shares of ThermoQuest............................................. 86,250 --
5% Subordinated convertible debentures, due 2000, convertible into
shares of Thermo Optek............................................ 86,250 --
4 7/8% Subordinated convertible debentures, due 2000, convertible
into shares of Thermo Remediation at $17.92 per share............. 34,950 --
6 1/2% Subordinated convertible debentures, due 1998, convertible
into shares of Thermedics at $10.42 per share..................... 8,037 10,252
6 1/2% Subordinated convertible debentures, due 1997, convertible
into shares of Thermo TerraTech at $10.33 per share............... 13,432 16,597
Noninterest-bearing subordinated convertible debentures, due 1997,
convertible into shares of Thermo Cardiosystems at $14.49 per
share............................................................. 11,642 33,000
5 1/2% Subordinated convertible notes, due 2002, convertible into
shares of Thermo Cardiosystems at $6.59 per share................. -- 450
3 3/4% Subordinated convertible debentures, due 2000, convertible
into shares of Thermo Voltek at $11.75 per share.................. 25,240 34,500
8.1% Nonrecourse tax-exempt obligation, payable in semiannual
installments, with final payment in 2000.......................... 59,100 62,500
6.0% Nonrecourse tax-exempt obligation, payable in semiannual
installments, with final payment in 2000.......................... 49,700 49,700
Tax-exempt obligations, payable in semiannual installments, with
final payment in 2017............................................. 132,047 133,670
Other............................................................... 101,228 19,353
---------- ----------
1,144,076 1,071,884
Less: Current maturities of long-term obligations................... 28,065 22,034
---------- ----------
$1,116,011 $1,049,850
========== ==========
</TABLE>
The debentures that are convertible into subsidiary common stock have been
issued by the respective subsidiaries and are guaranteed by the Company.
In the event of a change in control of the Company (as defined in the
related fiscal agency agreement) that has not been approved by the continuing
members of the Company's Board of Directors, each holder of the 5%, 4 5/8%, and
4 7/8% convertible debentures issued by the Company will have the right to
require the Company to buy all or part of the holder's debentures, at par value
plus accrued interest, within 50 calendar days after the date of expiration of a
specified approval period. In addition, substantially all of the obligations
convertible into subsidiary common stock become exchangeable for common stock of
the Company at an
F-16
<PAGE> 128
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
exchange price equal to 50% of the average price of the Company's common stock
for the 30 trading days preceding the change in control.
Nonrecourse tax-exempt obligations represent obligations issued by the
California Pollution Control Financing Authority (CPCFA), the proceeds of which
were used to finance two alternative-energy facilities (Delano I and Delano II)
located in Delano, California. The obligations are payable only by a subsidiary
of Thermo Ecotek and are not guaranteed by the Company, except under limited
circumstances. As required by the financing bank group, Thermo Ecotek entered
into interest rate swap agreements that effectively convert these obligations
from floating rates to the fixed rates described above. These swaps have terms
expiring in 2000, commensurate with the final maturity of the debt. During 1995
and 1994, the average variable rate received under the interest rate swap
agreements was 3.8% and 4.9%, respectively.
Tax-exempt obligations represent obligations issued by the CPCFA in January
1992, the proceeds of which were used to finance the construction of a
waste-recycling facility in San Diego County, California. Construction of this
facility was completed in 1994. Of these tax-exempt obligations, $93 million
carry fixed rates of interest ranging from 7.2% to 8.5%, and $39 million carry a
floating rate of interest that varies weekly based on short-term, tax-exempt
markets. The interest rate ranged from 4.3% to 7.5% in 1995 and 3.1% to 7.2% in
1994.
During 1994, the Company capitalized $2.1 million of interest expense, net
of interest income, incurred in connection with the construction of the
waste-recycling facility discussed above.
The annual requirements for long-term obligations are as follows (In
thousands):
<TABLE>
<S> <C>
1996..................................... $ 28,065
1997..................................... 214,181
1998..................................... 67,650
1999..................................... 37,084
2000..................................... 333,316
2001 and thereafter...................... 463,780
----------
$1,144,076
=========
</TABLE>
Certain of the Company's obligations include requirements to maintain
predetermined financial ratios. At December 30, 1995, the Company was in
compliance with these requirements.
See Note 14 for fair value information pertaining to the Company's
long-term obligations.
Notes payable and current maturities of long-term obligations in the
accompanying balance sheet include $78.1 million and $71.9 million in 1995 and
1994, respectively, of short-term bank borrowings by several of the Company's
subsidiaries. The weighted average interest rates for these borrowings were 5.1%
and 6.2% at year-end 1995 and 1994, respectively.
7. COMMITMENTS AND CONTINGENCIES
LITIGATION
Cogeneration Joint Venture
The Company has participated in the operation of the Dade County Downtown
Government Center cogeneration facility in Miami, Florida, through a 50/50 joint
venture of the Company and Rolls-Royce, Inc. Because the demand for power and
chilled water at the Dade County Downtown Government Center complex has been
substantially less than anticipated since the plant's startup in 1987, and
because the plant has had difficulty disposing of the remainder of its output,
the joint venture has experienced continuing losses. In
F-17
<PAGE> 129
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 1994, the plant's operations were suspended in connection with the
resolution of litigation that the joint venture brought against Dade County
related to the plant.
The joint venture has a pending antitrust lawsuit against another purchaser
of part of the plant's output, Florida Power and Light (FPL). FPL has continued
to pursue petitions it has filed with the Florida Public Service Commission
(FPSC) and the Federal Energy Regulatory Commission (FERC). The petition at FPSC
seeks a determination that the joint venture has been engaging in illegal retail
sales of electricity. FPL's actions at FERC seek to take advantage of a 1993
FERC order finding that, from 1987 through 1991, the plant did not meet required
operating efficiencies. If either FPSC or FERC were to take the action requested
by FPL, the joint venture could be subject to potentially significant refund and
other liabilities, including any deficiency between (a) in the event the lessor
of the plant's generating equipment declared a default under the lease and sold
the equipment, approximately $44 million and the amount realized from the sale,
or (b) in the case of a re-lease by the lessor in lieu of a sale, the present
value of future rentals and prepayment penalty under the lease (approximately
$33 million) and the present value of a fair rental to be collected from a new
tenant. The joint venture's revenues for the cumulative period from 1987 through
1991 were $26.3 million.
In 1996, the joint venture and FPL entered into an agreement to settle
their disputes. Before the settlement can become effective, it must be approved
by FPSC. There can be no assurance as to whether or when FPSC will approve the
settlement agreement. The settlement would include (i) the continued closure of
the plant but the availability of its capacity for potential dispatch by FPL,
(ii) payments by FPL of the plant's lease payments and operation and maintenance
costs, and (iii) termination of the antitrust litigation and withdrawal of FPL's
motions in the FPSC and FERC proceedings.
Other Litigation and Related Contingencies
The Company's wholly owned Napco, Inc. subsidiary is challenging a jury
verdict rendered against it during the third quarter of 1994 for approximately
$11.0 million in a contract dispute arising out of an allegedly defective
wastetreatment system installed by Napco in 1984. The Company believes that the
verdict is in error and has appealed the decision to the U.S. Court of Appeals
for the First Circuit. Because this verdict exceeds Napco's financial ability to
pay, Napco has filed a petition for bankruptcy.
In a lawsuit relating to the Company's waste-recycling facility in southern
California, a third party, from which the Company acquired certain development
rights, alleges that fees totaling $7.9 million plus interest and legal costs
are due and payable by the Company in connection with construction of the
facility. The Company contends that no additional fees are payable because the
facility actually built was substantially different from the one contemplated in
the agreement with the third-party developer.
The Company has been sued by third-party developers of an alternative-
energy facility, constructed by the Company and its subcontractors in 1988 and
1989 and leased and operated by a partnership including Thermo Ecotek. The
third-party developers seek $25 million in damages for alleged
misrepresentation, breach of contract, and other causes of action. The dispute
arises out of the development, construction, and subsequent operating
performance of the plant. The Company believes that the allegations are without
merit and intends to vigorously defend this matter.
The Company's ThermoTrex subsidiary is a defendant in a lawsuit brought by
Fischer Imaging Corporation (Fischer), which alleges that the StereoGuide(R)
prone breast-biopsy system of ThermoTrex's Lorad division infringes on a Fischer
patent on a precision mammographic needle-biopsy system. The Company believes it
has meritorious legal defenses and intends to vigorously defend the matter.
Lorad's cumulative revenues from this product totaled approximately $39 million
through December 30, 1995.
In the opinion of management, the ultimate liability for all such matters,
together with the liability for all other pending legal proceedings, asserted
legal claims, and known potential legal claims that are probable of
F-18
<PAGE> 130
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
assertion, will not be material to the Company's financial position, but could
materially affect the results of operations or cash flows for a particular
quarter or annual period.
OPERATING LEASES
The Company leases portions of its office and operating facilities under
various noncancelable operating lease arrangements. The accompanying statement
of income includes expenses from operating leases of $30.3 million, $24.3
million, and $17.2 million in 1995, 1994, and 1993, respectively. Minimum rental
commitments under noncancelable operating leases at December 30, 1995, are as
follows (In thousands):
<TABLE>
<S> <C>
1996...................................... $ 30,591
1997...................................... 23,955
1998...................................... 18,228
1999...................................... 13,717
2000...................................... 11,994
2001 and thereafter....................... 49,346
--------
$147,831
========
</TABLE>
8. EMPLOYEE BENEFIT PLANS
401(k) Savings Plan
The Company's 401(k) savings plan covers the majority of the Company's
eligible full-time U.S. employees. Contributions to the plan are made by both
the employee and the Company. Company contributions are based on the level of
employee contributions. For this plan, the Company contributed and charged to
expense $7.6 million, $6.5 million, and $4.5 million in 1995, 1994, and 1993,
respectively.
Other Retirement Plans
Certain of the Company's subsidiaries offer retirement plans, separate from
the Company's 401(k) savings plan. These retirement plans cover approximately a
third of the Company's U.S. employees. The majority of these subsidiaries offer
401(k) savings plans; however, one subsidiary offers a money purchase plan, and
two subsidiaries offer profit-sharing plans. Company contributions to the 401(k)
savings plans are based on the level of employee contributions. Company
contributions to the money purchase plan and profit-sharing plans are based on
formulas determined by the Company. For these plans, the Company contributed and
charged to expense $7.7 million, $5.8 million, and $4.8 million in 1995, 1994,
and 1993, respectively.
Employee Stock Ownership Plan
The Company's Employee Stock Ownership Plan (ESOP) covers eligible
full-time U.S. employees. The Company borrowed funds from a financial
institution and then loaned these funds to the ESOP to purchase shares of common
stock of the Company and its majority-owned subsidiaries. The loan balance
between the Company and the financial institution was paid in 1992. The loan
between the Company and the ESOP remains outstanding. The shares purchased are
reported as deferred compensation in the accompanying balance sheet. The Company
makes annual contributions to the ESOP, and shares are allocated to plan
participants based on employee compensation. Effective December 31, 1994, the
ESOP was split into two plans: ESOP I, covering employees of the Company's
corporate office and its wholly owned subsidiaries and ESOP II, covering
employees of certain of the Company's majority-owned subsidiaries. Also,
effective December 31, 1994, ESOP II was terminated, and as a result, employees
of certain of the Company's majority-owned subsidiaries are no longer eligible
to participate in an ESOP. For this plan, the Company charged to expense $0.3
million, $1.1 million, and $1.1 million in 1995, 1994, and 1993, respectively.
F-19
<PAGE> 131
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Employee Stock Purchase Plan
Substantially all of the Company's full-time U.S. employees are eligible to
participate in employee stock purchase plans sponsored by the Company or by the
Company's majority-owned public subsidiaries. Prior to the November 1995 plan
year, shares of the Company's common stock could be purchased at the end of a
12-month plan year at 85% of the fair market value at the beginning of the plan
year, and the shares purchased were subject to a one-year resale restriction.
Effective November 1, 1995, shares of the Company's common stock may be
purchased at 95% of the fair market value at the beginning of the plan year, and
the shares purchased are subject to a six-month resale restriction. Shares are
purchased through payroll deductions of up to 10% of each participating
employee's gross wages. Participants of employee stock purchase plans sponsored
by the Company's majority-owned public subsidiaries may also elect to purchase
shares of the common stock of the subsidiary by which they are employed under
the same general terms described above. During 1995, 1994, and 1993, the Company
issued 330,444 shares, 218,754 shares, and 281,853 shares of its common stock,
respectively, under these plans.
9. INCOME TAXES
The components of income before income taxes and minority interest are as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic................................................... $257,214 $165,761 $113,500
Foreign.................................................... 42,281 40,615 17,967
-------- -------- --------
$299,495 $206,376 $131,467
======== ======== ========
</TABLE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Currently payable:
Federal.................................................. $ 72,496 $ 30,089 $ 10,270
Foreign.................................................. 17,751 16,343 8,643
State.................................................... 19,733 9,672 5,320
-------- -------- --------
109,980 56,104 24,233
-------- -------- --------
Deferred (prepaid), net:
Federal.................................................. (9,050) 11,355 6,922
Foreign.................................................. 232 (243) 931
State.................................................... (2,262) 3,487 1,427
-------- -------- --------
(11,080) 14,599 9,280
-------- -------- --------
$ 98,900 $ 70,703 $ 33,513
======== ======== ========
</TABLE>
The provision for income taxes that is currently payable does not reflect
$20.5 million, $3.5 million, and $3.4 million of tax benefits of the Company and
its majority-owned subsidiaries allocated to capital in excess of par value,
directly or through the effect of majority-owned subsidiaries' equity
transactions, or $3.0 million, $0.1 million, and $2.3 million of tax benefits
used to reduce cost in excess of net assets of acquired companies in 1995, 1994,
and 1993, respectively. The deferred provision for income taxes does not reflect
$5.8 million of tax benefits used to reduce cost in excess of net assets of
acquired companies in 1995.
F-20
<PAGE> 132
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for income taxes in the accompanying statement of income
differs from the provision calculated by applying the statutory federal income
tax rate of 35% to income before income taxes and minority interest due to the
following:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Provision for income taxes at statutory rate............... $104,823 $ 72,232 $ 46,013
Increases (decreases) resulting from:
Gain on issuance of stock by subsidiaries................ (28,285) (8,849) (13,770)
State income taxes, net of federal tax................... 11,356 8,317 4,307
Investment and research and development tax credits...... -- (2,786) (6,625)
Foreign tax rate and tax law differential................ 3,785 1,422 3,969
Amortization and write-off of cost in excess of net
assets of acquired companies.......................... 7,484 3,450 3,400
Reduction in valuation allowance......................... (2,104) -- --
Other, net............................................... 1,841 (3,083) (3,781)
-------- -------- --------
$ 98,900 $ 70,703 $ 33,513
======== ======== ========
</TABLE>
Prepaid income taxes and deferred income taxes in the accompanying balance
sheet consist of the following:
<TABLE>
<CAPTION>
1995 1994
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Prepaid income taxes:
Reserves and accruals................................................. $ 31,659 $31,369
Inventory basis difference............................................ 19,782 16,756
Capitalized costs and joint venture equity............................ 4,821 3,727
Accrued compensation.................................................. 12,551 8,599
Allowance for doubtful accounts....................................... 5,592 5,470
Net operating loss carryforwards...................................... 28,692 17,022
Federal tax credit carryforwards...................................... 6,770 7,869
Available-for-sale investments........................................ (2,383) 1,025
Other, net............................................................ 4,723 6,185
-------- -------
112,207 98,022
Less: Valuation allowance............................................. 39,214 40,198
-------- -------
$ 72,993 $57,824
======== =======
Deferred income taxes:
Depreciation.......................................................... $ 55,418 $49,313
Intangible assets..................................................... 2,806 7,373
Other................................................................. 964 1,564
-------- -------
$ 59,188 $58,250
======== =======
</TABLE>
The valuation allowance relates to the uncertainty surrounding the
realization of tax loss and credit carryforwards and the realization of tax
benefits attributable to purchase accounting reserves and certain other tax
assets of the Company and certain subsidiaries. Of the year-end 1995 valuation
allowance, $24.6 million will be used to reduce cost in excess of net assets of
acquired companies when any portion of the related deferred tax asset is
recognized, and $2.1 million will increase capital in excess of par value when
previously unrealized stock option benefits are recognized.
F-21
<PAGE> 133
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1995, the valuation allowance was reduced as it became more likely
than not that certain tax benefits will be realized, offset in part by the
establishment of valuation allowances for tax loss and credit carryforwards of
businesses acquired in 1995.
The Company has not recognized a deferred tax liability for the difference
between the book basis and tax basis of 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 $101
million of undistributed earnings of foreign subsidiaries that could be subject
to taxation if remitted to the U.S. because the Company currently plans to keep
these amounts permanently reinvested overseas. The Company believes that any
additional U.S. tax liability due upon remittance of such earnings would be
immaterial due to available U.S. foreign tax credits.
10. TRANSACTIONS IN STOCK OF SUBSIDIARIES
Gain on issuance of stock by subsidiaries in the accompanying statement of
income results primarily from the following transactions:
1995
Initial public offering of 2,333,556 shares of Thermo Ecotek common stock
at $12.75 per share for net proceeds of $27.5 million resulted in a gain of $7.9
million.
Private placement of 1,601,500 shares of Thermo BioAnalysis common stock at
$10.00 per share for net proceeds of $14.9 million resulted in a gain of $9.5
million that was recorded by Thermo Instrument.
Private placement of 500,000 shares of Thermo Remediation common stock at
$13.25 per share for net proceeds of $6.6 million resulted in a gain of $1.6
million that was recorded by Thermo TerraTech.
Private placements of 150,000 and 50,000 shares of ThermoLase common stock
at $13.75 and $12.825 per share, respectively, and a public offering of
2,250,000 shares at $25.25 per share, for aggregate net proceeds of $55.3
million resulted in an aggregate gain of $34.7 million that was recorded by
ThermoTrex.
Initial public offering of 1,725,000 shares of ThermoSpectra common stock
at $14.00 per share and a private placement of 202,000 shares at $15.72 per
share, for aggregate net proceeds of $24.9 million resulted in an aggregate gain
of $10.6 million that was recorded by Thermo Instrument.
Conversion of $9.1 million of Thermo Voltek 3 3/4% subordinated convertible
debentures convertible at $11.75 per share into 775,399 shares of Thermo Voltek
common stock resulted in a gain of $3.5 million that was recorded by Thermedics.
Private placement of 1,862,000 shares of Trex Medical common stock at
$10.25 per share for net proceeds of $17.6 million resulted in a gain of $12.8
million that was recorded by ThermoTrex.
1994
Public offering of 1,610,000 shares of ThermoTrex common stock at $15.375
per share for net proceeds of $23.0 million resulted in a gain of $7.9 million.
Initial public offering of 5,349,572 shares of ThermoLase common stock at
$3.00 per share for net proceeds of $14.8 million resulted in a gain of $8.6
million that was recorded by ThermoTrex.
F-22
<PAGE> 134
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Private placements of 1,505,000 shares of ThermoSpectra common stock at
$10.00 per share for net proceeds of $14.0 million resulted in a gain of $6.5
million that was recorded by Thermo Instrument.
Conversion of $3.7 million of Thermedics 6 1/2% subordinated convertible
debentures convertible at $10.42 per share into 357,597 shares of Thermedics
common stock resulted in a gain of $1.0 million.
1993
Public offering of 3,225,000 shares of Thermedics common stock at $10.00
per share for net proceeds of $30.0 million resulted in a gain of $10.7 million.
Public offering of 4,312,500 shares of Thermo Power common stock at $9.00
per share for net proceeds of $36.0 million resulted in a gain of $10.6 million.
Private placements of 2,062,500 shares of ThermoTrex common stock at $11.17
and $14.50 per share for net proceeds of $27.5 million resulted in a gain of
$11.4 million.
Private placement of 300,000 shares and initial public offering of
1,650,000 shares of Thermo Remediation common stock at $6.59 and $8.33 per
share, respectively, for aggregate net proceeds of $14.6 million resulted in an
aggregate gain of $4.2 million that was recorded by Thermo TerraTech.
Conversion of $7.3 million of Thermedics 6 1/2% subordinated convertible
debentures convertible at $10.42 per share into 697,919 shares of Thermedics
common stock resulted in a gain of $2.5 million.
The Company's ownership percentage in these subsidiaries changed primarily
as a result of the transactions listed above, as well as the Company's purchases
of shares of its majority-owned subsidiaries' stock, the subsidiaries' purchases
of their own stock, the issuance of subsidiaries' stock by the Company or by the
subsidiaries under stock-based compensation plans or in other transactions, and
the conversion of convertible obligations held by the Company, its subsidiaries,
or by third parties.
The Company's ownership percentages at year-end were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Thermedics.......................................... 51% 51% 52%
Thermo Instrument................................... 86% 83% 81%
Thermo TerraTech.................................... 81% 80% 72%
Thermo Power........................................ 63% 60% 52%
ThermoTrex.......................................... 51% 50% 55%
Thermo Fibertek..................................... 81% 81% 80%
Thermo Ecotek....................................... 83% 97% 88%
Thermo Cardiosystems(a)............................. 55% 58% 57%
Thermo Voltek(a).................................... 59% 71% 67%
Thermo Remediation(b)............................... 69% 65% 67%
ThermoLase(c)....................................... 65% 69% 81%
ThermoSpectra(d).................................... 72% 86% 100%
Thermo EuroTech(e).................................. 62% 64% 72%
ThermoLyte(f)....................................... 78% 100% 100%
Thermo BioAnalysis(d)............................... 80% 100% 100%
ThermoQuest(d)...................................... 100% 100% 100%
Thermo Optek(d)..................................... 100% 100% 100%
Trex Medical(c)..................................... 91% 100% 100%
</TABLE>
(a) Reflects combined ownership by Thermedics and Thermo Electron.
F-23
<PAGE> 135
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(b) Reflects combined ownership by Thermo TerraTech and Thermo Electron.
(c) Reflects ownership by ThermoTrex.
(d) Reflects ownership by Thermo Instrument.
(e) Reflects ownership by Thermo TerraTech.
(f) Reflects ownership by Thermo Power.
11. OTHER EXPENSE, NET
The components of other expense, net, in the accompanying statement of
income are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income............................ $ 62,146 $ 43,280 $ 23,905
Interest expense........................... (76,961) (59,844) (31,736)
Equity in losses of unconsolidated
subsidiaries............................. (203) (4,019) (22,721)
Gain on sale of investments................ 9,305 4,851 2,469
Gain on sale of land....................... -- 14,698 --
Other income (expense), net................ (1,089) 45 535
-------- -------- --------
$ (6,802) $ (989) $(27,548)
======== ======== ========
</TABLE>
12. RESTRUCTURING AND OTHER NONRECURRING COSTS
Restructuring and other nonrecurring costs in the accompanying 1995
statement of income includes $11.5 million to write off the Company's net
investment in a waste-recycling facility in southern California due to
contractual defaults by the facility's sole customer, which have caused
operations to be substantially curtailed; $5.0 million to write off the cost in
excess of net assets of acquired companies at Thermo TerraTech's
thermal-processing equipment business due to this asset no longer being
recoverable based on discontinuing investment in this business; $2.5 million to
write off the cost in excess of net assets of acquired companies at the
Company's Napco subsidiary, which is a defendant in litigation described in Note
7; and $2.9 million of other nonrecurring costs.
The 1994 amount represents severance costs and, to a lesser extent, the
costs to write off leasehold improvements at ThermoTrex's East Coast division.
The 1993 amount primarily represents a $1.9 million reserve for the
write-off of machinery and equipment and costs to phase out a product line in
the Company's metal-fabrication services business, a $1.2 million reserve for
restructuring at the Company's steam turbines and compressors business, and $2.7
million for the write-off of mobile soil-remediation assets and other related
expenses.
F-24
<PAGE> 136
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Paid For:
Interest.............................................. $ 71,816 $ 47,745 $ 29,529
Income taxes.......................................... $ 50,788 $ 27,456 $ 9,909
Noncash Activities:
Conversions of the Company's and subsidiaries'
convertible obligations............................ $ 212,979 $ 89,625 $ 50,403
Acquisition of asset under capital lease.............. $ 47,020 $ -- $ --
Purchase of alternative-energy facility through
assumption of debt................................. $ -- $ -- $ 66,900
Fair value of assets of acquired companies............ $ 521,558 $ 250,404 $ 208,193
Cash paid for acquired companies...................... (339,075) (174,330) (143,790)
Issuance of subsidiaries' common stock and stock
options for acquired companies..................... (18,990) -- --
Issuance of long-term obligations for acquired
company............................................ (22,300) -- --
--------- --------- ---------
Liabilities assumed of acquired companies..... $ 141,193 $ 76,074 $ 64,403
========= ========= =========
</TABLE>
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist mainly of cash and cash
equivalents, available-for-sale and held-to-maturity investments, accounts
receivable, notes payable and current maturities of long-term obligations,
accounts payable, long-term obligations, forward exchange contracts, and
interest rate swaps. The carrying amount of these financial instruments, with
the exception of available-for-sale investments, long-term obligations, forward
exchange contracts, and interest rate swaps, 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. Held-to-maturity investments in the accompanying balance
sheet are carried at amortized cost. The fair values are disclosed on the
accompanying balance sheet and were determined based on quoted market prices.
The Company enters into forward exchange contracts to hedge certain firm
purchase and sale commitments denominated in currencies other than its
subsidiaries' local currencies, principally U.S. dollars, British pounds
sterling, French francs, and Japanese yen. The purpose of the Company's foreign
currency hedging activities is to protect the Company's local currency cash
flows related to these commitments from fluctuations in foreign exchange rates.
The amounts of such forward exchange contracts at year-end 1995 and 1994 were
$34.2 million and $19.9 million, respectively.
The Company's Thermo Ecotek subsidiary has interest rate swap agreements
relating to its nonrecourse tax-exempt obligations. The interest rate swap
agreements are with a different counterparty than the holders of the underlying
debt. The Company believes, however, that the credit risks associated with these
swaps are minimal because the agreements are with a large, reputable bank. The
notional amount of the swap agreement is $110.0 million at December 30, 1995 and
December 31, 1994.
F-25
<PAGE> 137
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The carrying amount and fair value of the Company's long-term obligations
and off-balance-sheet financial instruments are as follows:
<TABLE>
<CAPTION>
1995 1994
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Long-term obligations:
Convertible obligations....................... $ 802,001 $1,354,682 $ 806,661 $ 973,659
Other long-term obligations................... 314,010 334,004 243,189 245,045
---------- ---------- ---------- ----------
$1,116,011 $1,688,686 $1,049,850 $1,218,704
========== ========== ========== ==========
Off-balance-sheet financial instruments:
Forward exchange contracts receivable...... $ (1,015) $ (579)
Interest rate swaps (receivable) payable... $ 3,467 $ (2,113)
</TABLE>
The fair value of long-term obligations was determined based on quoted
market prices and on borrowing rates available to the Company at the respective
year-ends. The fair value of convertible obligations exceeds the carrying amount
primarily due to the market price of the Company's or subsidiaries' common stock
at the respective year-ends exceeding the conversion price of the convertible
obligations.
The fair value of forward exchange contracts and interest rate swap
agreements (used for hedging purposes) is the estimated amount that the Company
would pay or receive upon termination of the contract, taking into account the
change in foreign exchange rates on forward exchange contracts, and market
interest rates and the creditworthiness of the counterparties on interest rate
swap agreements.
15. BUSINESS SEGMENT AND GEOGRAPHICAL INFORMATION
The Company's business segments include the following:
- - Instruments: environmental-monitoring, analytical, test and measurement, and
process-control instruments
- - Alternative-energy Systems: biomass power plants, waste-recycling facility,
industrial refrigeration systems, natural gas engines, cooling and
cogeneration units, turbines and compressors
- - Process Equipment: paper-recycling equipment, papermaking systems and
accessories, metallurgical-processing systems, electroplating equipment
- - Biomedical Products: biomedical materials, mammography and needle-biopsy
systems, general-purpose X-ray systems, respiratory-care equipment,
skin-incision devices, blood coagulation-monitoring equipment, left
ventricular-assist systems, neurophysiology monitoring instruments,
personal-care products
- - Environmental Services: thermal soil-remediation, industrial-fluids
recycling, nuclear monitoring and cleanup, onsite industrial remediation,
laboratory analysis, environmental sciences, metallurgical heat treating and
fabrication
- - Advanced Technologies: process detection systems, explosives-detection
instruments, precision weighing and inspection equipment, electronic test
equipment, power-conversion instruments, laser-based hair-removal system,
systems integration and engineering, development of avionics products and
medical equipment
F-26
<PAGE> 138
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
BUSINESS SEGMENT INFORMATION
Revenues:
Instruments.......................................... $ 782,662 $ 650,114 $ 516,712
Alternative-energy Systems........................... 325,912 285,410 242,662
Process Equipment.................................... 317,951 190,217 167,524
Biomedical Products.................................. 255,752 180,318 127,533
Environmental Services............................... 210,503 141,438 121,987
Advanced Technologies................................ 321,563 286,523 181,094
Intersegment Sales Elimination (a)................... (6,926) (4,829) (3,004)
---------- ---------- ----------
$2,207,417 $1,729,191 $1,354,508
========= ========= =========
Income Before Income Taxes and Minority Interest:
Instruments.......................................... $ 113,651 $ 105,440 $ 91,412
Alternative-energy Systems........................... 32,952 34,451 12,859
Process Equipment.................................... 29,071 20,730 13,444
Biomedical Products.................................. 32,343 17,601 5,758
Environmental Services............................... 21,215 14,853 4,702
Advanced Technologies................................ 18,930 12,563 8,260
---------- ---------- ----------
Total Segment Income (b)..................... 248,162 205,638 136,435
Equity in Losses of Unconsolidated Subsidiaries...... (203) (4,019) (22,721)
Corporate (c)........................................ 51,536 4,757 17,753
---------- ---------- ----------
$ 299,495 $ 206,376 $ 131,467
========= ========= =========
Identifiable Assets:
Instruments.......................................... $1,372,814 $1,011,916 $ 850,688
Alternative-energy Systems........................... 695,849 577,781 593,247
Process Equipment.................................... 238,537 191,846 179,251
Biomedical Products.................................. 552,825 348,199 285,715
Environmental Services............................... 335,726 192,523 146,658
Advanced Technologies................................ 303,270 236,543 203,375
Corporate (d)........................................ 245,887 503,127 248,663
---------- ---------- ----------
$3,744,908 $3,061,935 $2,507,597
========= ========= =========
Depreciation and Amortization:
Instruments.......................................... $ 25,257 $ 22,070 $ 18,059
Alternative-energy Systems........................... 25,186 16,078 4,982
Process Equipment.................................... 5,228 4,780 4,277
Biomedical Products.................................. 8,597 6,292 5,328
Environmental Services............................... 11,197 8,382 6,641
Advanced Technologies................................ 8,243 6,193 3,679
Corporate............................................ 1,271 1,233 1,226
---------- ---------- ----------
$ 84,979 $ 65,028 $ 44,192
========= ========= =========
</TABLE>
F-27
<PAGE> 139
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Capital Expenditures:
Instruments.......................................... $ 10,313 $ 7,574 $ 6,347
Alternative-energy Systems (e)....................... 14,024 31,717 92,862
Process Equipment.................................... 3,686 3,231 2,631
Biomedical Products.................................. 7,168 7,284 9,042
Environmental Services............................... 19,499 7,559 7,583
Advanced Technologies................................ 7,757 8,019 8,898
Corporate............................................ 460 141 2,241
---------- ---------- ----------
$ 62,907 $ 65,525 $ 129,604
========= ========= =========
GEOGRAPHICAL INFORMATION
Revenues:
United States........................................ $1,739,910 $1,386,455 $1,103,133
Europe............................................... 504,439 374,192 298,562
Other................................................ 117,425 91,161 65,165
Transfers among geographical areas (a)............... (154,357) (122,617) (112,352)
---------- ---------- ----------
$2,207,417 $1,729,191 $1,354,508
========= ========= =========
Income Before Income Taxes and Minority Interest:
United States........................................ $ 201,464 $ 182,177 $ 116,863
Europe............................................... 33,059 13,315 12,175
Other................................................ 13,639 10,146 7,397
---------- ---------- ----------
Total Segment Income (b)..................... 248,162 205,638 136,435
Equity in Losses of Unconsolidated Subsidiaries...... (203) (4,019) (22,721)
Corporate (c)........................................ 51,536 4,757 17,753
---------- ---------- ----------
$ 299,495 $ 206,376 $ 131,467
========= ========= =========
Identifiable Assets:
United States........................................ $2,907,585 $2,110,843 $1,905,825
Europe............................................... 501,997 387,268 300,302
Other................................................ 89,439 60,697 52,807
Corporate (d)........................................ 245,887 503,127 248,663
---------- ---------- ----------
$3,744,908 $3,061,935 $2,507,597
========= ========= =========
Export Sales Included in United States Revenues Above
(f).................................................. $ 336,702 $ 265,298 $ 219,914
========= ========= =========
</TABLE>
- ---------------
(a) Intersegment sales and transfers among geographical areas are accounted for
at prices that are representative of transactions with unaffiliated parties.
(b) Segment income is income before corporate general and administrative
expenses, other income and expense, minority interest expense, and income
taxes.
(c) Includes corporate general and administrative expenses, other income and
expense, and gain on issuance of stock by subsidiaries.
(d) Primarily cash and cash equivalents, short- and long-term investments, and
property and equipment at the Company's Waltham, Massachusetts,
headquarters.
(e) Includes $88.4 million in 1993 for the purchase of an alternative-energy
facility in Delano, California.
(f) In general, export revenues are denominated in U.S. dollars.
F-28
<PAGE> 140
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENTS
Issuance of Subordinated Convertible Debentures
On January 3, 1996, the Company issued and sold $585 million principal
amount of 4 1/4% subordinated convertible debentures due 2003. The debentures
will be convertible into shares of the Company's common stock at a price of
$37.80 per share.
Acquisition
On March 1, 1995, Thermo Instrument entered into an agreement with Fisons
plc (Fisons) to acquire the Scientific Instruments Division of Fisons for
approximately 202 million British pounds sterling. On April 13, 1995, Thermo
Instrument announced that it had received a "second request" for information
regarding the transaction from the U.S. Federal Trade Commission (FTC). After
extensive discussions with Fisons and the FTC, in January 1996 Thermo Instrument
withdrew its original pre-merger notification filing under the Hart-Scott-Rodino
Antitrust Improvements Act (the HSR Act), and submitted a new filing with
respect to a modified form of the acquisition. On February 15, 1996, Thermo
Instrument announced that the FTC had granted early termination of the waiting
period under the HSR Act with respect to the modified acquisition and on March
1, 1996, Thermo Instrument announced that it had received clearance from U.K.
antitrust regulatory authorities. The form of the acquisition cleared by the FTC
and the U.K. authorities excludes from the businesses to be acquired by Thermo
Instrument substantially all of the mass spectrometer businesses of Fisons and a
high-resolution mass spectrometer/inductively-coupled plasma product. These
businesses accounted for slightly less than 20% of the 1995 revenues of Fisons'
Scientific Instruments Division.
On March 29, 1996, Thermo Instrument completed the acquisition of a
substantial portion of the businesses comprising the Scientific Instruments
Division of Fisons for approximately 123 million British pounds sterling in cash
(approximately $187 million) and the assumption of approximately 24 million
British pounds sterling of indebtedness (approximately $36 million). The
purchase price is subject to post-closing adjustments equal to the amounts by
which the net tangible assets and net debt of the acquired businesses on the
closing date are greater or less than certain target amounts agreed to by the
parties.
Stock Split
In March 1996, the Company declared a three-for-two stock split in the form
of a 50% stock dividend, payable on June 5, 1996, to shareholders of record on
May 22, 1996. All share and per share information, except for share information
in the accompanying balance sheet, has been restated to reflect the stock split.
Shares issued and treasury shares in the accompanying balance sheet will reflect
the stock split in the period in which the stock split is distributed.
Increase in Authorized Shares
On May 21, 1996, the Company's shareholders voted to increase the Company's
authorized common stock from 175 million shares to 350 million shares.
F-29
<PAGE> 141
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
17. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1995(a) FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues........................................ $478,545 $528,721 $570,373 $629,778
Gross profit.................................... 179,295 198,818 214,938 237,607
Net income...................................... 29,548 32,584 38,133 39,815
Earnings per share:
Primary....................................... .24 .26 .30 .31
Fully diluted................................. .22 .23 .27 .27
</TABLE>
<TABLE>
<CAPTION>
1994(b) FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues........................................ $383,724 $428,547 $445,516 $471,404
Gross profit.................................... 140,020 159,736 171,114 180,031
Net income...................................... 22,925 24,418 27,827 29,541
Earnings per share:
Primary....................................... .20 .21 .24 .25
Fully diluted................................. .18 .19 .21 .22
</TABLE>
- ---------------
(a) Results include nontaxable gains of $12.9 million, $9.7 million, $43.0
million, and $15.2 million in the first, second, third, and fourth quarters,
respectively, from the issuance of stock by subsidiaries.
(b) Results include nontaxable gains of $8.5 million, $0.2 million, $12.6
million, and $4.0 million in the first, second, third, and fourth quarters,
respectively, from the issuance of stock by subsidiaries.
F-30
<PAGE> 142
THERMO ELECTRON CORPORATION
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 30, 1996
F-31
<PAGE> 143
THERMO ELECTRON CORPORATION
INTERIM CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
MARCH 30, APRIL 1,
1996 1995
--------- --------
<S> <C> <C>
Revenues:
Product revenues..................................................... $ 533,387 $388,025
Service revenues..................................................... 59,214 43,908
Research and development contract revenues........................... 42,493 46,612
--------- --------
635,094 478,545
--------- --------
Costs and Expenses:
Cost of products..................................................... 321,933 227,876
Cost of services..................................................... 42,805 30,571
Expenses for research and development and new lines of business
(a)............................................................... 67,397 63,143
Selling, general and administrative expenses......................... 147,546 109,583
Write-off of acquired technology (Note 5)............................ 3,500 --
Restructuring and other nonrecurring costs........................... -- 1,522
--------- --------
583,181 432,695
--------- --------
Operating Income....................................................... 51,913 45,850
Gain on Issuance of Stock by Subsidiaries (Note 2)..................... 28,892 12,883
Other Expense, Net (Note 3)............................................ (5,472) (3,347)
--------- --------
Income Before Income Taxes and Minority Interest....................... 75,333 55,386
Provision for Income Taxes............................................. 22,330 18,434
Minority Interest Expense.............................................. 12,561 7,404
--------- --------
Net Income............................................................. $ 40,442 $ 29,548
======== ========
Earnings per Share:
Primary.............................................................. $ .31 $ .24
======== ========
Fully diluted........................................................ $ .27 $ .22
======== ========
Weighted Average Shares:
Primary.............................................................. 132,492 120,873
======== ========
Fully diluted........................................................ 174,321 156,654
======== ========
(a) Includes costs of:
Research and development contracts................................ $ 35,858 $ 40,803
Internally funded research and development........................ 31,012 21,532
Other expenses for new lines of business.......................... 527 808
--------- --------
$ 67,397 $ 63,143
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE> 144
THERMO ELECTRON CORPORATION
INTERIM CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 30, DECEMBER 30,
1996 1995
---------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................................................... $ 774,715 $ 461,983
Short-term available-for-sale investments, at quoted market value (amortized
cost of $671,161 and $588,471)............................................... 675,752 593,802
Accounts receivable, less allowances of $27,861 and $28,021..................... 587,948 476,479
Unbilled contract costs and fees................................................ 69,580 74,941
Inventories:
Raw materials and supplies................................................... 219,153 172,742
Work in process.............................................................. 97,591 72,087
Finished goods............................................................... 106,446 73,353
Prepaid income taxes............................................................ 87,404 72,993
Prepaid expenses................................................................ 47,968 22,846
---------- ------------
Property, Plant and Equipment, at cost............................................ 1,051,915 967,069
Less: Accumulated depreciation and amortization................................. 268,165 254,224
---------- ------------
783,750 712,845
---------- ------------
Long-term Available-for-sale
Investments, at Quoted Market Value (amortized cost of $56,932 and $60,780)..... 59,498 61,845
---------- ------------
Long-term Held-to-maturity Investments (quoted market value of $24,963 and
$24,942)........................................................................ 24,251 23,819
---------- ------------
Other Assets...................................................................... 108,999 98,102
---------- ------------
Cost in Excess of Net Assets of Acquired Companies (Note 5)....................... 995,358 827,071
---------- ------------
$4,638,413 $3,744,908
========= ==========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Notes payable and current maturities of long-term obligations................... $ 166,803 $ 106,248
Accounts payable................................................................ 187,014 164,605
Accrued payroll and employee benefits........................................... 98,964 91,393
Accrued income taxes............................................................ 54,169 51,807
Accrued installation and warranty costs......................................... 56,297 40,699
Accrued acquisition expenses (Note 5)........................................... 94,170 32,557
Other accrued expenses.......................................................... 299,687 227,527
---------- ------------
957,104 714,836
---------- ------------
Deferred Income Taxes and Other Deferred Items.................................... 128,228 125,066
---------- ------------
Long-term Obligations:
Senior convertible obligations.................................................. 383,122 458,925
Subordinated convertible obligations (Note 4)................................... 944,946 343,076
Tax-exempt obligations.......................................................... 127,639 128,567
Nonrecourse tax-exempt obligations.............................................. 78,700 94,700
Other........................................................................... 81,763 90,743
---------- ------------
1,616,170 1,116,011
---------- ------------
Minority Interest................................................................. 513,949 471,648
---------- ------------
Common Stock of Subsidiary Subject to Redemption ($18,450 redemption value)....... 17,591 17,513
---------- ------------
Shareholders' Investment (Note 6):
Preferred stock, $100 par value, 50,000 shares authorized; none issued
Common stock, $1 par value, 175,000,000 shares authorized; 90,716,061 and
87,863,315 shares issued..................................................... 90,716 87,863
Capital in excess of par value.................................................. 666,062 597,678
Retained earnings............................................................... 652,918 612,476
Treasury stock at cost, 55,861 and 11,574 shares................................ (3,321) (536)
Cumulative translation adjustment............................................... (3,326) 561
Deferred compensation........................................................... (2,185) (2,271)
Net unrealized gain on available-for-sale investments........................... 4,507 4,063
---------- ------------
1,405,371 1,299,834
---------- ------------
$4,638,413 $3,744,908
========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE> 145
THERMO ELECTRON CORPORATION
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
MARCH 30, APRIL 1,
1996 1995
--------- ---------
<S> <C> <C>
Operating Activities:
Net cash provided by operating activities..................... $ 41,853 $ 2,398
------- -------
Investing Activities:
Acquisitions, net of cash acquired (Note 5)...................... (265,203) (49,467)
Purchases of available-for-sale investments...................... (278,094) (104,765)
Purchases of long-term held-to-maturity investments.............. -- (22,300)
Proceeds from sale and maturities of available-for-sale
investments................................................... 199,963 207,146
Purchases of property, plant and equipment....................... (24,548) (12,724)
Proceeds from sale of property, plant and equipment.............. 1,183 1,225
Other............................................................ (999) (1,539)
------- -------
Net cash provided by (used in) investing activities........... (367,698) 17,576
------- -------
Financing Activities:
Net proceeds from issuance of long-term obligations (Note 4)..... 609,049 313
Repayment and repurchase of long-term obligations................ (3,188) (6,654)
Proceeds from issuance of Company and subsidiary common stock
(Note 2)...................................................... 44,676 51,272
Purchases of subsidiary common stock............................. (12,789) (44,257)
Other............................................................ 707 730
------- -------
Net cash provided by financing activities..................... 638,455 1,404
------- -------
Exchange Rate Effect on Cash....................................... 122 1,963
------- -------
Increase in Cash and Cash Equivalents.............................. 312,732 23,341
Cash and Cash Equivalents at Beginning of Period................... 461,983 383,005
------- -------
Cash and Cash Equivalents at End of Period......................... $ 774,715 $ 406,346
======= =======
Supplemental Cash Flow Information:
Provision for losses on accounts receivable........................ $ 249 $ 1,641
Cash paid for:
Interest........................................................ $ 24,639 $ 22,250
Income taxes.................................................... $ 14,762 $ 11,108
Noncash activities:
Conversions of Company and subsidiaries' convertible
obligations.................................................... $ 95,933 $ 41,115
Issuance of long-term obligations for acquired company.......... $ - $ 22,300
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-34
<PAGE> 146
THERMO ELECTRON CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The interim consolidated financial statements presented have been prepared
by Thermo Electron Corporation (the Company) without audit and, in the opinion
of management, reflect all adjustments of a normal recurring nature necessary
for a fair statement of (a) the results of operations for the three-month
periods ended March 30, 1996 and April 1, 1995, (b) the financial position at
March 30, 1996, and (c) the cash flows for the three-month periods ended March
30, 1996 and April 1, 1995. Interim results are not necessarily indicative of
results for a full year.
The consolidated balance sheet presented as of December 30, 1995, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as required for interim financial statements and do not
contain certain information included in the annual financial statements and
notes of the Company. The consolidated financial statements and notes included
herein should be read in conjunction with the financial statements and notes
included in the Company's Consolidated Financial Statements for the fiscal year
ended December 30, 1995, included elsewhere in this Proxy Statement/Prospectus.
2. ISSUANCE OF STOCK BY SUBSIDIARIES
Gain on issuance of stock by subsidiaries in the accompanying statement of
income for the three-month period ended March 30, 1996, resulted primarily from
the following:
Initial public offering of 3,000,000 shares of ThermoQuest Corporation
common stock in March 1996 at $15.00 per share for net proceeds of $41.6
million resulted in a gain of $24.4 million that was recorded by the
Company's Thermo Instrument Systems Inc. subsidiary.
Private placement of 300,000 shares of Thermedics Detection Inc.
common stock in March 1996 at $10.00 per share for net proceeds of $3.0
million resulted in a gain of $2.5 million that was recorded by the
Company's Thermedics Inc. subsidiary.
3. OTHER EXPENSE, NET
The components of other expense, net, in the accompanying statement of
income are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
MARCH 30, APRIL 1,
1996 1995
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Interest income........................................ $ 21,988 $ 14,514
Interest expense....................................... (27,398 ) (18,391)
Equity in income (loss) of unconsolidated
subsidiaries......................................... (341 ) 5
Gain on sale of investments............................ 270 1,187
Other income (expense), net............................ 9 (662)
-------- --------
$ (5,472 ) $ (3,347)
======== ========
</TABLE>
4. DEBENTURE OFFERING
In January 1996, the Company issued and sold $585 million principal amount
of 4 1/4% subordinated convertible debentures due 2003. The debentures are
convertible into shares of the Company's common stock at a price of $37.80 per
share.
F-35
<PAGE> 147
THERMO ELECTRON CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
5. ACQUISITIONS
On March 29, 1996, the Company's Thermo Instrument subsidiary completed the
acquisition of a substantial portion of the businesses comprising the Scientific
Instruments Division of Fisons plc (Fisons), a wholly owned subsidiary of
Rhone-Poulenc Rorer Inc., for approximately 123 million British pounds sterling
in cash (approximately $187 million) and the assumption of approximately 24
million British pounds sterling of indebtedness (approximately $36 million). The
purchase price is subject to post-closing adjustments equal to the amounts by
which the net tangible assets and net debt of the acquired businesses on the
closing date are greater or less than certain target amounts agreed to by the
parties. In the first quarter of 1996, Thermo Instrument wrote-off $3.5 million
of acquired technology in connection with this acquisition. The businesses
acquired are involved in the research, development, manufacture, and sale of
analytical instruments to industrial and research laboratories worldwide. During
the first quarter of 1996, the Company's majority-owned subsidiaries made
several other acquisitions for $88.9 million in cash subject to post-closing
adjustments.
These acquisitions have been accounted for using the purchase method of
accounting and the results of their operations have been included in the
accompanying financial statements from their respective dates of acquisition.
The cost of the acquisitions exceeded the estimated fair value of the acquired
net assets by $179.6 million, which is being amortized principally over 40
years. Allocation of the purchase price for these acquisitions was based on
estimates of the fair value of the net assets acquired and is subject to
adjustment upon finalization of the purchase price allocation. Pro forma data is
not presented since the acquisitions were not material to the Company's results
of operations.
In connection with the acquisition of certain businesses within the
Scientific Instruments Division of Fisons, Thermo Instrument established
reserves totaling $61 million for estimated severance, excess facilities, and
other exit costs associated with the acquisition, none of which was expended
during the first quarter of 1996. Thermo Instrument expects to substantially
complete its review and restructuring of these businesses over the one-year
period following the acquisition. Any changes in estimates of these costs will
be recorded as adjustments to cost in excess of net assets of acquired
companies.
6. SUBSEQUENT EVENT
In March 1996 the Company declared a three-for-two stock split in the form
of a 50% stock dividend, payable on June 5, 1996, to shareholders of record as
of May 22, 1996. All share and per share information, except for share
information in the accompanying balance sheet, has been restated to reflect the
stock split. Shares issued and treasury shares in the accompanying balance sheet
will reflect the stock split in the period distributed.
F-36
<PAGE> 148
SENSORMEDICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
F-37
<PAGE> 149
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
SensorMedics Corporation:
We have audited the accompanying consolidated balance sheets of
SensorMedics Corporation (a California corporation) and subsidiaries as of
September 30, 1995 and 1994, and the related consolidated statements of
operations, stockholders' deficit and cash flows for each of the three years in
the period ended September 30, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SensorMedics Corporation and
subsidiaries as of September 30, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1995, in conformity with generally accepted accounting principles.
As explained in Notes 1 and 6 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 106 "Employers'
Accounting for Postretirement Benefits Other Than Pensions" and Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes," effective
October 1, 1993.
ARTHUR ANDERSEN LLP
Orange County, California
January 12, 1996
F-38
<PAGE> 150
SENSORMEDICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
PRODUCT REVENUES.............................................. $53,847 $46,542 $48,793
SERVICE REVENUES.............................................. 9,027 8,943 8,389
------- ------- -------
62,874 55,485 57,182
------- ------- -------
COST OF PRODUCT REVENUES...................................... 29,191 25,400 25,927
COST OF SERVICE REVENUES...................................... 1,752 1,938 1,830
------- ------- -------
30,943 27,338 27,757
------- ------- -------
Gross profit................................................ 31,931 28,147 29,425
------- ------- -------
OPERATING EXPENSES:
Marketing, sales and service................................ 20,797 19,214 17,938
General and administrative.................................. 7,989 2,803 3,239
Research and development.................................... 3,225 3,945 3,742
------- ------- -------
32,011 25,962 24,919
------- ------- -------
Income (loss) from operations............................ (80) 2,185 4,506
------- ------- -------
OTHER:
Interest expense............................................ 900 931 1,047
Other (income) expense, net (Note 1)........................ (293) (30) 888
------- ------- -------
607 901 1,935
------- ------- -------
Income (loss) before provision (benefit) for income taxes
and cumulative effect of accounting changes............ (687) 1,284 2,571
PROVISION (BENEFIT) FOR INCOME TAXES (Note 2)................. (189) 729 195
------- ------- -------
Income (loss) before cumulative effect of accounting
changes................................................ (498) 555 2,376
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR POSTRETIREMENT
HEALTH CARE BENEFITS, NET OF INCOME TAXES (Note 6).......... -- (1,041) --
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES
(Note 1).................................................... -- 613 --
------- ------- -------
Net income (loss)........................................ (498) 127 2,376
PREFERRED STOCK DIVIDENDS..................................... (989) (1,228) (1,228)
------- ------- -------
NET INCOME (LOSS) AVAILABLE FOR COMMON SHAREHOLDERS........... $(1,487) $(1,101) $ 1,148
======= ======= =======
INCOME (LOSS) PER COMMON SHARE:
Income (loss) before cumulative effect of accounting
changes................................................ $ (0.76) $ (0.35) $ 0.49
Cumulative effect of accounting changes.................. -- (0.22) --
------- ------- -------
Net income (loss) per common share....................... $ (0.76) $ (0.57) $ 0.49
======= ======= =======
Weighted Average shares of Common stock and
equivalents............................................ 1,961 1,916 2,358
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-39
<PAGE> 151
SENSORMEDICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1995 1994
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 878 $ 1,050
Accounts receivable, net of allowance for doubtful accounts
of $1,297 at 1995 and $1,944 at 1994.............................. 16,371 12,867
Inventories (Note 1)................................................. 10,687 9,679
Notes receivable..................................................... 80 --
Prepaid expenses..................................................... 358 266
Deferred tax benefit (Note 2)........................................ 1,649 1,150
-------- --------
Total current assets.............................................. 30,023 25,012
-------- --------
DEMONSTRATION AND RENTAL INVENTORIES, net of accumulated depreciation
of $2,445 at 1995 and $2,082 at 1994 (Note 1)........................ 3,917 4,143
-------- --------
EQUIPMENT AND IMPROVEMENTS, at cost (Note 1):
Machinery, equipment and tooling..................................... 10,127 8,866
Leasehold improvements............................................... 495 431
Construction in progress............................................. 125 352
-------- --------
10,747 9,649
Less -- Accumulated depreciation and amortization.................... (8,004) (7,205)
-------- --------
2,743 2,444
-------- --------
OTHER ASSETS (Note 1):
Intangibles arising from acquisitions, net of accumulated
amortization of $4,394 at 1995 and $3,958 at 1994................. 1,296 1,683
Software development costs, net of accumulated
amortization of $3,099 at 1995 and $2,568 at 1994................. 1,795 1,499
Note receivable...................................................... 163 --
Deferred tax benefit (Note 2)........................................ 135 --
Other assets......................................................... 68 68
-------- --------
3,457 3,250
-------- --------
$ 40,140 $ 34,849
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-40
<PAGE> 152
SENSORMEDICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1995 1994
-------- --------
<S> <C> <C>
CURRENT LIABILITIES:
Note payable to bank (Note 3)........................................ $ 4,850 $ 5,000
Accounts payable..................................................... 8,218 5,306
Accrued expenses..................................................... 4,178 3,631
Accrued compensation................................................. 1,654 1,204
Deferred revenue (Note 1)............................................ 2,896 2,740
Current portion of long-term note payable to bank (Note 3)........... 1,097 1,080
Current portion of obligation under settlement agreement (Note 12)... 795 --
Current portion of long-term capital lease obligations (Note 5)...... 85 60
-------- --------
Total current liabilities......................................... 23,773 19,021
-------- --------
LONG-TERM LIABILITIES:
Term note payable to bank (Note 3)................................... 1,829 1,530
Obligation under settlement agreement (Note 12)...................... 2,014 --
Capital lease obligations (Note 5)................................... 237 253
Deferred tax liability (Note 2)...................................... -- 150
Accrued postretirement benefits (Note 6)............................. 1,938 1,920
-------- --------
Total long-term liabilities....................................... 6,018 3,853
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 9)
MANDATORY REDEEMABLE PREFERRED STOCK (Note 8):
Preferred stock, no par value --
Authorized--8,000 shares
Series A, 3820 shares issued and outstanding at September 30,
1995 and 1994.................................................. 4,890 4,294
Series B, 1,187 and 1,605 shares issued and outstanding at
September 30, 1995 and 1994, respectively...................... 10,927 12,968
-------- --------
15,817 17,262
-------- --------
STOCKHOLDERS' DEFICIT (Notes 7 and 10):
Common stock, no par value --
Authorized--25,000 shares
Issued and outstanding -- 1,968 and 1,954 shares at
September 30, 1995 and 1994, respectively......................... 3,709 3,660
Additional paid-in capital........................................... 1,761 13
Currency translation adjustment (Note 1)............................. 47 (28)
Accumulated deficit.................................................. (10,602) (8,549)
-------- --------
(5,085) (4,904)
Less -- Note receivable from stockholder............................. (383) (383)
-------- --------
Total stockholders' deficit....................................... (5,468) (5,287)
-------- --------
$ 40,140 $ 34,849
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-41
<PAGE> 153
SENSORMEDICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................................... $ (498) $ 127 $ 2,376
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Cumulative effect on income of accounting changes................... -- 428 --
Deferred tax provision (benefit).................................... (784) 307 --
Depreciation and amortization....................................... 2,862 2,310 2,437
Loss on disposal of equipment and improvements...................... 47 -- --
Non-cash expense related to settlement obligation................... 2,809 -- --
(Increase) decrease in accounts receivable.......................... (3,066) (1,022) (73)
(Increase) decrease in inventories.................................. (783) 268 (210)
(Increase) decrease in prepaid expenses............................. (80) (52) 110
Increase in intangibles............................................. (49) (26) (17)
Increase in accounts payable........................................ 2,857 61 321
Increase (decrease) in accrued expenses............................. 413 456 (39)
Increase (decrease) in accrued compensation......................... 450 (505) 280
Increase (decrease) in deferred revenue............................. 156 (10) 76
Increase in accrued postretirement benefits......................... 18 185 --
------- ------- -------
Net cash provided by operating activities...................... 4,352 2,527 5,261
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment and improvements............................... (1,022) (589) (640)
(Increase) decrease in notes receivable and other assets.............. (243) 60 83
Additions to software development costs............................... (827) (750) (745)
Increase in demonstration and rental inventories...................... (790) (868) (1,632)
------- ------- -------
Net cash used in investing activities.......................... (2,882) (2,147) (2,934)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.............................................. 49 115 264
Repurchase of Series B preferred stock................................ (1,252) -- --
Principal payments of notes payable to related parties................ -- (3,703) (3,102)
Payments on capital leases............................................ (72) (54) (31)
Net borrowings (payments) on note payable to bank..................... (150) 806 312
Proceeds from borrowings on term note payable to bank................. 1,530 3,060 --
Principal payments on term note payable to bank....................... (1,214) (450) --
------- ------- -------
Net cash used in financing activities.......................... (1,109) (226) (2,557)
------- ------- -------
EXCHANGE RATE EFFECT ON CASH............................................ (533) (253) 288
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................ (172) (99) 58
CASH AND CASH EQUIVALENTS, beginning of period.......................... 1,050 1,149 1,091
------- ------- -------
CASH AND CASH EQUIVALENTS, end of period................................ $ 878 $ 1,050 $ 1,149
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.............................. $ 898 $ 897 $ 1,040
======= ======= =======
Cash paid during the period for income taxes.......................... $ 396 $ 504 $ 119
======= ======= =======
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
During fiscal year 1995, 1994 and 1993, the Company entered into various
capital lease agreements for the acquisition of equipment and leasehold
improvements, respectively. The capital leases entered into amounted to $81,
$199 and $197 for the years ended September 30, 1995, 1994 and 1993,
respectively.
During fiscal 1993, the Company acquired a small distributorship in a
non-cash transaction resulting in the recording of an intangible arising from
acquisition of $538.
The accompanying notes are an integral part of these consolidated statements.
F-42
<PAGE> 154
SENSORMEDICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK NOTE
----------------- ADDITIONAL CURRENCY RECEIVABLE
NUMBER OF PAID-IN TRANSLATION ACCUMULATED FROM
SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT STOCKHOLDER TOTAL
--------- ------ ---------- ---------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, September 30, 1992.................. 1,850 $3,281 $ 13 $ 422 $ (9,148) $ (383) $(5,815)
Exercise of stock options and warrants....... 5 14 -- -- -- -- 14
Issuance of common stock..................... 24 250 -- -- -- -- 250
Currency translation adjustment.............. -- -- -- (412) -- -- (412)
Net income................................... -- -- -- -- 2,376 -- 2,376
----- ------ ------ ----- ------- ----- --------
BALANCE, September 30, 1993.................. 1,879 3,545 13 10 (6,772) (383) (3,587)
Exercise of stock options and warrants....... 75 115 -- -- -- -- 115
Currency translation adjustment.............. -- -- -- (38) -- -- (38)
Accretion of Preferred Stock dividend:
Series A................................... -- -- -- -- (474) -- (474)
Series B................................... -- -- -- -- (1,430) -- (1,430)
Net income................................... -- -- -- -- 127 -- 127
----- ------ ------ ----- ------- ----- --------
BALANCE, September 30, 1994.................. 1,954 3,660 13 (28) (8,549) (383) (5,287)
Exercise of stock options and warrants....... 14 49 -- -- -- -- 49
Currency translation adjustment.............. -- -- -- 75 -- -- 75
Repurchase of Preferred Stock................ -- -- 1,748 -- -- -- 1,748
Accretion of Preferred Stock dividend:
Series A................................... -- -- -- -- (596) -- (596)
Series B................................... -- -- -- -- (959) -- (959)
Net loss..................................... -- -- -- -- (498) -- (498)
----- ------ ------ ----- ------- ----- --------
BALANCE, September 30, 1995.................. 1,968 $3,709 $1,761 $ 47 $ (10,602) $ (383) $(5,468)
===== ====== ====== ===== ======= ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-43
<PAGE> 155
SENSORMEDICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
SensorMedics Corporation and subsidiaries (the Company) designs,
manufactures, markets and services advanced products for the respiratory care
market.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its international sales and service subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventory cost includes the cost of materials, labor and manufacturing
overhead. The following is a summary of inventory components:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1995 1994
------- ------
<S> <C> <C>
Raw materials............................................. $ 2,604 $2,663
Work-in-process........................................... 681 1,299
Finished goods............................................ 7,402 5,717
------- ------
$10,687 $9,679
======= ======
</TABLE>
Equipment and Improvements
The Company records additions to equipment and improvements at cost.
Expenditures for renewals and improvements that extend the useful life of an
asset are capitalized. Expenditures for maintenance and repairs are charged to
operations when incurred. When depreciable assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are eliminated from
the accounts and the resulting gain or loss is reflected in the statement of
operations.
Depreciation is computed principally using the straight-line method over
the estimated useful lives of the assets. Estimated useful lives are:
<TABLE>
<S> <C>
Machinery, equipment and tooling.......................... 5 to 12 years
Leasehold improvements.................................... Life of lease
</TABLE>
Demonstration and Rental Inventories
Demonstration and rental inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1995 1994
------ ------
<S> <C> <C>
Demonstration inventories.................................. $3,216 $3,417
Rental inventories......................................... 701 726
------ ------
$3,917 $4,143
====== ======
</TABLE>
The Company maintains demonstration inventory used to display and
demonstrate its products to customers. The Company also rents its products to
customers under short-term rental agreements. Demon-
F-44
<PAGE> 156
SENSORMEDICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
stration and rental inventories are recorded at cost and depreciated over the
estimated useful life, which approximates five years.
Currency Translation Adjustment
Exchange adjustments resulting from foreign currency transactions are
recognized currently in income, whereas adjustments resulting from the
translation of financial statements are reflected as a separate component of
stockholders' equity. Assets and liabilities of the European operations are
translated to U.S. dollars at fiscal year-end exchange rates. Revenues and
expenses are translated at the average exchange rate for the year.
Software Development Costs
Certain of the Company's products contain software developed by the Company
that is an integral component of the products. This software is only intended to
be used with the Company's equipment. Software development costs incurred to
establish the technological feasibility of the software are charged to research
and development expense in the period incurred. Costs incurred subsequent to
establishing technological feasibility but prior to general release to customers
are capitalized and amortized over the estimated economic life of the product.
Amortization is computed using the ratio of current revenues to current and
anticipated future revenues or the straight-line method, whichever is greater.
During the years ended September 30, 1995, 1994 and 1993, approximately $827,
$750 and $745 of costs were capitalized. Amortization expense of approximately
$531, $501 and $415 was charged to operations for the years ended September 30,
1995, 1994 and 1993, respectively.
Intangibles Arising From Acquisitions
Intangibles arising from acquisitions which occurred in 1987 and 1993
consist of goodwill and patents. These intangibles are amortized over their
estimated useful lives, which range from five to 17 years, using the
straight-line method.
Deferred Revenue
Deferred revenue consists of customer payments for extended maintenance
contracts which are amortized into revenue over the term of the contract, which
approximates one year.
Statements of Cash Flows
For financial reporting purposes, the Company considers all highly liquid
instruments purchased with an initial maturity of three months or less to be
cash equivalents.
Income Taxes
The Company accounted for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 96, "Accounting for Income Taxes,"
through September 30, 1993.
Effective October 1, 1993, the Company adopted SFAS No. 109 "Accounting for
Income Taxes." The Company adopted this accounting standard using the cumulative
catch-up method. The adoption of this accounting standard resulted in the
recognition of deferred tax assets previously not recorded under SFAS No. 96.
Included in the statement of income for the year ended September 30, 1994, is a
positive cumulative effect of $613.
F-45
<PAGE> 157
SENSORMEDICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Accounts Payable
As a result of the Company's cash management system, temporary book
overdrafts exist due to outstanding checks. Company policy is to reflect any
temporary overdraft in accounts payable for financial reporting purposes. There
were temporary overdrafts of $1,637 and $974 as of September 30, 1995 and 1994,
respectively.
Revenue Recognition
Product revenues are recognized generally upon shipment of the product to
the customer. Rental and service revenues are recognized over the period of the
agreement.
Accrued Warranties
The Company's financial statements reflect accruals for potential warranty
claims based on the Company's claim experience. Such costs are accrued at the
time revenue is recognized.
Other Expense
Included in other expense for the year ended September 30, 1993, is
approximately $500 of costs, primarily legal costs, related to the Company's
proposed initial public offering, which has been postponed indefinitely.
Income (Loss) Per Share
Income (loss) per share is computed by dividing net income, adjusted for
the Series A and B preferred stock dividend requirements, by the weighted
average number of shares of common stock outstanding, after giving effect to
dilutive stock options and warrants. The Company's outstanding options and
warrants are excluded from the fiscal 1995 and 1994 calculations due to their
antidilutive effect during those periods. The Company's Series A and B preferred
stock are excluded from the fiscal 1995, 1994 and 1993 calculations due to their
antidilutive effect during those periods.
New Accounting Pronouncement
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121 ("SFAS No. 121") on accounting for impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to assets to be held and
used. SFAS No. 121 also establishes accounting standards for long-lived assets
and certain identifiable intangibles to be disposed of. The Company is required
to adopt SFAS No. 121 no later than October 1, 1996, although earlier
implementation is permitted. SFAS No. 121 is required to be applied
prospectively for assets to be held and used. The initial application of SFAS
No. 121 to assets held for disposal is required to be reported as the cumulative
effect of a change in accounting principle.
The Company plans to adopt SFAS No. 121 on October 1, 1996. The Company has
yet to determine the impact, if any, of adopting SFAS No. 121.
Reclassifications
Certain reclassifications have been made to the 1994 and 1993 financial
statements in order to conform to classifications used in the current year.
F-46
<PAGE> 158
SENSORMEDICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. INCOME TAXES
The components of income (loss) before provision (benefit) for income taxes
and cumulative effect of accounting changes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1995 1994 1993
----- ------- -------
<S> <C> <C> <C>
Domestic........................................ $(476) $ 2,051 $ 3,316
Foreign......................................... (211) (767) (745)
----- ------- -------
$(687) $ 1,284 $ 2,571
===== ======= =======
</TABLE>
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30,
-----------------------
1995 1994 1993
----- ---- ----
<S> <C> <C> <C>
Current:
Federal.......................................... $ 436 $312 $ 20
Foreign.......................................... -- -- --
State............................................ 159 110 175
Deferred:
Federal.......................................... (667) 262 --
Foreign.......................................... -- -- --
State............................................ (117) 45 --
----- ---- ----
$(189) $729 $195
===== ==== ====
</TABLE>
A reconciliation of the Company's effective tax rate to the statutory
federal tax rate of 34 percent is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------
1995 1994 1993
------------------ ------------------ -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Federal statutory rate............... $(234) (34.0)% $ 437 34.0% $ 874 34.0%
State income taxes, net of federal
benefit............................ (42) (6.1) 79 6.2 175 6.8
Permanent differences................ (9) (1.3) (87) (6.7) 76 3.0
Non-taxed foreign (income) loss...... (11) (1.5) 300 23.3 453 17.6
Losses for which no tax benefit was
provided........................... 107 15.5 -- -- -- --
Net operating loss carryforward
benefit............................ -- -- -- -- (1,383) (53.8)
----- ----- ----- ----- ------- -----
$(189) (27.4)% $ 729 56.8% $ 195 7.6%
===== ===== ===== ===== ======= =====
</TABLE>
Deferred income taxes arise as a result of temporary differences in the
methods used to determine income for financial reporting versus income tax
reporting purposes. These temporary differences are principally related to
different methods of determining depreciation and amortization, the accrual for
postretirement benefits, the recognition of state taxes for federal purposes and
various reserves and allowances.
F-47
<PAGE> 159
SENSORMEDICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The components of the Company's deferred tax provision (benefit) for the
years ended September 30, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
1995 1994
------- -----
<S> <C> <C>
Net operating loss carryforwards.......................... $ -- $ 165
AMT credits............................................... -- 56
Software development costs................................ 118 100
Inventory reserve......................................... (194) 5
Allowance for doubtful accounts........................... 139 (8)
Obligation under settlement agreement..................... (1,124) --
Research and development tax credits...................... 173 --
Investment tax credits.................................... 144 --
Other..................................................... (40) (11)
------- -----
$ (784) $ 307
======= =====
</TABLE>
The components of the Company's net current deferred tax benefit and net
long-term deferred tax benefit (liability) at September 30, 1995 and 1994, are
as follows:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Current asset:
Inventory reserve...................................... $ 901 $ 707
Accrued warranty....................................... 343 347
Allowance for doubtful accounts........................ 166 305
Accrued vacation....................................... 311 294
Obligation under settlement agreement.................. 318 --
Research and development tax credits................... 401 396
Other.................................................. 114 9
------- -------
2,554 2,058
Valuation allowance.................................... (905) (908)
------- -------
Net current deferred tax benefit.................... $ 1,649 $ 1,150
======= =======
Non-current asset:
Accrued postretirement benefits........................ $ 775 $ 768
Obligation under settlement agreement.................. 806 --
Research and development tax credits................... -- 178
Investment tax credits................................. -- 144
Other.................................................. 33 33
------- -------
1,614 1,123
Valuation allowance.................................... (571) (476)
------- -------
1,043 647
Non-current liability:
Software development costs............................. (718) (600)
Depreciation........................................... (190) (197)
------- -------
Net long-term deferred tax benefit (liability)...... $ 135 $ (150)
======= =======
</TABLE>
F-48
<PAGE> 160
SENSORMEDICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax benefit will not be realized based on near term
estimates of future taxable income and utilization of tax planning strategies.
As of September 30, 1995, the Company has the following research and
development tax credits available to reduce future federal tax liabilities:
<TABLE>
<CAPTION>
YEAR OF
EXPIRATION
-----------
<S> <C>
2000................................ $ 13
2001................................ --
2002................................ 71
2003................................ 215
2004................................ 102
</TABLE>
3. NOTES PAYABLE TO BANK
The Company maintains a revolving line of credit with a bank which provides
for maximum borrowings of $6,000, subject to availability limitations based upon
eligible receivables and inventories. At September 30, 1995 and 1994, $4,850 and
$5,000, respectively, were outstanding under the agreement. Interest on
borrowings is charged at the bank's prime rate ( 8.75 percent at September 30,
1995) plus one-half of one percent. The agreement expires on March 5, 1996.
The Company has entered into two standby letters of credit with the same
bank, not reflected in the accompanying financial statements, aggregating $900
at September 30, 1995. These standby letters of credit reduce available
borrowings on the revolving line of credit and expire on March 5, 1996 and July
31, 1996.
The following summarizes the revolving line of credit transactions during
the years ended September 30, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Interest rate at end of period 9.25% 8.5% 7.5%
Weighted average interest rate for the period 9.4% 8.2% 7.8%
Weighted average balance outstanding $4,446 $4,249 $3,947
Maximum amount outstanding at any month end $4,976 $5,065 $4,641
</TABLE>
The Company also has a term loan agreement with the same bank which has
borrowings available of $3,500 at an interest rate of the bank's prime rate
(8.75 percent at September 30, 1995) plus one percent per annum. The amount
outstanding at September 30, 1995 and 1994 was $2,926 and $2,610, respectively
with $1,097, $1,097 and $732 due in fiscal year 1996, 1997 and 1998,
respectively. The term loan agreement expires February 5, 1998.
Borrowings under these agreements are secured by substantially all assets
of the Company. These agreements contain certain financial covenants which
require the Company to maintain a minimum tangible net worth, profitability on a
quarterly basis, quick ratio and debt to tangible net worth ratio, among other
things.
One of the Company's foreign subsidiaries has a credit facility amounting
to approximately $1,300. As of September 30, 1995, this facility was used for a
bank overdraft of approximately $350 and for the issuance of
F-49
<PAGE> 161
SENSORMEDICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
guarantees of approximately $432 (such guarantees are not reflected in the
accompanying financial statements).
Subsequent to year-end the Company increased the revolving line of credit
availability by $500 at the same terms as the existing agreement. Additionally,
the Company entered into an additional short-term debt agreement with the same
bank for $1,000, with interest at the bank's prime rate plus one half of one
percent, to be repaid in five monthly principal payments of $100 plus interest
and the remaining principal due March 5, 1996.
4. NOTES PAYABLE TO RELATED PARTIES
At September 30, 1993, the Company had subordinated notes payable, at 12
percent, to various investors who are also common stockholders, preferred
stockholders and/or own certain warrants to purchase the Company's common stock
(collectively referred to as "related parties"). The Company paid off all of
these notes in fiscal 1994.
5. CAPITAL LEASES
The Company leases certain equipment under capital leases. The following is
a schedule of the future minimum lease payments under capital leases together
with the present value of the net minimum lease payments as of September 30,
1995:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30:
--------------------------------------------------------------------
<S> <C>
1996.............................................................. $116
1997.............................................................. 116
1998.............................................................. 100
1999.............................................................. 47
2000.............................................................. 9
----
Future minimum payments........................................... 388
Less -- Amount representing interest (interest rates range from
9.91% to 12.75%).................................................. 66
----
Present value of net minimum lease payments......................... 322
Less -- current portion............................................. 85
----
$237
====
</TABLE>
Assets under capital leases are classified in the consolidated balance
sheets as equipment and leasehold improvements. The cost of these assets and the
related accumulated depreciation amounted to $477 and $121 as of September 30,
1995, and $396 and $44 as of September 30, 1994, respectively.
6. RETIREMENT PLANS
a. Money Purchase Pension Plan
The Company has a defined contribution money purchase pension plan covering
substantially all employees who have completed one year of employment. The
Company's policy is to fund annually a contribution equal to two percent of the
employee's eligible annual compensation. Company contributions are fully vested
and nonforfeitable after seven years of service or upon retirement, death or
approved disability. The amount charged to operations under the plan amounted to
approximately $229, $192 and $146 for the years ended September 30, 1995, 1994
and 1993, respectively.
F-50
<PAGE> 162
SENSORMEDICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
b. Supplementary Profit Sharing Plan
The Company has a supplementary profit sharing plan in which substantially
all employees are eligible to participate, after completing one year of
employment. Participation in the plan is voluntary. An employee may elect to
contribute up to five percent of pretax compensation as a basic contribution, up
to five percent of pretax compensation as an additional contribution and/or up
to 10 percent of after-tax compensation. The Company contributes an amount
ranging from 60 percent to 75 percent of the participant's basic contribution.
Company contributions are fully vested and nonforfeitable after seven years of
service or upon retirement, death or approved disability. The amount charged to
operations under the plan was approximately $278, $236 and $226 for the years
ended September 30, 1995, 1994 and 1993, respectively.
c. Postretirement Benefits
The Company provides certain health care and life insurance benefits to
eligible retired employees. All employees become eligible for retiree health
care benefits after reaching age 55 with 10 years of service, provided they
began employment with the Company prior to January 1, 1995. In situations where
full-time employees retire from the Company between age 55 and age 65, most are
eligible to receive, at a cost to the retiree equal to the cost for an active
employee, certain health care benefits identical to those available to active
employees. The plans are unfunded. The Company continues to fund benefit costs
principally on a pay-as-you-go basis, with the retiree paying a portion of the
costs. After attaining age 65, an eligible retiree's health care benefits
coverage becomes subject to Medicare "carve-out" provisions, with the retiree
paying the same pro-rata amount they paid prior to reaching age 65 (although
total payments for the Company and retiree are lower due to Medicare "carve-out"
provisions). The Company reserves the right to change or terminate the benefits
at any time.
Effective October 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions." This statement,
among other things, requires the accrual of the cost of providing postretirement
benefits during the active service period of the employee. The Company elected
to immediately recognize the cumulative effect of the change in accounting for
postretirement benefits of $1,735 ($1,041 net of income tax benefit) which
represents the accumulated postretirement benefit obligation (APBO) existing at
October 1, 1993. The effect of this change on 1995 and 1994 operating results,
after recording the cumulative effect for years prior to 1994, was to recognize
additional pretax expense of $19 and $186, respectively. The effect of the
change on years prior to 1994 was not determinable. Prior to 1994, the Company
recognized expense in the year the benefits were provided, which amounted to $66
for the year ended September 30, 1993. If the prior method had been used in
fiscal 1995 and 1994, the Company would have recognized $45 and $70 in expenses,
respectively, related to postretirement benefits.
Effective January 1, 1995 the Company amended the health care and life
insurance benefits available for eligible retirees. The amendment principally
caps benefits the Company will pay for eligible retiree health care for
employees retiring on or after January 1, 1997, and excludes any postretirement
benefits for any employee hired after January 1, 1995. This amendment resulted
in an unrecognized prior service gain of $1,013, which is being amortized on a
straight-line basis over the average remaining employee service period of
approximately 13 years as a reduction in postretirement benefit expense
beginning in 1995.
F-51
<PAGE> 163
SENSORMEDICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Summary information of the Company's plans as of September 30, 1995 and
1994, is as follows:
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees................................................. $ 405 $ 476
Fully eligible, active plan participants................. 259 521
Other active plan participants........................... 288 923
------ ------
952 1,920
Unrecognized prior service cost.......................... 935 --
Unrecognized net gain.................................... 51 --
------ ------
Accrued postretirement benefits............................ $1,938 $1,920
====== ======
</TABLE>
The components of net periodic postretirement benefit cost for the years
ended September 30, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Service cost benefits attributed to employee service during
the year.................................................... $ 54 $120
Interest cost on APBO......................................... 88 136
Amortization of prior service cost............................ (78) --
---- ----
Net periodic postretirement benefit cost............ $ 64 $256
==== ====
</TABLE>
Assumptions used to calculate the APBO were as follows:
<TABLE>
<S> <C>
Discount rate --
September 30, 1995................................... 7.25%
September 30, 1994................................... 8.00%
Health care trend rate --
September 30, 1995 -- age 65 and less................ 8.0 % grading to 5.0%
-- age 65 and older............ 7.5 % grading to 5.0%
September 30, 1994 -- age 65 and less................ 8.5 % grading to 5.5%
-- age 65 and older............ 7.75% grading to 5.5%
</TABLE>
If the health care cost trend rate assumptions were increased by 1%, the
APBO as of September 30, 1995, would be increased by 3.5%. The effect of this
change on the sum of the service cost and interest cost components of net
periodic postretirement benefit cost for 1995 would be an increase of 10.1%.
7. STOCK PLANS AND WARRANTS
The Company has a note receivable from a stockholder from the sale of
shares to the stockholder in fiscal year 1989. The note receivable is reflected
as a contra equity account in the accompanying consolidated balance sheets.
The Company has an incentive stock option plan under which a maximum
aggregate of 846,000 shares has been reserved for grant. Options become
exercisable over five years following the date of grant and expire in 10 years.
The option price per share is determined by the Board of Directors, but may not
be less than the fair market value of the stock on the date of grant.
F-52
<PAGE> 164
SENSORMEDICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
A summary of the status of the Company's stock option plan is as follows:
<TABLE>
<CAPTION>
SHARES PRICE RANGE
------- ------------
<S> <C> <C>
Outstanding at September 30, 1992................... 581,900 $ .20-$10.50
Granted........................................... 15,500 10.50
Exercised......................................... 430 .20- 3.60
Canceled.......................................... 420 3.60
------- ------------
Outstanding at September 30, 1993................... 596,550 .20- 10.50
Granted........................................... 25,350 10.50
Exercised......................................... 3,778 .20- 3.60
Canceled.......................................... 1,022 .20- 3.60
------- ------------
Outstanding at September 30, 1994................... 617,100 3.60- 10.50
Granted........................................... 24,000 8.00
Exercised......................................... 13,788 3.60
Canceled.......................................... 17,672 3.60
------- ------------
Outstanding at September 30, 1995................... 609,640 $3.60-$10.50
======= ============
Exercisable at September 30, 1995................... 502,210 $3.60-$10.50
======= ============
Available for grant at September 30, 1995........... 201,389
=======
</TABLE>
The Company has outstanding warrants to purchase common stock which expire
at various dates through March 1998. The following is a summary of warrant
activity for the years ended September 30, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
SHARES PRICE RANGE
------- -------------
<S> <C> <C>
Outstanding at September 30, 1992.................. 410,662 $ .40-$10.50
Granted.......................................... 50,754 3.60- 11.66
Exercised........................................ 4,408 3.60
Canceled......................................... -- --
------- -------------
Outstanding at September 30, 1993.................. 457,008 .40- 11.66
Granted.......................................... 25,000 10.87- 10.87
Exercised........................................ 70,968 .40- 3.60
Canceled......................................... 78,883 3.60
------- -------------
Outstanding at September 30, 1994.................. 332,157 3.60- 11.66
Granted.......................................... 25,000 10.50
Exercised........................................ -- --
Canceled......................................... -- --
------- -------------
Outstanding at September 30, 1995.................. 357,157 $ 3.60-$11.66
======= =============
</TABLE>
8. PREFERRED STOCK
Preferred stock is summarized as follows:
a. Series A
The holders are entitled to cumulative dividends at the rate of $.08 per
share commencing on January 1, 1987. If any shares of Series A stock are
outstanding, no dividends or other distributions shall be made with
F-53
<PAGE> 165
SENSORMEDICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
respect to the common stock. In the event of any voluntary or involuntary
liquidation, Series A stock has a liquidating preference of $1.00 per share plus
cumulative unpaid dividends. At September 30, 1995 and 1994, cumulative unpaid
dividends on Series A stock were $2,674 and $2,369, respectively.
In addition, in 1989 the Company agreed to a mandatory redemption of the
Series A stock at the rate of 5% per quarter starting December 31, 1993,
inclusive of all related cumulative dividends. The Company has not redeemed any
of these shares or dividends and has determined that the shareholders are
willing to waive scheduled redemption rights, subject to the Company's pursuing
of an initial public offering or merger in which the shareholders would recover
all preference amounts. At September 30, 1995 and 1994, total Series A shares
which should have been redeemed per the 1989 schedule were 1,528,000 and
764,000, respectively. The cumulative dividends on such shares at September 30,
1995 and 1994 were $1,070 and $474, respectively.
In connection with an initial public offering, all outstanding shares would
automatically be converted into shares of common stock. Each share would be
convertible into the number of common shares which results from dividing the
liquidation preference per share by the higher of the initial public offering
price per share or the prevailing conversion price per share.
b. Series B
The holders of Series B preferred shares are entitled to cumulative
dividends at the rate of $.575 per share commencing on January 1, 1987. If any
shares of Series B stock are outstanding, no dividends or other distributions
shall be made with respect to the common stock, and no common stock shall be
repurchased until cumulative dividends on the Series B stock and the then
current quarterly dividend shall have been declared and paid or set apart. If
there are insufficient funds legally available to pay the aggregate amount of
dividends payable on both Series A and Series B stock, such dividends shall be
ratably paid. In the event of any voluntary or involuntary liquidation, Series B
stock has a liquidation preference of $7.19 plus cumulative unpaid dividends. At
September 30, 1995 and 1994, cumulative unpaid dividends on Series B stock were
$5,974 and $7,151, respectively.
In addition, in 1989 the Company agreed to a mandatory redemption of the
Series B stock at the rate of 5% per quarter starting December 31, 1993,
inclusive of all related cumulative dividends. The Company has not redeemed any
of these shares or dividends and has determined that the shareholders are
willing to waive scheduled redemption rights, subject to the Company's pursuing
of an initial public offering or merger in which the shareholders would recover
all preference amounts. At September 30, 1995 and 1994, total Series B shares
which should have been redeemed per the 1989 schedule were 474,966 and 320,932,
respectively. The cumulative dividends on such shares at September 30, 1995 and
1994 were $2,389 and $1,430, respectively.
In connection with an initial public offering, all outstanding shares would
automatically be converted into shares of common stock. Each share of stock
would be convertible into the number of shares of common stock which results
from dividing the liquidation preference per share by the prevailing conversion
price per share.
During fiscal 1995 the Company repurchased 417,246 shares of Series B
preferred at a price of $3.00 per share. This investors original investment was
$3,000 at a price of $7.19 per share. The difference between the repurchase
price and the original investment has been recorded as additional paid in
capital in the accompanying balance sheet.
Holders of Series A preferred stock have no voting rights. The holders of
Series B preferred stock have the right to vote that number of shares of common
stock issuable upon conversion.
F-54
<PAGE> 166
SENSORMEDICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. COMMITMENTS AND CONTINGENCIES
The Company leases its operating facilities and certain equipment under
operating leases expiring through 2004. Rental expense for these leases was
approximately $1,581, $1,439 and $1,385 for the years ended September 30, 1995,
1994 and 1993, respectively. At September 30, 1995, future minimum lease
payments under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30,
---------------------------------------------------------
<S> <C>
1996 $ 1,487
1997 1,148
1998 1,168
1999 1,149
2000 1,204
Thereafter 5,537
-------
$11,693
=======
</TABLE>
The Company is from time to time involved in various legal proceedings,
most of which are routine litigation, in the normal course of business. In the
opinion of management, after consultation with legal counsel, the resolution of
these matters will not have a material adverse impact on the Company's financial
position or results of operations.
10. SALE OF STOCK AND ISSUANCE OF WARRANTS
In March 1993 and March 1992, the Company sold 23,810 and 95,000 shares,
respectively, of common stock with net proceeds of $250 and $972, respectively,
to two separate companies (the Purchasers). The Purchasers were issued warrants
to purchase an additional 23,810 and 95,000 shares, respectively, of common
stock at $10.50 per share, the fair market value of the stock on the date of the
transactions as determined by the Board of Directors. In addition, the
Purchasers may receive warrants to purchase up to 250,000 and 375,000 shares,
respectively, of common stock over a five-year period if certain annual sales of
products to the Purchasers' affiliates exceed specified levels. In any one year,
the warrants to purchase common stock may not exceed 50,000 and 75,000,
respectively. The measurement periods commenced May 1, 1993 and 1992,
respectively, and terminate April 30, 1998 and 1997, respectively. The purchase
price per share for the warrants shall be the average of the Company's daily
closing prices of the Company's shares immediately prior to the date of
issuance, if the Company's shares are publicly traded, or otherwise shall be
determined by a defined formula. During 1995, 1994 and 1993, 25,000 warrants
were earned and granted related to the 1992 sale.
In conjunction with the 1992 sale, if the Company's stock is traded on an
exchange and 125,000 or more warrants are outstanding under this agreement with
the Purchaser and the average market price of the stock for the previous month
is less than $10.50 per share, the Purchaser has the right to require the
Company to repurchase all or a portion of the warrants at a price equal to $2.00
per share. Additionally, the 1992 agreement states that if at any time the
Purchaser sells any of the shares acquired under the agreement for a gross price
per share which exceeds the purchase price per share by $60 or more, the amount
of such excess shall be paid to the Company.
F-55
<PAGE> 167
SENSORMEDICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11. FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Information with respect to the Company's foreign and domestic operations
and its export sales is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Total Revenues:
United States............................... $50,238 $45,427 $49,197
Europe...................................... 12,636 10,058 7,985
------- ------- -------
$62,874 $55,485 $57,182
======= ======= =======
Income (loss) from Operations:
United States............................... $ (515) $ 2,540 $ 4,679
Europe...................................... 435 (355) (173)
------- ------- -------
$ (80) $ 2,185 $ 4,506
======= ======= =======
Total Assets:
United States............................... $30,410 $27,048 $26,912
Europe...................................... 9,730 7,801 5,711
------- ------- -------
$40,140 $34,849 $32,623
======= ======= =======
</TABLE>
Included in United States revenue is export revenue of $4,034, $4,034 and
$3,471 for the years ended September 30, 1995, 1994 and 1993, respectively.
12. SUBSEQUENT EVENTS
On April 15, 1994, Medical Graphics Corporation filed suit in the United
States District Court for the District of Minnesota against the Company,
asserting claims of patent infringement, unfair competition, antitrust
violations, product and business disparagement and defamation. The Company
asserted counterclaims against Medical Graphics Corporation for patent
infringement, unfair competition, antitrust violations and product
disparagement.
Both the Company and Medical Graphics Corporation denied the allegations
but rather than committing any additional resources to the defense and
counterclaims the parties entered into a settlement agreement in December 1995,
the terms of which are confidential. Legal and settlement costs of $3,958 are
included in the 1995 statement of operations. Payments to Medical Graphics
Corporation are due beginning December 1995, and thereafter semi-annually
commencing in June 1996 through June 2004. Such obligations were discounted in
the financial statements at 7.5%.
The settlement agreement also states that if the Company completes an
initial public offering, merger, sale of all or substantially all of its stock
or assets, sale of a defined product line or sale of a subsidiary, all
outstanding and unpaid amounts shall be accelerated and the discounted net
present value immediately due.
F-56
<PAGE> 168
SENSORMEDICS CORPORATION AND SUBSIDIARIES
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
F-57
<PAGE> 169
SENSORMEDICS CORPORATION AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED MARCH 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
PRODUCT REVENUES....................................................... $27,638 $25,628
SERVICE REVENUES....................................................... 4,422 4,451
------- -------
32,060 30,079
------- -------
COST OF PRODUCT REVENUES............................................... 13,497 13,953
COST OF SERVICE REVENUES............................................... 796 850
------- -------
14,293 14,803
------- -------
Gross profit...................................................... 17,767 15,276
------- -------
OPERATING EXPENSES:
Marketing, sales and service......................................... 11,170 10,053
General and administrative........................................... 2,580 2,442
Research and development............................................. 1,348 1,776
------- -------
15,098 14,271
------- -------
Income from operations............................................ 2,669 1,005
------- -------
OTHER:
Interest expense..................................................... 497 499
Other (income) expense, net.......................................... 418 (523)
------- -------
915 (24)
------- -------
Income before provision for income taxes.......................... 1,754 1,029
PROVISION FOR INCOME TAXES............................................. 702 427
------- -------
Net income........................................................ 1,052 602
Preferred stock dividends.............................................. (495) (495)
------- -------
Net income available for common shareholders........................... $ 557 $ 107
======= =======
Income per common share -- primary..................................... $ .24 $ .05
======= =======
Weighted average shares of common stock and equivalents................ 2,336 2,338
======= =======
Income per common share -- fully diluted............................... $ .23 $ .05
======= =======
Weighted average shares of common stock and equivalents................ 4,579 2,338
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-58
<PAGE> 170
SENSORMEDICS CORPORATION AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1996 1995
----------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 90 $ 878
Accounts receivable, net of allowance for doubtful accounts of
$1,345 at March 31, 1996 and $1,297 at September 30, 1995..... 14,860 16,371
Inventories...................................................... 10,770 10,687
Notes receivable................................................. 80 80
Prepaid expenses................................................. 658 358
Deferred tax benefit............................................. 1,649 1,649
------- -------
Total current assets..................................... 28,107 30,023
------- -------
DEMONSTRATION AND RENTAL INVENTORIES, net of accumulated
depreciation of $2,800 at March 31, 1996 and $2,445 at September
30, 1995......................................................... 3,748 3,917
------- -------
EQUIPMENT AND IMPROVEMENTS, at cost:
Machinery, equipment and tooling................................. 10,143 10,127
Leasehold improvements........................................... 495 495
Construction in progress......................................... 385 125
------- -------
11,023 10,747
Less -- Accumulated depreciation and amortization................ (8,501) (8,004)
------- -------
2,522 2,743
------- -------
OTHER ASSETS:
Intangibles arising from acquisitions, net of accumulated
amortization of $4,616 at March 31, 1996 and $4,394 at
September 30, 1995............................................ 1,066 1,296
Software development costs, net of accumulated amortization of
$3,417 at March 31, 1996 and $3,099 at September 30, 1995..... 1,979 1,795
Note receivable.................................................. 150 163
Deferred tax benefit............................................. 135 135
Other assets..................................................... 68 68
------- -------
3,398 3,457
------- -------
$37,775 $40,140
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-59
<PAGE> 171
SENSORMEDICS CORPORATION AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS (UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1996 1995
----------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Note payable to bank............................................. $ 4,675 $ 4,850
Accounts payable................................................. 6,366 8,218
Accrued expenses................................................. 4,056 4,178
Accrued compensation............................................. 1,485 1,654
Deferred revenue................................................. 3,098 2,896
Current portion of long-term note payable to bank................ 1,097 1,097
Current portion of obligation under settlement agreement......... 214 795
Current portion of long-term capital lease obligations........... 85 85
------- -------
Total current liabilities................................ 21,076 23,773
------- -------
LONG-TERM LIABILITIES:
Term note payable to bank........................................ 1,280 1,829
Obligation under settlement agreement............................ 1,905 2,014
Capital lease obligations........................................ 197 237
Accrued postretirement benefits.................................. 1,938 1,938
------- -------
Total long-term liabilities.............................. 5,320 6,018
------- -------
COMMITMENTS AND CONTINGENCIES
MANDATORY REDEEMABLE PREFERRED STOCK:
Preferred stock, no par value-
Authorized -- 8,000 shares
Series A, 3,820 shares issued and outstanding
at March 31, 1996 and September 30, 1995................. 5,233 4,890
Series B, 1,187 shares issued and outstanding
at March 31, 1996 and September 30, 1995................. 11,695 10,927
------- -------
16,928 15,817
------- -------
STOCKHOLDERS' DEFICIT:
Common stock, no par value-
Authorized -- 25,000 shares
Issued and outstanding -- 1,969 and 1,968 shares at
March 31, 1996 and September 30, 1995, respectively......... 3,715 3,709
Additional paid-in capital....................................... 1,761 1,761
Currency translation adjustment.................................. 19 47
Accumulated deficit.............................................. (10,661) (10,602)
------- -------
(5,166) (5,085)
Less -- Note receivable from stockholder........................... (383) (383)
------- -------
Total stockholders' deficit.............................. (5,549) (5,468)
------- -------
$ 37,775 $ 40,140
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-60
<PAGE> 172
SENSORMEDICS CORPORATION AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDING MARCH 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................. $ 1,052 $ 602
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization....................................... 1,642 1,399
Payments related to settlement obligation........................... (690) --
Decrease in accounts receivable..................................... 1,310 319
Increase in inventories............................................. (181) (1,110)
Increase in prepaid expenses........................................ (308) (204)
Decrease in intangibles............................................. 8 --
Increase (decrease) in accounts payable............................. (1,819) 2,194
Decrease in accrued expenses........................................ (65) (365)
Decrease in accrued compensation.................................... (169) (39)
Increase in deferred revenue........................................ 202 77
Increase in accrued postretirement benefits......................... -- 1
------- -------
Net cash provided by operating activities...................... 982 2,874
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment and improvements................................ (361) (712)
(Increase) decrease in notes receivable................................ 13 (80)
Additions to software development costs................................ (472) (362)
Increase in demonstration and rental inventories....................... (430) (556)
------- -------
Net cash used in investing activities.......................... (1,250) (1,710)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock............................................... 6 20
Repurchase of Series B preferred stock................................. -- (1,252)
Payments on capital leases............................................. (40) (60)
Payments on note payable to bank....................................... (175) (1,023)
Net borrowings (payments) on term note payable to bank................. (549) 890
------- -------
Net cash used in financing activities.......................... (758) (1,425)
------- -------
EXCHANGE RATE EFFECT ON CASH............................................. 238 (616)
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... (788) (877)
CASH AND CASH EQUIVALENTS, beginning of period........................... 878 1,050
------- -------
CASH AND CASH EQUIVALENTS, end of period................................. $ 90 $ 173
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest............................... $ 498 $ 476
======= =======
Cash paid during the period for income taxes........................... $ 477 $ 300
======= =======
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
During the six months ending March 31, 1996 and 1995, the Company entered
into various capital lease agreements for the acquisition of equipment and
leasehold improvements. The capital leases entered into amounted to none and $40
for the six months ending March 31, 1996 and 1995, respectively.
The accompanying notes are an integral part of these consolidated statements.
F-61
<PAGE> 173
SENSORMEDICS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The interim consolidated financial statements presented have been prepared
by SensorMedics Corporation (the Company) without audit and, in the opinion of
management, reflect all adjustments of a normal recurring nature necessary for a
fair statement of (a) the results of operations for the six-month periods ended
March 31, 1996 and March 31, 1995, (b) the financial position at March 31, 1996,
and (c) the cash flows for the six-month periods ended March 31, 1996 and March
31, 1995. Interim results are not necessarily indicative of results for a full
year.
The consolidated balance sheet presented as of September 30, 1995, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as required for interim financial statements and do not
contain certain information included in the annual financial statements and
notes of the Company. The consolidated financial statements and notes included
herein should be read in conjunction with the financial statements and notes
included in the Company's Consolidated Financial Statements for the fiscal year
ended September 30, 1995 included elsewhere in this Proxy Statement/Prospectus.
2. SUBSEQUENT EVENT
In April 1996, the Company entered into a letter of intent with Thermo
Electron Corporation ("Thermo") to merge with a wholly owned subsidiary of
Thermo subject to the execution of a definitive agreement and other conditions
described therein.
F-62
<PAGE> 174
APPENDIX A
AGREEMENT AND PLAN OF MERGER
Agreement entered into as of June , 1996 by and among Thermo Electron
Corporation, a Delaware corporation (the "Buyer"), SMC Acquisition Corp., a
Delaware corporation and a wholly-owned subsidiary of the Buyer (the "Transitory
Subsidiary"), and SensorMedics Corporation, a California corporation (the
"Company"). The Buyer, the Transitory Subsidiary and the Company are referred to
collectively herein as the "Parties."
This Agreement contemplates a tax-free merger of the Transitory Subsidiary
into the Company. In such merger, the stockholders of the Company will receive
capital stock of the Buyer in exchange for their capital stock of the Company.
Now, therefore, in consideration of the representations, warranties and
covenants herein contained, the Parties agree as follows.
ARTICLE I
THE MERGER
1.1 THE MERGER. At the Effective Time (as defined in Section 1.3 below),
in accordance with this Agreement, the General Corporation Law of the State of
California (the "California Law") and the Delaware General Corporation Law (the
"Delaware Law"), the Transitory Subsidiary shall be merged with and into the
Company (the "Merger"), the separate existence of the Transitory Subsidiary
shall cease and the Company shall continue as the surviving corporation. The
Company is hereinafter sometimes referred to as the "Surviving Corporation." At
the election of the Buyer, any direct or indirect wholly-owned subsidiary of the
Buyer organized under the laws of a state of the United States may be
substituted for the Transitory Subsidiary as a constituent corporation in the
Merger for purposes of this Section 1.1. At the election of the Buyer, the
Merger may be structured so that the Company shall be merged with and into the
Transitory Subsidiary with the result that the Transitory Subsidiary shall be
the "Surviving Corporation." If the Buyer elects to structure the Merger so that
the Transitory Subsidiary, rather than the Company, is the Surviving
Corporation, (a) the inaccuracy of any representation or warranty of the Company
which is premised on the assumption that the Company shall be the Surviving
Corporation, which representation or warranty becomes inaccurate solely as the
result of the Transitory Subsidiary, rather than the Company, being the
Surviving Corporation, shall not be deemed to be a breach of such representation
or warranty and shall not release Buyer and the Transitory Subsidiary from their
duties and obligations under this Agreement and (b) the other provisions of this
Agreement relating to the Merger (including without limitation Section 1.4)
shall be deemed to be appropriately modified to reflect such alternative
structure.
1.2 EFFECT OF THE MERGER. At the Effective Time, the Surviving
Corporation shall continue its corporate existence under the laws of the State
of California and the Merger shall have the effects set forth in Section 259 of
the Delaware Law and Section 1107 of the California Law.
1.3 CONSUMMATION OF THE MERGER. At the Closing (as defined in Section
1.6), the Parties will cause the Merger to be consummated by delivering to the
Secretary of State of the State of Delaware a certificate of merger and by
delivering to the Secretary of State of the State of California an agreement of
merger, together with officer's certificates, each in such form or forms as may
be required by, and executed and acknowledged in accordance with, the relevant
provisions of the Delaware Law and the California Law (such documents being
referred to collectively as the "Merger Documents"), and shall make all other
filings and recordings required by the Delaware Law and the California Law in
connection with the Merger. The Merger shall become effective at the time of
filing of the appropriate Merger Documents with the Secretary of State of the
State of California, or at such later time, which shall be as soon as reasonably
practicable, specified as the effective time in the Merger Documents (the
"Effective Time").
1.4 ARTICLES OF INCORPORATION; BYLAWS; DIRECTORS AND OFFICERS. The
Articles of Incorporation and By-laws of the Surviving Corporation shall be the
Articles of Incorporation and By-laws of the Company as in effect immediately
prior to the Effective Time until thereafter amended as provided under the
California Law. The directors of the Transitory Subsidiary immediately prior to
the Effective Date will be the initial directors
<PAGE> 175
of the Surviving Corporation, and the officers of the Company immediately prior
to the Effective Date will be the initial officers of the Surviving Corporation,
in each case until their successors are elected and qualified.
1.5 CONVERSION OF COMPANY SHARES.
(a) At the Effective Time, by virtue of the Merger and without any
action on the part of the Transitory Subsidiary, the Company, the Surviving
Corporation or the holder of any of the of the following securities:
(i) Subject to Section 1.5(b), (c) and (d), each share of the
Company's common stock, no par value (the "Company Common Stock"),
issued and outstanding immediately prior to the Effective Time (the
"Outstanding Common Stock") (other than shares to be canceled pursuant
to clause (iii) below), shall be canceled and extinguished and be
converted into and become the right to receive .2864 shares of the
common stock, $1.00 par value, of the Buyer (the "Buyer Common Stock").
The fraction of a share of Buyer Common Stock into which a share of
Company Common Stock is to be converted pursuant to the preceding
sentence is referred to herein as the "Common Stock Exchange Ratio."
(ii) Subject to Section 1.5(b), (c) and (d), each share of the
Company's Series A Preferred Stock, no par value ("Series A Stock"),
issued and outstanding immediately prior to the Effective Time (the
"Outstanding Series A Stock") shall be canceled and extinguished and be
converted into the right to receive, at the election of the holder
thereof, either (A) .0411 shares of Buyer Common Stock or (B) $1.74 in
cash pursuant to Section A.4. of Article Four of the Company's Amended
and Restated Articles of Incorporation.
(iii) Each share of the Company's Series B Preferred Stock, no par
value ("Series B Stock"), issued and outstanding immediately prior to
the Effective Time (the "Outstanding Series B Stock") shall be canceled
and extinguished and be converted into the right to receive $12.51 in
cash pursuant to Section A.4. of Article Four of the Company's Amended
and Restated Articles of Incorporation. The Outstanding Common Stock,
Outstanding Series A Stock and Outstanding Series B Stock are sometimes
collectively referred to herein as the "Company Shares."
(iv) Each Company Share that is issued and outstanding immediately
prior to the Effective Time and owned by the Buyer, the Transitory
Subsidiary or the Company or any direct or indirect subsidiary of the
Buyer, the Transitory Subsidiary or the Company, shall be canceled and
retired, and no payment shall be made with respect thereto.
(v) Each share of the Transitory Subsidiary's capital stock issued
and outstanding immediately prior to the Effective Time shall be
converted into and become one validly issued, fully paid and
nonassessable share of the same class of capital stock of the Surviving
Corporation.
(vi) The adoption of this Agreement and the approval of the Merger
by the holders of Company Shares shall constitute their ratification and
approval of all actions taken, and all instruments, documents and
certificate executed, and all amendments to the charter or by-laws of
the Company required, by or on behalf of the Company to give effect to
the Merger and the transactions contemplated hereby.
(b) Post-Closing Adjustment. The number of shares of Buyer Common
Stock issuable in consideration for the Company Shares shall be subject to
adjustment after the Closing Date as follows:
(i) Within 60 days after the Closing Date (as defined in Section
1.6), the Buyer shall prepare and deliver to George D. Holmes, as
representative of the Company Stockholders (as defined in paragraph (ii)
below) (the "Company Stockholder Representative"), a balance sheet
reflecting the net assets of the Company as of the Closing Date (the
"Draft Closing Balance Sheet"). The Buyer shall prepare the Draft
Closing Balance Sheet in accordance with GAAP (as defined in Section 2.6
below). For purposes of this Agreement, "net assets" shall mean total
assets of the Company minus total liabilities of the Company (excluding
any liability to Cowen & Co. under the Engagement
2
<PAGE> 176
Letter dated , 1995 (the "Engagement letter") and excluding
the Bonus Pool Amount (as defined in Section 2.19)).
(ii) The Company Stockholder Representative shall deliver to the
Buyer within 60 days after receiving the Draft Closing Balance Sheet a
detailed statement describing his objections (if any) thereto. Failure
of the Company Stockholder Representative so to object to the Draft
Closing Balance Sheet shall constitute acceptance thereof, whereupon the
Draft Closing Balance Sheet shall be deemed to be the "Closing Balance
Sheet". The Buyer and the Company Stockholder Representative shall use
reasonable efforts to resolve any such objections, but if they do not
reach a final resolution within 30 days after the Buyer has received the
statement of objections, the Buyer and the Company Stockholder
Representative shall select an internationally recognized accounting
firm mutually acceptable to them (the "Neutral Auditors") to resolve any
remaining objections. If the Buyer and the Company Stockholder
Representative are unable to agree on the choice of Neutral Auditors,
they shall select as Neutral Auditors a "big six" accounting firm other
than Arthur Andersen LLP by lot. The Neutral Auditors shall determine
whether the objections raised by the Company Stockholder Representative
are valid. The Draft Closing Balance Sheet shall be adjusted in
accordance with the Neutral Auditor's determination and, as so adjusted,
shall be the Closing Balance Sheet. Such determination by the Neutral
Auditors shall be conclusive and binding upon the Buyer and the
stockholders of the Company as of the Effective Time (the "Company
Stockholders"). The Buyer, on one hand, and the Company Stockholders, on
the other, shall share equally the fees and expenses of the Neutral
Auditors. The Company Stockholders' portion of such fees and expenses
shall be deducted from the Indemnity Escrow Shares (as defined in
Section 1.5(c)), as provided in the Escrow Agreement (as defined in
Section 1.7).
(iii) During the period of any dispute referred to above, the Buyer
shall cooperate fully with the Company Stockholder Representative and
the Company Stockholder Representative's accountants. The Company
Stockholder Representative shall have access to all books and records
and other information of the Company reasonably necessary for the
evaluation of the Draft Closing Balance Sheet; provided, however, that
any such access shall be allowed only in such manner as not to interfere
unreasonably with the operations of the Company.
(iv) If the net tangible assets as shown on the Closing Balance
Sheet are less than $11,651,000, then a number of Indemnity Escrow
Shares (as defined in Section 15(c)) having a fair market value (as
defined in the Escrow Agreement) equal to such shortfall shall be
deducted from the Indemnity Escrow Shares and returned by the Escrow
Agent to the Buyer as provided in the Escrow Agreement, and such shares
shall not be issued in consideration for the Company Shares in the
Merger.
(v) The adoption of this Agreement and the approval of the Merger
by the stockholders of the Company shall constitute approval of the
appointment of the Company Stockholder Representative and ratification
of all actions taken by the Company Stockholder Representative pursuant
to this Section 1.5(b).
(c) Notwithstanding anything to the contrary in Section 1.5(a) or (b),
in no event will or more than shares of Buyer Common Stock be issued
in consideration for the Company Shares (including any Company Shares held
by holders of Dissenting Shares (as defined in Section 1.5(d)). In the
event that the number of shares of Buyer Common Stock issuable in
consideration for the Company Shares (after giving effect to any adjustment
caused by the preceding sentence or Section 1.5(b)), is determined as a
result of the preceding sentence, then the number of shares of Buyer Common
Stock that would be issued to the Company Stockholders but for the
preceding sentence shall be reduced pro rata based upon the number of
shares of Buyer Common Stock that each Company Stockholder would have been
entitled to receive but for the preceding sentence. The shares of Buyer
Common Stock issuable in consideration for the Company Shares (after giving
effect to any adjustment caused by the first sentence of this Section
1.5(c)) (the "Buyer Shares", shall be subject to equitable adjustment in
the event of any stock split, stock dividend, reverse stock split or
similar event affecting the Buyer Common Stock between the date
3
<PAGE> 177
of this Agreement and the Effective Time. At Closing (as defined in Section
1.6 below) (i) ten percent of the Buyer Shares (the "Indemnity Escrow
Shares") and (ii) Buyer Shares (the "FDA Shares" and, together
with the Indemnity Escrow Shares, the "Escrow Shares") shall be withheld
from the payment that Company Stockholders are entitled to receive pursuant
to this Section 1.5, and placed in an escrow account as described in
Section 1.12. Such withholding shall be made pro rata based on the number
of Buyer Shares that each Company Stockholder would have been entitled to
receive but for the creation of such escrow. The shares of Buyer Common
Stock issued at Closing are referred to as the "Closing Shares."
(d) (i) Company Shares held by a holder who, subject to and in
accordance with Section 1300 et seq. of the California Law, has demanded
and perfected his right to an appraisal of his Company Shares and has not
effectively withdrawn or lost his right to such appraisal ("Dissenting
Shares"), shall not be converted into a right to receive Buyer Shares or
cash, as the case may be, and such holder shall be entitled only to such
rights as are granted by Section 1300 et seq. of the California Law. If
after the Effective Time such holder withdraws, with the consent of the
Surviving Corporation, or loses his right to appraisal for his Company
Shares, such Company Shares shall be treated as if they had been converted
as of the Effective Time into the right to receive the Buyer Shares,
issuable in respect of such Company Shares pursuant to Section 1.5.
(ii) The Company shall give the Buyer and the Transitory Subsidiary
prompt notice of any demands for purchase, or notices of intent to
demand purchase, received by the Company with respect to Company Shares,
and the Buyer and the Transitory Subsidiary shall have the right to
control all negotiations and proceedings with respect to such demands.
The Company shall not, except with the prior written consent of the
Buyer and the Transitory Subsidiary or as otherwise required by law,
make any payment with respect to, or settle, or offer to settle, any
such demands.
1.6 THE CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of the Buyer in
Waltham, Massachusetts, commencing at 9:00 a.m. local time on ,
1996, or, if all of the conditions to the obligations of the Parties to
consummate the transactions contemplated hereby have not been satisfied or
waived by such date, on such mutually agreeable later date as soon as
practicable after the satisfaction or waiver of all conditions to the
obligations of the Parties to consummate the transactions contemplated hereby
(the "Closing Date").
1.7 ACTIONS AT THE CLOSING. At the Closing, (a) the Company shall
deliver to the Buyer and the Transitory Subsidiary the various certificates,
instruments and documents referred to in Section 5.2, (b) the Buyer and the
Transitory Subsidiary shall deliver to the Company the various certificates,
instruments and documents referred to in Section 5.3, (c) the Company and the
Transitory Subsidiary shall file the Merger Documents as provided in Section
1.3, and (d) the Buyer, the Company Stockholder Representative and the Escrow
Agent (as defined therein) shall execute and deliver the Indemnification and
Stock Escrow Agreement attached hereto as Exhibit A (the "Escrow Agreement") and
the Buyer shall deliver to the Escrow Agent certificates for the Escrow Shares
being placed in escrow on the Closing Date pursuant to Section 1.12.
1.8 ADDITIONAL ACTION. The Surviving Corporation may, at any time after
the Effective Time, take any action, including executing and delivering any
document, in the name and on behalf of either the Company or the Transitory
Subsidiary, in order to consummate the transactions contemplated by this
Agreement.
1.9 EXCHANGE OF SHARES
(a) Promptly following the Closing Date, Boston Equiserve, L.P., the
Buyer's stock transfer agent (the "Exchange Agent"), shall transmit to each
Company Stockholder a form of letter of transmittal (the "Letter of
Transmittal") and instructions for use in effecting the surrender of each
certificate representing Company Shares (a "Certificate") held by such
Company Stockholder in exchange for the Closing Shares or cash, as the case
may be, represented by such Company Shares. Upon the proper surrender of
such Certificates and a duly executed Letter of Transmittal and any
required tax certifications, in accordance with such instructions, to the
Exchange Agent, the Exchange Agent shall
4
<PAGE> 178
deliver a certificate for the Buyer Shares that such Company Stockholder is
entitled to receive, minus Escrow Shares as provided in Section 1.5(c),
and/or a check for any cash that such Company Stockholder is entitled to
receive. It shall be a condition of such payment and delivery that the
surrendered Certificate be properly endorsed or otherwise in proper form
for transfer and that the person requesting such shall pay any transfer or
other taxes required by reason of such payment or delivery or establish to
the satisfaction of the Exchange Agent, the Buyer and/or the Surviving
Corporation that such tax has been paid or is not applicable. Until so
surrendered for exchange, each Certificate heretofore representing Company
Shares (other than Dissenting Shares) shall, subject to Section 1.12
hereof, be deemed for all purposes to evidence the right to receive Buyer
Shares or cash as described in accordance with Section 1.5 above; provided,
however, that unless and until any such outstanding Certificate is so
surrendered, the holder of such outstanding Certificate shall cease to have
any rights as a stockholder of the Company, except such rights, if any, as
such holder may have with respect to Dissenting Shares and shall not be
entitled to receive any consideration from the Surviving Corporation and/or
the Buyer with respect to the Company Shares represented by such
Certificate. Each Company Stockholder upon surrender of each such
Certificate to the Exchange Agent, shall receive promptly in exchange for
each such Certificate the Buyer Shares and/or cash to which such holder is
entitled pursuant to this Agreement.
(b) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed, the Buyer shall
issue in exchange for such lost, stolen or destroyed Certificate the Buyer
Shares or cash issuable in exchange therefor as provided in Section 1.5.
The Buyer may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
Certificate to give the Buyer a bond in such sum as it may direct as
indemnity against any claim that may be made against the Buyer with respect
to the Certificate alleged to have been lost, stolen or destroyed.
1.10 DIVIDENDS. No dividends or other distributions that are payable to
the holders of record of Buyer Common Stock as of a date on or after the Closing
Date shall be paid to former Company Stockholders entitled by reason of the
Merger to receive Buyer Shares until such holders surrender their Certificates
in accordance with Section 1.9. Upon such surrender, the Buyer shall pay or
deliver to the persons in whose name the certificates representing such Buyer
Shares are issued any dividends or other distributions that are payable to the
holders of record of Buyer Common Stock as of a date on or after the Closing
Date and which were paid or delivered between the Effective Time and the time of
such surrender; provided that no such person shall be entitled to receive any
interest on such dividends or other distributions.
1.11 FRACTIONAL SHARES. No certificates or scrip representing fractional
Buyer Shares shall be issued to former Company Stockholders upon the surrender
for exchange of Certificates, and such former Company Stockholders shall not be
entitled to any voting rights, rights to receive any dividends or distributions
or other rights as a stockholder of the Buyer with respect to any fractional
Buyer Shares that would otherwise be issued to such former Company Stockholders.
In lieu of any fractional Buyer Shares that would otherwise be issued, each
former Company Stockholder that would have been entitled to receive a fractional
Buyer Share shall, upon proper surrender of such person's Certificates, receive
a cash payment equal to the closing price per share of the Buyer Common Stock on
the New York Stock Exchange on the trading day immediately preceding the Closing
Date, multiplied by the fraction of a share that such Company Stockholder would
otherwise be entitled to receive.
1.12 ESCROW.
(a) On the Closing Date, the Buyer shall deliver to the Escrow Agent
certificates (issued in the name of the Escrow Agent or its nominee)
representing the Escrow Shares, as described in Section 1.5(c). The Escrow
Shares shall be held by the Escrow Agent under the Escrow Agreement
pursuant to the terms thereof. The Escrow Shares shall be held as a trust
fund and shall not be subject to any lien, attachment, trustee process or
any other judicial process of any creditor of any party, and shall be held
and disbursed solely for the purposes and in accordance with the terms of
the Escrow Agreement. It is intended that the assets held in escrow as
above provided shall facilitate the ability of the Buyer and
5
<PAGE> 179
the Surviving Corporation to recover amounts to which they are entitled
under this Agreement or the Escrow Agreement as a result of
misrepresentations, breaches of warranties and breaches of covenants
contained in this Agreement and to satisfy claims of the Buyer and the
Surviving Corporation arising as a result of this Agreement or the Escrow
Agreement and to satisfy the Company's obligations under Section 1.5(b)
hereof. Accordingly, and to the extent necessary to provide such protection
to the Buyer and the Surviving Corporation, property held in escrow
thereunder shall be available to satisfy claims of the Buyer and the
Surviving Corporation under this Agreement or the Escrow Agreement to the
extent provided in such agreements.
(b) The adoption of this Agreement and the approval of the Merger by
the Company Stockholders shall constitute approval of the Escrow Agreement
and of all of the arrangements relating thereto, including without
limitation the placement of the Escrow Shares in escrow and the appointment
of the Company Stockholder Representative.
1.13 CLOSING OF TRANSFER BOOKS. At the Effective Time, the stock transfer
books of the Company shall be closed and no transfer of Company Shares shall
thereafter be made. If, after the Effective Time, Certificates are presented to
the Surviving Corporation they shall be canceled and exchanged for Buyer Shares
or cash in accordance with Section 1.5, subject to Section 1.12 and to
applicable law in the case of Dissenting Shares.
1.14 STOCK OPTIONS. At or prior to the Effective Time, Buyer and the
Company shall take all action necessary to cause the assumption by the Buyer as
of the Effective Time of the options to purchase Company Common Stock
outstanding as of the Effective Time (the "Company Options"). Each of the
Company Options shall be converted without any action on the part of the holder
thereof into an option to purchase shares of Buyer Common Stock (the "Buyer
Options") as of the Effective Time. The number of shares of Buyer Common Stock
that each record holder of an option agreement which represents a Company Option
(the "Optionholders") shall be entitled to receive upon the exercise of such
option shall be a number of whole and fractional shares of Buyer Common Stock
determined by multiplying the number of shares of Company Common Stock subject
to such option, determined immediately before the Effective Time, by the Common
Stock Exchange Ratio. The option exercise price of each share of Buyer Common
Stock subject to any Buyer Option shall be the amount (rounded up to the nearest
whole cent) obtained by dividing the exercise price per share of Company Common
Stock at which the assumed Company Option was exercisable immediately before the
Effective Time by the Common Stock Exchange Ratio. The assumption and conversion
of Company Options to Buyer Options as provided herein shall not give the
Optionholders additional benefits which they did not have immediately prior to
the Effective Time, result in any acceleration of any vesting schedule for any
Company Option, other than any acceleration of the vesting schedules pursuant to
the terms of the Company's 1984 Stock Option Plan (as restated through May 1,
1995) (the "Option Plan"), or relieve the Optionholders of any obligations or
restrictions applicable to their options or the shares obtainable upon exercise
of the options. Only whole shares of Buyer Common Stock shall be issued upon
exercise of any Buyer Option and in lieu of receiving any fractional share of
Buyer Common Stock, the holder of such option shall receive in cash the fair
market value of the fractional share, net of the applicable exercise price of
the fractional share and applicable withholding taxes.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Buyer that the statements
contained in this Article II are true and correct, except as set forth in the
disclosure schedule attached hereto as Exhibit B (the "Disclosure Schedule").
The Disclosure Schedule shall be arranged in paragraphs corresponding to the
numbered and lettered paragraphs contained in this Article II, and the
disclosures in any paragraph of the Disclosure Schedule shall qualify only the
corresponding paragraph in this Article II. Each individual representation and
warranty contained herein shall be interpreted and enforced separately and no
representation or warranty contained herein shall be construed as limiting any
other representation and warranty contained herein. The Buyer shall be assumed
to have relied upon the representations and warranties contained herein,
notwithstand-
6
<PAGE> 180
ing any investigation of the Company made by the Buyer prior to the Closing. The
term "ordinary course of business", when used in this Article II, shall mean the
ordinary course of business of the Company consistent with its past custom and
practice (including with respect to frequency and amount).
2.1 ORGANIZATION, QUALIFICATION AND CORPORATE POWER. The Company is a
corporation duly organized, validly existing and in corporate and tax good
standing under the laws of the state of California. The Company is duly
qualified to conduct business and is in corporate and tax good standing under
the laws of each jurisdiction in which the nature of its businesses or the
ownership or leasing of its properties requires such qualification. The Company
has all requisite corporate power and authority to carry on the businesses in
which it is engaged and to own and use the properties owned and used by it. The
Company has furnished to the Buyer true and complete copies of its Articles of
Incorporation and By-laws, each as amended and as in effect on the date hereof.
The Company is not in default under or in violation of any provision of its
Amended and Restated Articles of Incorporation or By-laws or any other
instrument, document or agreement setting forth the terms and conditions of any
shares of capital stock or other securities of the Company, or the rights and
obligations of any holder of such shares or other securities, including, without
limitation, the Securities Purchase Agreement dated as of December 23, 1983
among the Company and the Purchasers named in Exhibits 1 and 2 thereto (the
"Series A Agreement"), and the Series B Preferred Stock Purchase Agreement dated
as of September 28, 1984 among the Company and the Purchasers listed in the
Schedule of Purchasers thereto, as amended (the "Series B Agreement").
2.2 CAPITALIZATION. The authorized capital stock of the Company consists
of (i) 25,000,000 shares of Company Common Stock, of which 1,970,622 shares are
issued and outstanding and (ii) 8,000,000 shares of preferred stock, no par
value, of which (a) 3,820,000 shares have been designated Series A Stock, of
which 3,820,000 shares are issued and outstanding and (b) 1,668,985 shares have
been designated as Series B Stock, of which 1,187,414 shares are issued and
outstanding. The Series A Stock is not convertible into shares of Company Common
Stock except upon the initial public offering of the Company Common Stock. The
shares of Series B Stock issued and outstanding are convertible into an
aggregate of shares of Company Common Stock, representing the
conversion of each share of Series B Stock into shares of Company
Common Stock and the conversion of accrued dividends on the Series B Stock at a
rate of one share of Company Common Stock for each $10.52 of accrued dividends.
The liquidation preferences (including any accumulated but unpaid dividends
through June 28, 1996) for the Series A Stock and the Series B Stock would be
$1.74 and $12.51, respectively, per share. Under the terms of the Series A Stock
and the Series B Stock, the Merger will be considered to be a liquidation of the
Company. Section 2.2 of the Disclosure Schedule sets forth a complete and
accurate list of (i) all stockholders of the Company, indicating the type and
number of shares held by each stockholder, and (ii) all Optionholders and all
holders of outstanding warrants to purchase capital stock of the Company
("Warrants") indicating the type and number of shares subject to each Company
Option and Warrant and the exercise price and vesting status of each Company
Option and Warrant. All of the issued and outstanding shares of Company Common
Stock, Series A Stock and Series B Stock are, and all shares of Company Common
Stock that may be issued upon exercise of Company Options and Warrants or upon
conversion of Series B Stock will be, upon such exercise or conversion, duly
authorized, validly issued, fully paid, nonassessable and free of all preemptive
rights. Each of the Warrants, upon consummation of the Merger, will be
exercisable in accordance with their terms without any action on the part of the
Surviving Corporation or the holder thereof, for that number of shares of Buyer
Common Stock that such holder would have been entitled to receive if he had
exercised such warrant in full immediately prior to the Effective Time. Except
as set forth in Section 2.2 of the Disclosure Schedule, there are no outstanding
or authorized shares of capital stock or other securities or options, warrants,
rights, agreements or commitments to which the Company is a party or which are
binding upon the Company providing for the issuance, disposition or acquisition
of any of its capital stock or other securities. There are no outstanding or
authorized stock appreciation, phantom stock or similar rights with respect to
the Company. There are no agreements, voting trusts, proxies, or understandings
with respect to the voting or registration under the Securities Act of 1933 (the
"Securities Act"), of any shares of any capital stock of Company. All of the
issued and outstanding shares of Company Common Stock, Series A Stock and Series
B Stock and other outstanding securities of the Company were issued in
compliance with applicable federal and state securities laws.
7
<PAGE> 181
2.3 AUTHORIZATION OF TRANSACTION. The Company has all requisite power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder. The execution and delivery of this Agreement and, subject to the
adoption of this Agreement and the approval of the Merger by (a) the holders of
a majority of the shares of Company Common Stock and Series B Stock (as
converted) issued and outstanding and entitled to vote, voting together as a
single class, (b) the holders of 75% of the shares of Series A Stock issued and
outstanding and entitled to vote and (c) the holders of 75% of the shares of the
Series B Stock issued and outstanding and entitled to vote (the "Requisite
Stockholder Approval"), the performance by the Company of this Agreement and the
consummation by the Company of the transactions contemplated hereby have been
duly and validly authorized by all necessary corporate action on the part of the
Company. This Agreement has been duly and validly executed and delivered by the
Company and constitutes a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms. The Board of
Directors of the Company has, after due consideration of its fiduciary duties,
(i) determined that this Agreement and the transactions contemplated hereby,
including the Merger, are fair to and in the best interests of the Company and
the shareholders of the Company, (ii) approved this Agreement and the
transactions contemplated hereby, including the Merger and (iii) resolved to
recommend approval and adoption of this Agreement and the Merger by the
shareholders of the Company.
2.4 NONCONTRAVENTION. Subject to compliance with the applicable
requirements of the Securities Act and any applicable state securities laws, the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"Hart-Scott-Rodino Act"), and the filing of the Merger Documents with the
Secretary of State of the State of California and the Secretary of State of the
State of Delaware, neither the execution and delivery of this Agreement by the
Company, nor the consummation by the Company of the transactions contemplated
hereby, will (a) require on the part of the Company or any corporation with
respect to which the Company, directly or indirectly, has the power to vote or
direct the voting of sufficient securities to elect a majority of the directors
(any of the foregoing being referred to herein as a "Subsidiary") any filing
with, or any permit, authorization, consent or approval of, any court,
arbitrational tribunal, administrative agency or commission or other
governmental or regulatory authority or agency (a "Governmental Entity"), (b)
conflict with or violate any provision of the charter or By-laws of the Company
or any Subsidiary, (c) conflict with, result in a breach of, constitute (with or
without due notice or lapse of time or both) a default under, result in the
acceleration of, create in any party the right to accelerate, terminate, modify
or cancel, or require any notice, consent or waiver under, any contract, lease,
sublease, license, sublicense, franchise, permit, indenture, agreement or
mortgage for borrowed money, instrument of indebtedness, Security Interest (as
defined below) or other arrangement to which the Company or any Subsidiary is a
party or by which the Company or any Subsidiary is bound or to which any of
their assets is subject, (d) result in the imposition of any Security Interest
upon any assets of the Company or any Subsidiary or (e) violate any order, writ,
injunction, decree, statute, Rule or regulation applicable to the Company, any
Subsidiary or any of their properties or assets or (f) entitle any employee of
the Company or any Subsidiary to severance or other payments or to any increase
in compensation or benefits. For purposes of this Agreement, "Security Interest"
means any mortgage, pledge, security interest, encumbrance, charge, or other
lien (whether arising by contract or by operation of law), other than (i)
mechanic's, materialmen's, and similar liens, (ii) liens arising under worker's
compensation, unemployment insurance, social security, retirement, and similar
legislation, and (iii) liens on goods in transit incurred pursuant to
documentary letters of credit, in each case arising in the ordinary course of
business of the Company or any Subsidiary and not material to the Company and
its Subsidiaries taken as a whole. Section 2.4 of the Disclosure Schedule sets
forth a true, correct and complete list of all consents and approvals of
non-governmental third parties that are required in connection with the
consummation by the Company and the Subsidiaries of the transactions
contemplated by this Agreement.
2.5 SUBSIDIARIES. Section 2.5 of the Disclosure Schedule sets forth for
each Subsidiary (a) its name and jurisdiction of incorporation, (b) the number
of shares of authorized capital stock of each class of its capital stock, (c)
the number of issued and outstanding shares of each class of its capital stock,
the names of the holders thereof and the number of shares held by each such
holder, (d) the number of shares of its capital stock held in treasury, and (e)
its directors and officers. Each Subsidiary is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation. Each Subsidiary is duly qualified to conduct business and is in
corporate and tax good standing under the laws of each jurisdiction
8
<PAGE> 182
in which the nature of its businesses or the ownership or leasing of its
properties requires such qualification. Each Subsidiary has all requisite
corporate power and authority to carry on the businesses in which it is engaged
and to own and use the properties owned and used by it. The Company has
delivered to the Buyer correct and complete copies of the charter and By-laws of
each Subsidiary, as amended to date. No Subsidiary is in default under or in
violation of any provision of its charter or By-laws. All of the issued and
outstanding shares of capital stock of each Subsidiary are duly authorized,
validly issued, fully paid, nonassessable and free of preemptive rights. All
shares of each Subsidiary that are held of record or owned beneficially by
either the Company or any Subsidiary are held or owned free and clear of any
restrictions on transfer (other than restrictions under the Securities Act and
state securities laws), claims, Security Interests, options, warrants, rights,
contracts, calls, commitments, equities and demands. There are no outstanding or
authorized options, warrants, rights, agreements or commitments to which the
Company or any Subsidiary is a party or which are binding on any of them
providing for the issuance, disposition or acquisition of any capital stock of
any Subsidiary. There are no outstanding stock appreciation, phantom stock or
similar rights with respect to any Subsidiary. There are no voting trusts,
proxies, or other agreements or understandings with respect to the voting of any
capital stock of any Subsidiary. The Company does not control directly or
indirectly or have any direct or indirect equity participation in any
corporation, partnership, trust, or other business association which is not a
Subsidiary.
2.6 REPORTS AND FINANCIAL STATEMENTS. The Company has provided to the
Buyer (i) the audited consolidated balance sheets and statements of income,
changes in stockholders' equity and cash flows for each of the last three fiscal
years for the Company and the Subsidiaries (or such shorter periods as such
Subsidiaries have been in existence); and (ii) the unaudited consolidated
balance sheet and statements of income, changes in stockholders' equity and cash
flows as of and for the quarter ended as of March 31, 1996 (the "Most Recent
Fiscal Quarter End"). Such financial statements (collectively, the "Financial
Statements") have been prepared in accordance with United States generally
accepted accounting principles ("GAAP") applied on a consistent basis throughout
the periods covered thereby, fairly present the financial condition, results of
operations and cash flows of the Company and the Subsidiaries as of the
respective dates thereof and for the periods referred to therein and are
consistent with the books and records of the Company and the Subsidiaries,
provided, however, that the Financial Statements referred to in clause (ii)
above are subject to normal recurring year-end adjustments (which will not be
material) and do not include footnotes.
2.7 ABSENCE OF CERTAIN CHANGES. Since the Most Recent Fiscal Quarter End,
(a) there has not been any material adverse change in the assets, business,
prospects, financial condition or results of operations of the Company or any
Subsidiary, nor has there occurred any event or development which could
reasonably be foreseen to result in such a material adverse change in the
future, and (b) neither the Company nor any Subsidiary has taken any of the
actions set forth in paragraphs (a) through (p) of Section 4.6.
2.8 UNDISCLOSED LIABILITIES. Neither the Company nor any of its
Subsidiaries has any liability, whether absolute or contingent, liquidated or
unliquidated, accrued and unaccrued and whether due or to become due), except
for (a) liabilities shown on the balance sheet referred to in clause (ii) of
Section 2.6 (the "Most Recent Balance Sheet"), (b) liabilities which have arisen
since the Most Recent Fiscal Quarter End in the ordinary course of business and
which are similar in nature and amount to the liabilities which arose during the
comparable period of time in the immediately preceding fiscal year and (c)
contractual liabilities incurred in the ordinary course of business which are
not required by GAAP to be reflected on a balance sheet.
2.9 TAX MATTERS.
(a) Each of the Company and the Subsidiaries has filed in a timely
manner (including permitted exceptions) all Tax Returns (as defined below)
that it was required to file and all such Tax Returns were correct and
complete in all material respects. Each of the Company and the Subsidiaries
has paid all Taxes (as defined below) that are shown to be due on any such
Tax Returns. The unpaid Taxes of the Company and the Subsidiaries for tax
periods through the date of the Most Recent Balance Sheet do not exceed the
accruals and reserves for Taxes set forth on the Most Recent Balance Sheet.
Neither the Company nor any Subsidiary has any actual or potential
liability for any Tax obligation of any taxpayer (including without
limitation any affiliated group of corporations or other entities that
included the
9
<PAGE> 183
Company or any Subsidiary during a prior period) other than the Company and
the Subsidiaries. All Taxes that the Company or any Subsidiary is or was
required by law to withhold or collect have been duly withheld or collected
and, to the extent required, have been paid to the proper Governmental
Entity. There are no liens for taxes on the assets of the Company or any
Subsidiary. For purposes of this Agreement, "Taxes" means all taxes,
charges, fees, levies or other similar assessments or liabilities,
including without limitation income, gross receipts, ad valorem, premium,
value-added, excise, real property, personal property, sales, use,
transfer, withholding, employment, payroll and franchise taxes imposed by
the United States of America or any state, local or foreign government, or
any agency thereof, or other political subdivision of the United States or
any such government, and any interest, fines, penalties, assessments or
additions to tax resulting from, attributable to or incurred in connection
with any tax or any contest or dispute thereof. For purposes of this
Agreement, "Tax Returns" means all reports, returns, declarations,
statements or other information required to be supplied to a taxing
authority in connection with Taxes.
(b) The Company has delivered to the Buyer correct and complete copies
of all federal income Tax Returns, examination reports and statements of
deficiencies assessed against or agreed to by any of the Company or any
Subsidiary since January 1, 1989. The federal income Tax Returns of the
Company have been audited by the Internal Revenue Service or are closed by
the applicable statute of limitations for all taxable years through .
No examination or audit of any Tax Returns of the Company or any Subsidiary
by any Governmental Entity is currently in progress or, to the knowledge of
the Company and the Subsidiaries, threatened or contemplated. Neither the
Company nor any Subsidiary has waived any statute of limitations with
respect to taxes or agreed to an extension of time with respect to a tax
assessment or deficiency.
(c) Neither the Company nor any Subsidiary is a "consenting
corporation" within the meaning of Section 341(f) of the Internal Revenue
Code of 1986 (the "Code") and none of the assets of the Company nor the
Subsidiaries are subject to an election under Section 341(f) of the Code.
Neither the Company nor any Subsidiary has been a United States real
property holding corporation within the meaning of Section 897(c)(2) of the
Code during the applicable period specified in Section 897(c)(l)(A)(ii) of
the Code. Neither the Company nor any Subsidiary is a party to any Tax
allocation or sharing agreement.
(d) Neither the Company nor any Subsidiary is or has ever been a
member of an "affiliated group" of corporations (within the meaning of
Section 1504 of the Code), other than a group of which only the Company and
the Subsidiaries are members. Neither the Company nor any Subsidiary has
made an election under Treasury Reg. Section 1.1502-20(g). Neither the
Company nor any Subsidiary is or has been required to make a basis
reduction pursuant to Treasury Reg. Section 1.1502-20(b) or Treasury Reg.
Section 1.337(d)-2T(b).
(e) All material elections with respect to Taxes as of the date hereof
are set forth in Section 2.9 of the Disclosure Schedule. None of the assets
of the Company nor any Subsidiary is property that the Company or any
Subsidiary is required to treat as being owned by any other person pursuant
to the "safe harbor lease" provisions of former Section 168(f)(8) of the
Code. None of the assets of the Company nor any Subsidiary directly or
indirectly secures any debt the interest on which is tax exempt under
Section 103(a) of the Code. None of the assets of the Company nor any
Subsidiary is "tax exempt use property" within the meaning of Section
168(h) of the Code. Neither the Company nor any Subsidiary has agreed to
make or is required to make any adjustment under Section 481 of the Code by
reason of a change in accounting method or otherwise. Neither the Company
nor any Subsidiary has participated in an international boycott within the
meaning of Section 999 of the Code. Neither the Company nor any Subsidiary
has or has had a permanent establishment in any foreign country, as defined
in any applicable treaty or convention between the United States and such
foreign country. Neither the Company nor any Subsidiary is a party to any
joint venture, partnership or other arrangement or contract that could be
treated as a partnership for federal income tax purposes.
10
<PAGE> 184
2.10 ASSETS. Each of the Company and the Subsidiaries owns or leases all
tangible assets necessary for the conduct of its businesses as presently
conducted and as presently proposed to be conducted. Each such tangible asset is
free from material defects, has been maintained in accordance with normal
industry practice, is in good operating condition and repair (subject to normal
wear and tear) and is suitable for the purposes for which it presently is used.
No asset of the Company (tangible or intangible) is subject to any Security
Interest.
2.11 OWNED REAL PROPERTY. None of the Company nor any Subsidiary owns any
real property.
2.12 INTELLECTUAL PROPERTY.
(a) Each of the Company and the Subsidiaries owns, or is licensed or
otherwise possesses legally enforceable rights to use, all Intellectual
Property (as defined below) that is used to conduct its business as
currently conducted or planned to be conducted. For purposes of this
Agreement, the term "Intellectual Property" means all (i) patents, patent
applications, patent disclosures and all related continuation,
continuation-in-part, divisional, reissue, reexamination, utility, model,
certificate of invention and design patents, patent applications,
registrations and applications for registrations, (ii) trademarks, service
marks, trade dress, logos, trade names and corporate names and
registrations and applications for registration thereof, (iii) copyrights
and registrations and applications for registration thereof, (iv) mask
works and registrations and applications for registration thereof, (v)
computer software, data and documentation, (vi) trade secrets and
confidential business information, whether patentable or unpatentable and
whether or not reduced to practice, know-how, manufacturing and production
processes and techniques, research and development information,
copyrightable works, financial, marketing and business data, pricing and
cost information, business and marketing plans and customer and supplier
lists and information, (vii) other proprietary rights relating to any of
the foregoing and (viii) copies and tangible embodiments thereof. Section
2.12 of the Disclosure Schedule lists (i) all patents and patent
applications and all trademarks, registered copyrights, trade names and
service marks which are used in the business of the Company or the
Subsidiaries, including the jurisdictions in which each such Intellectual
Property right has been issued or registered or in which any such
application for such issuance or registration has been filed, (ii) all
material written licenses, sublicenses and other agreements to which the
Company or a Subsidiary is a party and pursuant to which any person is
authorized to use any Intellectual Property rights, and (iii) all material
written licenses, sublicenses and other agreements as to which the Company
or a Subsidiary is a party and pursuant to which the Company or a
Subsidiary is authorized to use any third party patents, trademarks or
copyrights, including software ("Third Party Intellectual Property Rights")
which are used in the business of the Company or any Subsidiary or which
form a part of any product or service of the Company or any Subsidiary. The
Company has made available to the Buyer correct and complete copies of all
such patents, registrations, applications, licenses and agreements (as
amended to date) and related documentation. Except pursuant to the
Contracts listed on Section 2.14 of the Disclosure Schedule and except
pursuant to the licenses listed on Section 2.12 of the Disclosure Schedule,
neither the Company nor any Subsidiary has agreed to indemnify any person
or entity for or against any infringement, misappropriation or other
conflict with respect to any item of Intellectual Property that the Company
or any Subsidiary owns or uses. Neither the Company nor any Subsidiary is a
party to any oral license, sublicense or agreement which, if reduced to
written form, would be required to be listed in Section 2.12 of the
Disclosure Schedule under the terms of this Section 2.12(a).
(b) Neither the Company nor any of the Subsidiaries is, nor will any
of them be as a result of the execution and delivery of this Agreement or
the performance of the Company's obligations under this Agreement, in
breach of any license, sublicense or other agreement relating to the
Intellectual Property or Third Party Intellectual Property Rights.
(c) Neither the Company nor any of the Subsidiaries has been named in
any suit, action or proceeding which involves a claim of infringement of
any Intellectual Property right of any third party. The manufacturing,
marketing, licensing or sale of the products or performance of the service
offerings of the Company and the Subsidiaries do not infringe any
Intellectual Property right of any third party; and
11
<PAGE> 185
to the knowledge of the Company and the Subsidiaries, the Intellectual
Property rights of the Company and the Subsidiaries are not being infringed
by activities, products or services of any third party.
2.13 REAL PROPERTY LEASES. Section 2.13 of the Disclosure Schedule lists
and describes briefly all real property leased or subleased to the Company or
any Subsidiary and lists the term of such lease or sublease, any extension and
expansion options, and the rent payable thereunder. The Company has delivered to
the Buyer correct and complete copies of the leases and subleases (as amended to
date) listed in Section 2.13 of the Disclosure Schedule. With respect to each
lease and sublease listed in Section 2.13 of the Disclosure Schedule:
(a) the lease or sublease is legal, valid, binding, enforceable and in
full force and effect;
(b) the lease or sublease will continue to be legal, valid, binding,
enforceable and in full force and effect immediately following the Closing
in accordance with the terms thereof as in effect prior to the Closing;
(c) no party to the lease or sublease is in breach or default, and no
event has occurred which, with notice or lapse of time, would constitute a
breach or default or permit termination, modification, or acceleration
thereunder;
(d) there are no disputes, oral agreements or forbearance programs in
effect as to the lease or sublease;
(e) neither the Company nor any Subsidiary has assigned, transferred,
conveyed, mortgaged, deeded in trust or encumbered any interest in the
leasehold or subleasehold;
(f) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said
facilities;
(g) to the knowledge of the Company, the owner of the facility leased
or subleased has good and clear record and marketable title to the parcel
of real property, free and clear of any Security Interest, easement,
covenant or other restriction, except for recorded easements, covenants,
and other restrictions which do not impair the intended use, occupancy or
value of the property subject thereto; and
(h) the Company and the Subsidiaries have obtained non-disturbance
agreements from the holder of each superior Security Interest and ground
lease in connection with each such lease or sublease (each of which is
listed in Section 2.13 of the Disclosure Schedule); and the representations
and warranties set forth in clauses (a) through (d) of this Section 2.13
with respect to leases and subleases are true and correct with respect to
such nondisturbance agreements.
2.14 CONTRACTS. Section 2.14 of the Disclosure Schedule lists the
following written arrangements to which the Company or any Subsidiary is a
party:
(a) any written arrangement pursuant to which any party is indemnified
for or against any liability under Environmental Laws (as defined in
Section 2.21 below);
(b) any written arrangement (or group of related written arrangements)
for the lease of personal property from or to third parties providing for
lease payments in excess of $50,000 per annum;
(c) any written arrangement (or group of related written arrangements)
for the purchase or sale of raw materials, commodities, supplies, products
or other personal property or for the furnishing or receipt of services (i)
which calls for performance over a period of more than one year, (ii) which
involves more than the sum of $50,000, or (iii) in which the Company or any
Subsidiary has granted manufacturing rights, "most favored nation" pricing
provisions or marketing or distribution rights relating to any products or
territory or has agreed to purchase a minimum quantity of goods or services
or has agreed to purchase goods or services exclusively from a certain
party;
(d) any written arrangement establishing a partnership or joint
venture;
12
<PAGE> 186
(e) any written arrangement (or group of related written arrangements)
under which it has created, incurred, assumed, or guaranteed (or may
create, incur, assume, or guarantee) indebtedness (including capitalized
lease obligations) involving more than $50,000 or under which it has
imposed (or may impose) a Security Interest on any of its assets, tangible
or intangible;
(f) any written arrangement concerning confidentiality or
noncompetition;
(g) any written arrangement involving any stockholder of the Company
or their affiliates, as defined in Rule 12b-2 under the Securities Exchange
Act of 1934 (as amended, the "Exchange Act") ("Affiliates");
(h) any written arrangement under which the consequences of a default
or termination could have a material adverse effect on the assets,
business, financial condition, results of operations or future prospects of
the Company and the Subsidiaries taken as a whole; and
(i) any other written arrangement (or group of related written
arrangements) either involving more than $50,000 or not entered into in the
Ordinary Course of Business.
The Company has delivered to the Buyer a correct and complete copy of each
written arrangement (as amended to date) listed in Section 2.14 of the
Disclosure Schedule. With respect to each written arrangement so listed: (i) the
written arrangement is legal, valid, binding and enforceable and in full force
and effect; (ii) the written arrangement will continue to be legal, valid,
binding and enforceable and in full force and effect immediately following the
Closing in accordance with the terms thereof as in effect prior to the Closing;
and (iii) no party is in material breach or default, and no event has occurred
which with notice or lapse of time would constitute a material breach or default
or permit termination, modification, or acceleration, under the written
arrangement. Neither the Company nor any Subsidiary is a party to any oral
contract, agreement or other arrangement which, if reduced to written form,
would be required to be listed in Section 2.14 of the Disclosure Schedule under
the terms of this Section 2.14.
2.15 ACCOUNTS RECEIVABLE. All accounts receivable of the Company and the
Subsidiaries reflected on the Most Recent Balance Sheet (except for those that
have been collected since the Most Recent Fiscal Quarter End) are valid
receivables subject to no setoffs or counterclaims and are current and
collectible (within 90 days after the date on which it first became due and
payable), net of the applicable reserve for bad debts on the Most Recent Balance
Sheet. All accounts receivable reflected in the financial or accounting records
of the Company that have arisen since the Most Recent Fiscal Quarter End (except
for those that have been collected since the Most Recent Fiscal Quarter End) are
valid receivables subject to no setoffs or counterclaims and are collectible,
net of a reserve for bad debts in an amount proportionate to the reserve shown
on the Most Recent Balance Sheet.
2.16 POWERS OF ATTORNEY. There are no outstanding powers of attorney
executed on behalf of the Company or any Subsidiary.
2.17 INSURANCE. Section 2.17 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including fire,
theft, casualty, general liability, workers compensation, business interruption,
environmental, product liability and automobile insurance policies and bond and
surety arrangements) to which the Company or any Subsidiary has been a party, a
named insured, or otherwise the beneficiary of coverage at any time within the
past five years:
(a) the name of the insurer, the name of the policyholder and the name
of each covered insured;
(b) the policy number and the period of coverage;
(c) the scope (including an indication of whether the coverage was on
a claims made, occurrence, or other basis) and amount (including a
description of how deductibles and ceilings are calculated and operate) of
coverage; and
(d) a description of any retroactive premium adjustments or other
loss-sharing arrangements.
13
<PAGE> 187
Each such insurance policy (i) is enforceable and in full force and effect;
and (ii) will continue to be enforceable and in full force and effect
immediately following the Closing in accordance with the terms thereof as in
effect prior to the Closing. Neither the Company nor any Subsidiary (A) is in
breach or default (including with respect to the payment of premiums or the
giving of notices) under such policy, and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default or permit
termination, modification or acceleration, under such policy; (B) has received
any notice from the insurer disclaiming coverage or reserving rights with
respect to a particular claim or such policy in general; or (C) has incurred any
loss, damage, expense or liability covered by any such insurance policy for
which it has not properly asserted a claim under such policy. Each of the
Company and the Subsidiaries is covered by insurance in scope and amount
customary and reasonable for the businesses in which it is engaged.
2.18 LITIGATION. Section 2.18 of the Disclosure Schedule identifies, and
contains a brief description of, (a) any unsatisfied judgment, order, decree,
stipulation or injunction and (b) any claim, complaint, action, suit,
proceeding, hearing or investigation of or in any Governmental Entity or before
any arbitrator to which the Company or any Subsidiary is a party or, to the
knowledge of the Company and the Subsidiaries, is threatened to be made a party
or which would otherwise have an adverse impact on the business or assets of the
Company. None of the complaints, actions, suits, proceedings, hearings, and
investigations set forth in Section 2.18 of the Disclosure Schedule could have a
material adverse effect on the assets, business, financial condition, results of
operations or future prospects of the Company and the Subsidiaries taken as a
whole.
2.19 EMPLOYEES. Section 2.19 of the Disclosure Schedule contains a list
of all employees of the Company and each Subsidiary, indicating, with respect to
each such employee, his or her position, annual rate of compensation, bonus for
the last fiscal year of the Company, method for calculating bonus for the
current fiscal year and any other arrangement under which cash compensation is
payable by the Company. Each such employee has entered into a
confidentiality/assignment of inventions agreement with the Company or a
Subsidiary, a copy of which has previously been delivered to the Buyer. To the
knowledge of the Company and its Subsidiaries, no employee has any plans to
terminate employment with the Company or any Subsidiary. Neither the Company nor
any Subsidiary is a party to or bound by any collective bargaining agreement,
nor has any of them experienced any strikes, grievances, claims of unfair labor
practices or other collective bargaining disputes. The Company and the
Subsidiaries have no knowledge of any organizational effort made or threatened,
either currently or within the past two years, by or on behalf of any labor
union with respect to employees of the Company or any Subsidiary. Under the
bonus pool adopted by the Board of Directors of the Company at a meeting held
October , 1995, the Company will be obligated to pay to certain of its
employees an aggregate of not more than $8.3 million (the "Bonus Pool Amount")
upon consummation of the Merger.
2.20 EMPLOYEE BENEFITS.
(a) Section 2.20(a) of the Disclosure Schedule contains a complete and
accurate list of all Employee Benefit Plans (as defined below) maintained,
or contributed to, by the Company, any Subsidiary, or any ERISA Affiliate
(as defined below). For purposes of this Agreement, "Employee Benefit Plan"
means any "employee pension benefit plan" (as defined in Section 3(2) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA")),
any "employee welfare benefit plan" (as defined in Section 3(1) of ERISA),
and any other written or oral plan, agreement or arrangement involving
direct or indirect compensation, including without limitation insurance
coverage, severance benefits, disability benefits, deferred compensation,
bonuses, stock options, stock purchase, phantom stock, stock appreciation
or other forms of incentive compensation or post-retirement compensation.
For purposes of this Agreement, "ERISA Affiliate" means any entity which is
a member of (i) a controlled group of corporations (as defined in Section
414(b) of the Code), (ii) a group of trades or businesses under common
control (as defined in Section 414(c) of the Code), or (iii) an affiliated
service group (as defined under Section 414(m) of the Code or the
regulations under Section 414(o) of the Code), any of which includes the
Company or a Subsidiary. Complete and accurate copies of (i) all Employee
Benefit Plans which have been reduced to writing, (ii) written summaries of
all unwritten Employee Benefit Plans, (iii) all related trust agreements,
insurance contracts and summary plan descriptions, and (iv) all annual
reports filed on IRS Form 5500, 5500C or 5500R for the last five plan
14
<PAGE> 188
years for each Employee Benefit Plan, have been delivered to the Buyer.
Each Employee Benefit Plan has been administered in all material respects
in accordance with its terms and each of the Company, the Subsidiaries and
the ERISA Affiliates has in all material respects met its obligations with
respect to such Employee Benefit Plan and has made all required
contributions thereto. The Company and all Employee Benefit Plans are in
compliance in all material respects with the currently applicable
provisions of ERISA and the Code and the regulations thereunder.
(b) There are no investigations by any Governmental Entity,
termination proceedings or other claims (except claims for benefits payable
in the normal operation of the Employee Benefit Plans and proceedings with
respect to qualified domestic relations orders), suits or proceedings
against or involving any Employee Benefit Plan or asserting any rights or
claims to benefits under any Employee Benefit Plan that could give rise to
any material liability.
(c) All the Employee Benefit Plans that are intended to be qualified
under Section 401(a) of the Code have received determination letters from
the Internal Revenue Service to the effect that such Employee Benefit Plans
are qualified and the plans and the trusts related thereto are exempt from
federal income taxes under Sections 401(a) and 501(a), respectively, of the
Code, no such determination letter has been revoked and revocation has not
been threatened, and no such Employee Benefit Plan has been amended since
the date of its most recent determination letter or application therefor in
any respect, and no act or omission has occurred, that would adversely
affect its qualification or materially increase its cost.
(d) Neither the Company, any Subsidiary, nor any ERISA Affiliate has
ever maintained an Employee Benefit Plan subject to Section 412 of the Code
or Title IV of ERISA.
(e) At no time has the Company, any Subsidiary or any ERISA Affiliate
been obligated to contribute to any "multi-employer plan" (as defined in
Section 4001(a)(3) of ERISA).
(f) There are no unfunded obligations under any Employee Benefit Plan
providing benefits after termination of employment to any employee of the
Company or any Subsidiary (or to any beneficiary of any such employee),
including but not limited to retiree health coverage and deferred
compensation, but excluding continuation of health coverage required to be
continued under Section 4980B of the Code and insurance conversion
privileges under state law.
(g) No act or omission has occurred and no condition exists with
respect to any Employee Benefit Plan maintained by the Company, any
Subsidiary or any ERISA Affiliate that would subject the Company, any
Subsidiary or any ERISA Affiliate to any material fine, penalty, tax or
liability of any kind imposed under ERISA or the Code.
(h) No Employee Benefit Plan is funded by, associated with, or related
to a "voluntary employee's beneficiary association" within the meaning of
Section 501(c)(9) of the Code.
(i) No Employee Benefit Plan, plan documentation or agreement, summary
plan description or other written communication distributed generally to
employees by its terms prohibits the Company from amending or terminating
any such Employee Benefit Plan.
(j) Section 2.20(j) of the Disclosure Schedule discloses each: (i)
agreement with any director, executive officer or other key employee of the
Company or any Subsidiary (A) the benefits of which are contingent, or the
terms of which are materially altered, upon the occurrence of a transaction
involving the Company or any Subsidiary of the nature of any of the
transactions contemplated by this Agreement, (B) providing any term of
employment or compensation guarantee or (C) providing severance benefits or
other benefits after the termination of employment of such director,
executive officer or key employee; (ii) agreement, plan or arrangement
under which any person may receive payments from the Company or any
Subsidiary that may be subject to the tax imposed by Section 4999 of the
Code or included in the determination of such person's "parachute payment"
under Section 280G of the Code; and (iii) agreement or plan binding the
Company or any Subsidiary, including without limitation any stock option
plan, stock appreciation right plan, restricted stock plan, stock purchase
plan, severance benefit
15
<PAGE> 189
plan, or any Employee Benefit Plan, any of the benefits of which will be
increased, or the vesting of the benefits of which will be accelerated, by
the occurrence of any of the transactions contemplated by this Agreement or
the value of any of the benefits of which will be calculated on the basis
of any of the transactions contemplated by this Agreement.
2.21 ENVIRONMENTAL MATTERS.
(a) Each of the Company and the Subsidiaries has complied with all
Environmental Laws (as defined below) applicable to their business
operations. For purposes of this Agreement, "Environmental Law" means any
federal, state or local law, statute, Rule or regulation or the common law
relating to the environment or occupational health and safety, including
without limitation any statute, regulation or order pertaining to (i)
treatment, storage, disposal, generation and transportation of Materials of
Environmental Concern (as defined below); (ii) air, water and noise
pollution; (iii) groundwater and soil contamination; (iv) the release or
threatened release into the environment of Materials of Environmental
Concern, including without limitation emissions, discharges, injections,
spills, escapes or dumping of pollutants, contaminants or chemicals; (v)
the protection of wild life, marine sanctuaries and wetlands, including
without limitation all endangered and threatened species; (vi) storage
tanks, vessels and containers; (vii) underground and other storage tanks or
vessels, abandoned, disposed or discarded barrels, containers and other
closed receptacles; (viii) health and safety of employees and other
persons; and (ix) manufacture, processing, use, distribution, treatment,
storage, disposal, transportation or handling of Materials of Environmental
Concern. As used above, the terms "release" and "environment" shall have
the meaning set forth in the federal Comprehensive Environmental
Compensation, Liability and Response Act of 1980, as amended ("CERCLA").
(b) There have been no releases of any Materials of Environmental
Concern into the environment at any parcel of real property or any facility
formerly or currently owned or leased by the Company or a Subsidiary. There
has been no release of Materials of Environmental Concern for which
liability can be imposed on the Company or the Subsidiary under any
Environmental Law. For purposes of this Agreement, "Materials of
Environmental Concern" means any chemicals, pollutants or contaminants,
hazardous substances (as such term is defined under CERCLA), solid wastes
and hazardous wastes (as such terms are defined under the federal Resource
Conservation and Recovery Act), toxic materials, industrial materials, oil
or petroleum and petroleum products, or any other material subject to
regulation under any Environmental Law.
(c) There is no pending or, to the knowledge of the Company and the
Subsidiaries, threatened civil or criminal litigation, written notice of
violation or noncompliance, formal administrative or judicial proceeding,
claim, cause of action, liability, investigation, citation, order, consent
order, consent decree, inquiry or information request by any Governmental
Entity, involving the Company or any Subsidiary relating to any of the
following: (i) violation of any Environmental Law; (ii) violation of any
permit, license or registration issued under any Environmental Law; (iii)
the disposal, discharge or release of Materials of Environmental Concern,
whether or not in compliance with Environmental Laws; (iv) the generation,
storage, treatment, transportation, reclamation, recycling or other
handling of Materials of Environmental Concern, whether or not in
compliance with Environmental Laws; (v) the ownership, operation or use of
any landfill, surface impoundment, pit, pond, lagoon, underground injection
well, waste pile, land treatment unit, wastewater treatment plant, air
pollution control equipment, or any other unit used for the storage,
disposal, handling or treatment of Materials of Environmental Concern; (vi)
the exacerbation of previously existing environmental contamination; or
(vii) exposure to any Materials of Environmental Concern, noises, odors, or
vibrations at or from any real property or facility formerly or currently
owned or leased by the Company or a Subsidiary. Without limiting the
foregoing, none of the Company nor any Subsidiary has been named a
"potentially responsible party" under any Environmental Law or has received
any correspondence or notice that it may be named a "potentially
responsible party."
(d) The Company and the Subsidiaries possess all permits, licenses
and/or registrations required under Environmental Laws for their business
operations, and all such permits, licenses and/or registrations are valid
and in full force and effect. Set forth in Section 2.21(d) of the
Disclosure Schedule is a list
16
<PAGE> 190
of all violations by the Company and its Subsidiaries of any terms,
conditions or requirements of such permits, licenses and/or registrations
since the date of incorporation of the Company.
(e) Set forth in Section 2.21(e) of the Disclosure Schedule is a list
of all environmental, health and safety reports, investigations, audits,
assessments, surveys and analyses, relating to premises currently or
previously owned or occupied by the Company or a Subsidiary which the
Company has possession of or access to. Complete and accurate copies of
each such report, or the results of each such investigation have been
provided to the Buyer.
(f) To the knowledge of the Company and its Subsidiaries, all
entities, including without limitation transporters, treatment, storage and
disposal facilities, and remediation companies, used by the Company or a
Subsidiary, for the transportation, storage, disposal, treatment or other
handling of Materials of Environmental Concern possess all permits,
licenses and registrations required under Environmental Laws. None of the
Company or any of its Subsidiaries have or will have any liability as a
result of any act or omission by any of such entities. To the knowledge of
the Company, there is no previous, pending or threatened civil or criminal
litigation, written notice of violation or noncompliance, formal
administrative or judicial proceeding, investigation, citation, order,
consent order, consent decree, inquiry or information request by any
Governmental Entity, relating to such entities for any violations of
Environmental Laws.
2.22 LEGAL COMPLIANCE.
(a) Each of the Company and the Subsidiaries, and the conduct and
operation of their respective businesses, are in compliance in all material
respects with all laws (including rules and regulations thereunder) of any
federal, state, local or foreign government, or any Governmental Entity,
which are applicable to the Company or such Subsidiary or business, and
none of the Company or any Subsidiaries has received any notice from any
Governmental Entity that it is in violation of, or has violated any such
laws (including rules and regulations thereunder).
(b) For purposes of this Section 2.22(b), the "Products" shall mean
all products manufactured or sold at any time by the Company. The Company,
and each Product in current commercial distribution, is currently duly
registered (in case of the Company) and listed (in case of each such
Product) with the U.S. Food and Drug Administration ("FDA") under section
360 of the Federal Food, Drug and Cosmetic Act, 21 U.S.C. 301 et seq. (the
"FDC Act") and the applicable rules and regulations thereunder. Each
Product in current commercial distribution is a Class II medical device as
defined under 21 U.S.C. 360c (a)(1)(B) and the applicable rules and
regulations thereunder and was first marketed in its present form and
design prior to May 28, 1976 or is covered by a premarket notification
submission to the FDA in compliance with 21 U.S.C. 360(k) and the
applicable rules and regulations thereunder. The Company is currently in
compliance with, and each Product in current commercial distribution is
manufactured, prepared, assembled and processed in compliance with, the
Good Manufacturing Practices for Medical Devices set forth in 21 C.F.R.
part 820. The Company is in compliance with the recordkeeping and FDA
reporting requirements for Medical Devices Reporting set forth in 21 C.F.R.
Part 803. The premises of the Company and its records relating to the
Products were most recently inspected by the FDA on , 19 , and
a true and complete copy of the report of such inspection has been
furnished to Buyer. The Company has corrected all deficiencies noted
therein and has implemented all recommendations made therein. Since
, 19 , the FDA has not inspected such premises and records.
The Company is not subject to any enforcement proceedings by the FDA and no
proceedings have been threatened. The Company has not introduced in
commercial distribution during the period of six calendar years immediately
preceding the date hereof any Products which were upon their shipment by
the Company adulterated or misbranded in violation of 21 U.S.C. 331. The
Company has not recalled any Product since January 1, 1991 and, to the best
knowledge of the Company, there is no basis for any such recall.
2.23 PERMITS. Section 2.23 of the Disclosure Schedule sets forth a list
of all permits, licenses, registrations, certificates, orders or approvals from
any Governmental Entity (including without limitation those issued or required
under Environmental Laws and those relating to the occupancy or use of owned or
leased real property) ("Permits") issued to or held by the Company or any
Subsidiary. Such listed Permits
17
<PAGE> 191
are the only Permits that are required for the Company and the Subsidiaries to
conduct their respective businesses as presently conducted or as proposed to be
conducted, except for those the absence of which would not have any material
adverse effect on the assets, business, financial condition, results of
operations or future prospects of the Company and the Subsidiaries taken as a
whole. Each such Permit is in full force and effect and, to the best of the
knowledge of the Company or any Subsidiary, no suspension or cancellation of
such Permit is threatened and there is no basis for believing that such Permit
will not be renewable upon expiration. Each such Permit will continue in full
force and effect following the Closing.
2.24 CERTAIN BUSINESS RELATIONSHIPS WITH AFFILIATES. No Affiliate of the
Company or of any Subsidiary (a) owns any property or right, tangible or
intangible, which is used in the business of the Company or any Subsidiary, (b)
has any claim or cause of action against the Company or any Subsidiary, or (c)
owes any money to, or is owed by money by, the Company or any Subsidiary.
Section 2.24 of the Disclosure Schedule describes any transactions or
relationships between the Company and any Affiliate thereof which are reflected
in the statements of operations of the Company included in the Financial
Statements.
2.25 BROKERS' FEES. Neither the Company nor any Subsidiary has any
liability or obligation to pay any fees or commissions to any broker, finder or
agent with respect to the transactions contemplated by this Agreement except
that the Company is obligated to pay Cowen & Co. the fees described in Section
2.25 of the Disclosure Schedule. Except for such fees, the Company shall have no
liability to Cowen & Co. under the Engagement Letter or otherwise arising out of
the transactions contemplated hereby or thereby.
2.26 BOOKS AND RECORDS. The minute books and other similar records of the
Company and each Subsidiary contain true and complete records of all actions
taken at any meetings of the Company's or such Subsidiary's stockholders, Board
of Directors or any committee thereof and of all written consents executed in
lieu of the holding of any such meeting. The books and records of the Company
and each Subsidiary accurately reflect in all material respects the assets,
liabilities, business, financial condition and results of operations of the
Company or such Subsidiary and have been maintained in accordance with good
business and bookkeeping practices.
2.27 CUSTOMERS AND SUPPLIERS. No material purchase order or commitment of
the Company or any Subsidiary is in excess of normal requirements, nor are
prices provided therein in excess of current market prices for the products or
services to be provided thereunder. No material supplier of the Company or any
Subsidiary has indicated within the past year that it will stop, or decrease the
rate of, supplying materials, products or services to them and no material
customer of the Company or any Subsidiary has indicated within the past year
that it will stop, or decrease the rate of, buying, leasing or licensing
materials, products or services from them. Section 2.27 of the Disclosure
Schedule sets forth a list of (a) each customer that accounted for more than 5%
of the consolidated revenues of the Company during the last full fiscal year or
the interim period through the Most Recent Fiscal Quarter End and the amount of
revenues accounted for by such customer during each such period and (b) each
supplier that is the sole supplier of any significant product or component to
the Company or a Subsidiary.
18
<PAGE> 192
2.28 BANKING FACILITIES.
(a) Section 2.28 of the Disclosure Schedule sets forth a true, correct
and complete list of: (i) each bank, savings and loan or similar financial
institution at which the Company or any Subsidiary has an account, safety
deposit box, line of credit or credit facility and the numbers of the
accounts or safety deposit boxes maintained by the Company or any
Subsidiary thereat and details, including terms, of any line of credit or
credit facility; and (ii) the names of all persons authorized to draw on
each such account or to have access to any such safety deposit box
facility, together with a description of the authority (and conditions
thereof, if any) of each such person with respect thereto.
(b) All of the outstanding indebtedness (secured or unsecured) for
borrowed money of the Company may be prepaid without the consent or
approval of, or prior notice to, any other person, and without payment of
any premium or penalty.
2.29 SURETYSHIPS. Except as set forth in Section 2.29 of the Disclosure
Schedule, none of the Company or any Subsidiary has any obligation or liability
(whether actual, accrued, accruing, contingent or otherwise) as guarantor,
surety, co-signer, endorser, co-maker, indemnitor or otherwise in respect of the
obligation of any person, corporation, partnership, joint venture, association,
organization or other entity, except as endorser or maker of checks or letters
of credit, respectively, endorsed or made in the ordinary course of business.
2.30 BACKLOG. The Company's backlog of binding purchase orders as of
April 30, 1996 was at least $ .
2.31 GOVERNMENT CONTRACTS. The Company has not been suspended or debarred
from bidding on contracts or subcontracts with any Governmental Entity; no such
suspension or debarment has been initiated or, to the Company's knowledge,
threatened; and the consummation of the transactions contemplated by this
Agreement will not result in any such suspension or debarment. The Company has
not been audited or investigated and is not now being audited or investigated by
the U.S. Government Accounting Office, the U.S. Department of Defense or any of
its agencies, the Defense Contract Audit Agency, the U.S. Department of Justice,
the Inspector General of any U.S. Governmental Entity, any similar agencies or
instrumentalities of any foreign Governmental Entity, or any price contractor
with a Governmental Entity nor, to the Company's knowledge, has any such audit
or investigation been threatened. To the Company's knowledge, there is no valid
basis for (a) the suspension or debarment of the Company from bidding on
contracts or subcontracts with any Governmental Entity or (b) any claim pursuant
to an audit or investigation by any of the entities named in the foregoing
sentence. The Company has no agreements, contracts or commitments which require
it to obtain or maintain a security clearance with any Governmental Entity.
2.32 REGISTRATION STATEMENT; PROXY STATEMENT.
(a) None of the information supplied or to be supplied by the Company
for inclusion or incorporation by reference in (i) the Registration
Statement on Form S-4 to be filed with the Securities and Exchange
Commission (the "Commission") by the Buyer in connection with the
submission of this Agreement to the Company's stockholders and the issuance
of Buyer Shares in the Merger (together with any amendments or supplements
thereto, the "Registration Statement") or (ii) the proxy statement relating
to the meeting of the Company's shareholders (the "Shareholder Meeting") to
be held in connection with the Merger (the "Proxy Statement" and, together
with the prospectus contained in the Registration Statement, the "Proxy
Statement/Prospectus") will, at the respective times filed with the
Commission and, in addition (A) in the case of the Proxy
Statement/Prospectus, at the date it or any amendments or supplements
thereto are mailed to stockholders, at the time of the Shareholder Meeting
and at the Effective Time, and (B) in the case of the Registration
Statement, when it becomes effective under the Securities Act and the
Effective Time, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which
they are made, not misleading. The Proxy Statement will comply as to form
in all material respects with the applicable provisions of the Exchange Act
and the rules and regulations thereunder. If at any time prior to the
Effective Time any event relating to the
19
<PAGE> 193
Company or any of its respective Affiliates, officers or directors should
be discovered by the Company which should be set forth in an amendment to
the Registration Statement or a supplement to the Proxy
Statement/Prospectus, the Company shall promptly inform the Buyer.
Notwithstanding the foregoing, the Company makes no representation or
warranty with respect to any information supplied by the Buyer or the
Transitory Subsidiary which is contained in any of the foregoing documents.
(b) The Company has not taken any action that constitutes an "offer",
"offer to sell, "offer for sale" or "sale" of Buyer Shares within the
meaning of Rule 145 under the Securities Act.
2.33 CONTINUITY OF INTEREST. To the best of the Company's knowledge,
there is no plan or intention on the part of the Company Stockholders to sell,
exchange or otherwise dispose of a number of Buyer Shares received in the Merger
that would reduce the Company Stockholders' ownership of Buyer Common Stock to a
number of shares having a value, as of the Effective Time, of less than fifty
(50%) percent of the value of all of the Company Shares as of the Effective
Time. For purposes of this representation, Company Shares surrendered by
dissenters or exchanged for cash or in lieu of fractional shares of Buyer Common
Stock will be treated as outstanding Company Shares at the Effective Time.
Moreover, shares of Buyer Common Stock held by the Company Stockholders and
otherwise sold, redeemed, or disposed of prior or subsequent to the Merger will
be considered in making this representation. The Company has caused each person
who it identified as an Affiliate to deliver to Buyer and each Affiliate has,
concurrently with the signing of this Agreement, signed an affiliate agreement
in the form attached hereto as Exhibit C (an "Affiliate Agreement") providing,
among other things, that such person has no plan or intention and will not sell,
pledge, transfer or otherwise dispose of Buyer Shares or in any way reduce their
risk relative to any such shares, until such time as financial results covering
at least 30 days of combined operations of the Buyer and the Company have been
published within the meaning of Section 201.01 of the Codification of Financial
Reporting Policies and the Commission and except in compliance with the
applicable provisions of the Securities Act, and the rules and regulations
thereunder.
2.34 POOLING ACCOUNTING. The Company and the Company Stockholders have
taken no actions that would prevent the Buyer from accounting for the Merger as
a pooling-of-interests for accounting purposes.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE BUYER
AND THE TRANSITORY SUBSIDIARY
Each of the Buyer and the Transitory Subsidiary represents and warrants to
the Company as follows:
3.1 ORGANIZATION. Each of the Buyer and the Transitory Subsidiary is
a corporation duly organized, validly existing and in good standing under
the laws of the state of its incorporation.
3.2 CAPITALIZATION. The authorized capital stock of the Buyer
consists of 350,000,000 shares of Buyer Common Stock, of which 136,074,091
shares were issued and outstanding and 83,791 shares were held in the
treasury of the Buyer as of March 30, 1996 (after giving effect to a
three-for-two stock split effected June 5, 1996), and 50,000 shares of
preferred stock, $1.00 par value, of which 40,000 shares have been
designated Series B Junior Participating Preferred Stock, none of which are
issued and outstanding. All of the issued and outstanding shares of Buyer
Common Stock are duly authorized, validly issued, fully paid, nonassessable
and free of all preemptive rights. All of the Buyer Shares will be, when
issued in accordance with this Agreement, duly authorized, validly issued,
fully paid, nonassessable and free of all preemptive rights.
3.3 AUTHORIZATION OF TRANSACTION. Each of the Buyer and the
Transitory Subsidiary has all requisite power and authority to execute and
deliver this Agreement and (in the case of the Buyer) the Escrow Agreement
and to perform its obligations hereunder and thereunder. The execution and
delivery of this Agreement and (in the case of the Buyer) the Escrow
Agreement by the Buyer and the Transitory Subsidiary, the performance of
this Agreement and (in the case of the Buyer) the Escrow Agreement and the
consummation of the transactions contemplated hereby and thereby by the
Buyer and the Transitory Subsidiary have been duly and validly authorized
by all necessary corporate action on the part
20
<PAGE> 194
of the Buyer and the Transitory Subsidiary. This Agreement has been duly
and validly executed and delivered by the Buyer and the Transitory
Subsidiary and constitutes a valid and binding obligation of the Buyer and
the Transitory Subsidiary, enforceable against them in accordance with its
terms.
3.4 NONCONTRAVENTION. Subject to compliance with the applicable
requirements of the Securities Act and any applicable state securities
laws, the Hart-Scott-Rodino Act and the filing of the Merger Documents with
the Secretary of State of the State of California and the Secretary of
State of the State of Delaware, neither the execution and delivery of this
Agreement or (in the case of the Buyer) the Escrow Agreement by the Buyer
or the Transitory Subsidiary, nor the consummation by the Buyer or the
Transitory Subsidiary of the transactions contemplated hereby or thereby,
will (a) conflict or violate any provision of the charter or By-laws of the
Buyer or the Transitory Subsidiary, (b) require on the part of the Buyer or
the Transitory Subsidiary any filing with, or permit, authorization,
consent or approval of, any Governmental Entity, (c) conflict with, result
in breach of, constitute (with or without due notice or lapse of time or
both) a default under, result in the acceleration of, create in any party
any right to accelerate, terminate, modify or cancel, or require any
notice, consent or waiver under, any contract, lease, sublease, license,
sublicense, franchise, permit, indenture, agreement or mortgage for
borrowed money, instrument of indebtedness, Security Interest or other
arrangement to which the Buyer or the Transitory Subsidiary is a party or
by which either is bound or to which any of their assets are subject, or
(d) violate any order, writ, injunction, decree, statute, Rule or
regulation applicable to the Buyer or the Transitory Subsidiary or any of
their properties or assets.
3.5 REPORTS AND FINANCIAL STATEMENTS. The Buyer has previously
furnished to the Company complete and accurate copies, as amended or
supplemented, of (a) its Annual Report on Form 10-K for the fiscal year
ended December 30, 1995 as filed with the Commission, and (b) all other
reports filed by the Buyer under Section 13 of the Securities Exchange Act
of 1934 (the "Exchange Act") with the Commission since December 30, 1995
(such reports are collectively referred to herein as the "Buyer Reports").
The Buyer Reports constitute all of the documents required to be filed by
the Buyer under Section 13 of the Exchange Act with the Commission since
December 30, 1995. As of their respective dates, the Buyer Reports did not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The audited financial statements and unaudited interim
financial statements of the Buyer included in the Buyer Reports (i) comply
as to form in all material respects with applicable accounting requirements
and the published rules and regulations of the Commission with respect
thereto, (ii) have been prepared in accordance with GAAP applied on a
consistent basis throughout the periods covered thereby (except as may be
indicated therein or in the notes thereto, and in the case of quarterly
financial statements, as permitted by Form 10-Q under the Exchange Act),
(iii) fairly present the consolidated financial condition, results of
operations and cash flows of the Buyer as of the respective dates thereof
and for the periods referred to therein, and (iv) are consistent with the
books and records of the Buyer.
3.6 BROKERS' FEES. Neither the Buyer nor the Transitory Subsidiary
has any liability or obligation to pay any fees or commissions to any
broker, finder or agent with respect to the transactions contemplated by
this Agreement.
3.7 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS. Subject to
the accuracy of the representations of the Company in Section 2.32(a), the
Registration Statement shall not, at the time it is declared effective by
the Commission and at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements including therein, in
light of the circumstances under which they were made, not misleading.
Subject to the accuracy of the representations of the Company in Section
2.32(a), the Proxy Statement/Prospectus will not, at the date it or any
amendments or supplements thereto are mailed to stockholders, at the time
of the Shareholder Meeting and at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading. If at
any time prior to the Effective Time any event relating to the Buyer, the
Transitory
21
<PAGE> 195
Subsidiary or any of their respective Affiliates, officers or directors
should be discovered by the Buyer or the Transitory Subsidiary which should
be set forth in an amendment to the Registration Statement or a supplement
to the Proxy Statement/Prospectus, the Buyer or the Transitory Subsidiary
will promptly inform the Company. Notwithstanding the foregoing, the Buyer
makes no representation or warranty with respect to any information
supplied by the Company which is contained in, or furnished in connection
with the preparation of, the Registration Statement or the Proxy
Statement/Prospectus.
ARTICLE IV
COVENANTS
4.1 BEST EFFORTS. Each of the Parties shall use its best efforts, to the
extent commercially reasonable, to take all actions and to do all things
necessary, proper or advisable to consummate the transactions contemplated by
this Agreement; provided, however, that notwithstanding anything in this
Agreement to the contrary, the Buyer shall not be required to sell or dispose of
or hold separately (through a trust or otherwise) any assets or businesses of
the Buyer or its Affiliates.
4.2 NOTICES AND CONSENTS. The Company shall use its best efforts to
obtain, at its expense, all such waivers, permits, consents, approvals or other
authorizations from third parties and Governmental Entities, and to effect all
such registrations, filings and notices with or to third parties and
Governmental Entities, as may be required by or with respect to the Company in
connection with the transactions contemplated by this Agreement (including
without limitation those listed in Section 2.4 of the Disclosure Schedule).
4.3 PREPARATION OF REGISTRATION STATEMENT. The Company and the Buyer
shall cooperate to prepare and file the Registration Statement as soon as
practicable after the execution hereof. The Company and the Buyer shall use
their respective best efforts to respond promptly to any comments of the
Commission with respect to the Registration Statement and to cause the
Registration Statement to become effective as promptly as practicable.
4.4 DISTRIBUTION OF PROXY STATEMENT/PROSPECTUS; SHAREHOLDERS'
APPROVAL. The Company shall take all action necessary in accordance with
applicable law to convene the Shareholder Meeting at the earliest possible time
after the Registration Statement is declared effective for the purpose of
approving the Merger (taking into account the timeframe resulting from
incorporation by reference of the Buyer's Exchange Act filings into the
Registration Statement). The Company shall submit the Proxy Statement/Prospectus
to its shareholders, and its Board of Directors shall recommend to the
shareholders, and continue to recommend until the completion of the Shareholder
Meeting, the adoption of this Agreement and the approval of the Merger. The
Company shall use all reasonable efforts to solicit proxies from its
shareholders and otherwise to obtain all votes and approvals of the shareholders
necessary for the approval and adoption of the Merger under California Law and
its Articles of Incorporation and By-laws.
4.5 HART-SCOTT-RODINO ACT. Each of the Parties has filed the Notification
and Report Forms and related material required to be filed with the Federal
Trade Commission and the Antitrust Division of the United States Department of
Justice under the Hart-Scott-Rodino Act, and each shall use its best efforts to
obtain an early termination of the applicable waiting period, and shall make any
further filings or information submissions pursuant thereto that may be
necessary, proper or advisable; provided, however, that the Buyer shall not be
obligated to respond to formal requests for additional information or
documentary material pursuant to 16 C.F.R. 803.20 under the Hart-Scott-Rodino
Act except to the extent it elects to do so in its sole discretion.
4.6 TAX-FREE TREATMENT. None of the Parties shall take any action,
directly or indirectly, that would prevent the Merger from qualifying as a
tax-free reorganization under Section 368(a) of the Code.
4.7 OPERATION OF BUSINESS. Except as contemplated by this Agreement,
during the period from the date of this Agreement to the Effective Time, the
Company shall (and shall cause each Subsidiary to) conduct its operations in the
ordinary course of business and in compliance with all applicable laws and
regulations and, to the extent consistent therewith, use all reasonable efforts
to preserve intact its current business organization, keep its physical assets
in good working condition, keep available the services of its
22
<PAGE> 196
current officers and employees and preserve its relationships with customers,
suppliers and others having business dealings with it to the end that its
goodwill and ongoing business shall not be impaired in any material respect.
Without limiting the generality of the foregoing, prior to the Effective Time or
termination of this Agreement pursuant to Section 7.1 hereof, neither the
Company nor any Subsidiary shall, without the written consent of the Buyer:
(a) issue, sell, deliver or agree or commit to issue, sell or deliver
(whether through the issuance or granting of options, warrants,
commitments, subscriptions, rights to purchase or otherwise) or authorize
the issuance, sale or delivery of, or redeem or repurchase, any stock of
any class or any other securities or any rights, warrants or options to
acquire any such stock or other securities (except pursuant to the
conversion or exercise of Series B Stock, Company Options or Warrants
outstanding on the date hereof in accordance with their terms), or amend
any of the terms of any such stock, securities, rights, warrants or
options;
(b) split, combine or reclassify any shares of its capital stock; or
declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock;
(c) create, incur or assume any debt not currently outstanding
(including obligations in respect of capital leases) except in the ordinary
course of business; assume, guarantee, endorse or otherwise become liable
or responsible (whether directly, contingently or otherwise) for the
obligations of any other person or entity; or make any loans, advances or
capital contributions to, or investments in, any other person or entity;
(d) enter into, adopt or amend any Employee Benefit Plan or any
employment or severance agreement or arrangement of the type described in
Section 2.20(j) or (except for normal increases in the ordinary course of
business) increase in any manner the compensation or fringe benefits of, or
modify the employment terms of, its directors, officers or employees,
generally or individually, or pay any benefit not required by the terms in
effect on the date hereof of any existing Employee Benefit Plan;
(e) acquire, sell, lease, encumber or dispose of any assets or
property (including without limitation any shares or other equity interests
in or securities of any Subsidiary or any corporation, partnership,
association or other business organization or division thereof), other than
purchases and sales of assets in the ordinary course of business;
(f) amend its charter or By-laws;
(g) change in any material respect its accounting methods, principles
or practices, except insofar as may be required by a generally applicable
change in GAAP;
(h) discharge or satisfy any Security Interest or pay any obligation
or liability other than in the ordinary course of business;
(i) mortgage or pledge any of its property or assets or subject any
such assets to any Security Interest other than in the ordinary course of
business;
(j) sell, assign, transfer or license any Intellectual Property, other
than in the ordinary course of business;
(k) enter into any material contract or, amend, terminate, take or
omit to take any action that would constitute a violation of or default
under, or waive any rights under, any contract or agreement listed in
Section 2.14 of the Disclosure Schedule;
(l) make or commit to make any capital expenditure in excess of
$25,000 per item;
(m) make any tax election or, except in the ordinary course of
business, settle or compromise any federal, state, local or foreign tax
liability;
23
<PAGE> 197
(n) take any action, directly or indirectly, that would prevent the
Buyer from accounting for the Merger and other transactions contemplated by
this Agreement as a pooling-of-interests for accounting purposes.
(o) take any action or fail to take any action permitted by this
Agreement with the knowledge that such action or failure to take action
would result in (i) any of the representations and warranties of the
Company set forth in this Agreement becoming untrue or (ii) any of the
conditions to the Merger set forth in Article V not being satisfied; or
(p) agree in writing or otherwise to take any of the foregoing
actions.
4.8 FULL ACCESS. The Company shall (and shall cause each Subsidiary to)
permit representatives of the Buyer to have full access (at all reasonable
times, and in a manner so as not to interfere with the normal business
operations of the Company and the Subsidiaries) to all premises, properties,
financial and accounting records, contracts, other records and documents, and
personnel, of or pertaining to the Company and each Subsidiary.
4.9 NOTICE OF BREACHES. The Company shall promptly deliver to the Buyer
written notice of any event or development that would (a) render any statement,
representation or warranty of the Company in this Agreement (including the
Disclosure Schedule) inaccurate or incomplete in any material respect, or (b)
constitute or result in a breach by the Company of, or a failure by the Company
to comply with, any agreement or covenant in this Agreement applicable to such
party. The Buyer or the Transitory Subsidiary shall promptly deliver to the
Company written notice of any event or development that would (i) render any
statement, representation or warranty of the Buyer or the Transitory Subsidiary
in this Agreement inaccurate or incomplete in any material respect, or (ii)
constitute or result in a breach by the Buyer or the Transitory Subsidiary of,
or a failure by the Buyer or the Transitory Subsidiary to comply with, any
agreement or covenant in this Agreement applicable to such party. No such
disclosure shall be deemed to avoid or cure any such misrepresentation or
breach.
4.10 EXCLUSIVITY. The Company shall not, and the Company shall use its
best efforts to cause its Affiliates and each of its officers, directors,
employees, representatives and agents not to, directly or indirectly, (a)
encourage, solicit, initiate, engage or participate in discussions or
negotiations with any person or entity (other than the Buyer) concerning any
merger, consolidation, sale of material assets, tender offer, recapitalization,
accumulation of Company shares of the Company's capital stock, proxy
solicitation or other business combination involving the Company, any Subsidiary
or any division of the Company or any Subsidiary or (b) provide any non-public
information concerning the business, properties or assets of the Company or any
Subsidiary to any person or entity (other than the Buyer).
ARTICLE V
CONDITIONS TO CONSUMMATION OF MERGER
5.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of
each Party to consummate the Merger are subject to the satisfaction of the
following conditions:
(a) this Agreement and the Merger shall have received the Requisite
Stockholder Approval;
(b) all applicable waiting periods (and any extensions thereof) under
the Hart-Scott-Rodino Act shall have expired or otherwise been terminated;
(c) no action, suit or proceeding shall be pending or threatened by or
before any Governmental Entity wherein an unfavorable judgment, order,
decree, stipulation or injunction would (i) prevent consummation of any of
the transactions contemplated by this Agreement, (ii) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation or (iii) affect adversely the right of the Buyer to own,
operate or control any of the assets and operations of the Surviving
Corporation and the Subsidiaries following the Merger, and no such
judgment, order, decree, stipulation or injunction shall be in effect;
24
<PAGE> 198
(d) the Registration Statement shall have become effective and no stop
order suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall have been initiated
or threatened by the Commission; and
(e) the Buyer Shares shall have been authorized for listing on the New
York Stock Exchange subject to official notice of issuance.
5.2 CONDITIONS TO OBLIGATIONS OF THE BUYER AND THE TRANSITORY
SUBSIDIARY. The obligation of each of the Buyer and the Transitory Subsidiary
to consummate the Merger is subject to the satisfaction of the following
additional conditions:
(a) the holders of at least ninety-five percent (95%) of the
outstanding shares of each of the Company Common Stock, Series A Stock and
Series B Stock shall have voted in favor of the Merger;
(b) the Company and the Subsidiaries shall have obtained all of the
waivers, permits, consents, approvals or other authorizations, and effected
all of the registrations, filings and notices, referred to in Section 4.2;
(c) the representations and warranties of the Company set forth in
Article II shall be true and correct when made on the date hereof and shall
be true and correct as of the Effective Time as if made as of the Effective
Time, except for representations and warranties made as of a specific date,
which shall be true and correct as of such date;
(d) the Company shall have performed or complied with its agreements
and covenants required to be performed or complied with under this
Agreement as of or prior to the Effective Time;
(e) the Company shall have delivered to the Buyer and the Transitory
Subsidiary a certificate (without qualification as to knowledge or
materiality or otherwise) to the effect that each of the conditions
specified in clauses (a) through (d) of this Section 5.2 is satisfied in
all respects;
(f) the Buyer and the Transitory Subsidiary shall have received from
Riordan & McKinzie, counsel to the Company, an opinion dated as of the
Closing Date in the form set forth in Exhibit D attached hereto (including
without limitation an opinion to the effect that when the Merger is
consummated in accordance with the terms of this Agreement, the Merger
should be treated for Federal income tax purposes as a tax-free
reorganization within the meaning of Section 368(a) of the Code, in the
form attached hereto as Exhibit E (the "Tax Opinion"));
(g) the Buyer and the Transitory Subsidiary shall have received the
resignations, effective as of the Effective Time, of each director and
officer of the Company and the Subsidiaries specified by the Buyer in
writing at least five business days prior to the Closing;
(h) all agreements between the Company and the Company Stockholders
(other than employment agreements and stock option agreements), including,
without limitation, the Series A Agreement and the Series B Agreement,
shall have been terminated prior or shall terminate effective upon the
Effective Time with the effect that the Company shall have no further
obligation or liability thereunder;
(i) all the terms, covenants and conditions of the Affiliate
Agreements to be complied with and performed by the Company or any
shareholder, officer or director of the Company as of or before the
Effective Time shall have been complied with and performed in all material
respects;
(j) all Warrants contingently issuable to the customers of the Company
shall have been canceled and terminated with the consent of the holders
thereof;
(k) 95% of the shares of Series B Stock issued and outstanding at the
record date for the Shareholder Meeting shall have been converted into
Company Common Stock prior to the Effective Time; and
(l) all actions to be taken by the Company in connection with the
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments and other documents required to effect the
25
<PAGE> 199
transactions contemplated hereby shall be reasonably satisfactory in form
and substance to the Buyer and the Transitory Subsidiary.
5.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligation of the
Company to consummate the Merger is subject to the satisfaction of the following
additional conditions:
(a) the representations and warranties of the Buyer and the Transitory
Subsidiary set forth in Article III shall be true and correct when made on
the date hereof and shall be true and correct as of the Effective Time as
if made as of the Effective Time, except for representations and warranties
made as of a specific date, which shall be true and correct as of such
date;
(b) each of the Buyer and the Transitory Subsidiary shall have
performed or complied with its agreements and covenants required to be
performed or complied with under this Agreement as of or prior to the
Effective Time;
(c) each of the Buyer and the Transitory Subsidiary shall have
delivered to the Company a certificate (without qualification as to
knowledge or materiality or otherwise) to the effect that each of the
conditions specified in clauses (a) and (b) of this Section 5.3 is
satisfied in all respects;
(d) the Company shall have received from the Buyer's general counsel,
an opinion dated as of the Closing Date in the form attached hereto as
Exhibit F;
(e) the Company shall have received the Tax Opinion from Riordan &
McKinzie; and
(f) all actions to be taken by the Buyer and the Transitory Subsidiary
in connection with the consummation of the transactions contemplated hereby
and all certificates, opinions, instruments and other documents required to
effect the transactions contemplated hereby shall be reasonably
satisfactory in form and substance to the Company.
ARTICLE VI
INDEMNIFICATION
6.1 BY THE BUYER. If the Closing occurs, the Buyer hereby agrees to
indemnify and hold harmless the Company from and against all claims, damages,
losses, diminution of value, liabilities, costs and expenses (including, without
limitation, settlement costs and any legal, accounting, consulting and other
fees or expenses for investigating or defending any actions or threatened
actions) whether or not involving a third-party claim (collectively, the
"Damages") arising out of or related to each and all of the following:
(a) any misrepresentation or breach of any representation or warranty
made by the Buyer in this Agreement or in any statement, certificate or
schedule furnished by the Buyer pursuant to this Agreement; and
(b) any breach of any covenant, agreement or obligation of the Buyer
contained in this Agreement or any other agreement, instrument or document
contemplated by this Agreement.
6.2 LIMITATION ON DAMAGES. The right of the Company to be indemnified
pursuant to Section 6.1 (a) shall not apply until the sum of the Damages
suffered by the Company on a cumulative basis equals or exceeds $250,000, and at
which point the Buyer shall become liable for all Damages, not just amounts in
excess of $250,000, and (ii) shall be only for claims that are asserted by the
Company before the first anniversary of the Closing Date. In no event shall the
Buyer's liability hereunder exceed an amount equal to (i) the aggregate number
of Indemnity Escrow Shares multiplied by (ii) the fair market value of such
Indemnity Escrow Shares (as determined in accordance with the Escrow Agreement).
Notwithstanding the foregoing, this Section 6.2 shall not apply in the event the
Buyer has actual knowledge of a breach of a representation or warranty.
26
<PAGE> 200
ARTICLE VII
TERMINATION
7.1 TERMINATION OF AGREEMENT. The Parties may terminate this Agreement
prior to the Effective Time (whether before or after Requisite Stockholder
Approval) as provided below:
(a) the Parties may terminate this Agreement by mutual written
consent;
(b) the Buyer may terminate this Agreement by giving written notice to
the Company in the event the Company is in breach, and the Company may
terminate this Agreement by giving written notice to the Buyer and the
Transitory Subsidiary in the event the Buyer or the Transitory Subsidiary
is in breach, of any material representation, warranty or covenant
contained in this Agreement, and such breach is not remedied within 10 days
of delivery of written notice thereof;
(c) any Party may terminate this Agreement by giving written notice to
the other Parties at any time after the Company Stockholders have voted on
whether to approve this Agreement and the Merger in the event this
Agreement and the Merger fail to receive the Requisite Stockholder
Approval;
(d) any Party may terminate this Agreement if (i) there shall be an
order of a court in effect to prevent consummation of this Agreement or
(ii) there shall be any action taken, or any statute, rule, regulation or
order enacted, promulgated, issued or deemed applicable to this Agreement
or the transactions contemplated hereby, by any Governmental Entity that
would make the consummation of this Agreement illegal;
(e) the Buyer may terminate this Agreement by giving written notice to
the Company if the Closing shall not have occurred on or before June 28,
1996 by reason of the failure of any condition precedent under Section 5.1
or 5.2 hereof (unless the failure results from a breach by the Buyer or the
Transitory Subsidiary of any representation, warranty or covenant contained
in this Agreement); or
(f) the Company may terminate this Agreement by giving written notice
to the Buyer and the Transitory Subsidiary if the Closing shall not have
occurred on or before June 28, 1996 by reason of the failure of any
condition precedent under Section 5.1 or 5.3 hereof (unless the failure
results from a breach by the Company of any representation, warranty or
covenant contained in this Agreement).
7.2 EFFECT OF TERMINATION. If any Party terminates this Agreement
pursuant to Section 7.1, all obligations of the Parties hereunder shall
terminate without any liability of any Party to any other Party (except for any
liability of any Party for breaches of this Agreement).
ARTICLE VIII
DEFINITIONS
For purposes of this Agreement, each of the following defined terms is
defined in the Section of this Agreement indicated below.
<TABLE>
<CAPTION>
DEFINED TERM SECTION
--------------------------------------------------------------- -------------
<S> <C>
Affiliate...................................................... 2.14(g)
Affiliate Agreement............................................ 2.33
Bonus Pool Amount.............................................. 2.19
Buyer.......................................................... Introduction
Buyer Common Stock............................................. 1.5(a)
Buyer Options.................................................. 1.14
Buyer Reports.................................................. 3.5
Buyer Shares................................................... 1.5(a)
California Law................................................. 1.1
</TABLE>
27
<PAGE> 201
<TABLE>
<CAPTION>
DEFINED TERM SECTION
--------------------------------------------------------------- -------------
<S> <C>
CERCLA......................................................... 2.21(a)
Certificates................................................... 1.9(a)
Closing........................................................ 1.6
Closing Balance Sheet.......................................... 1.5(b)
Closing Date................................................... 1.6
Closing Shares................................................. 1.5(b)
Code........................................................... 2.9(c)
Commission..................................................... 2.32(a)
Common Stock Exchange Ratio.................................... 1.5(a)
Company........................................................ Introduction
Company Common Stock........................................... 1.5(a)
Company Options................................................ 1.14
Company Shares................................................. 1.5(a)
Company Stockholder............................................ 1.5(b)
Company Stockholder Representative............................. 1.5(b)
Damages........................................................ 6.1
Delaware Law................................................... 1.1
Disclosure Schedule............................................ Article II
Dissenting Shares.............................................. 1.5(d)
Draft Closing Balance Sheet.................................... 1.5(b)
Effective Time................................................. 1.3
Employee Benefit Plan.......................................... 2.20(a)
Engagement Letter.............................................. 1.5(b)
Environmental Law.............................................. 2.21(a)
ERISA.......................................................... 2.20(a)
ERISA Affiliate................................................ 2.20(a)
Escrow Agreement............................................... 1.7
Escrow Agent................................................... 1.7
Escrow Shares.................................................. 1.5(c)
Exchange Act................................................... 3.5
Exchange Agent................................................. 1.9
FDA............................................................ 2.22(b)
FDA Shares..................................................... 1.5(c)
FDC Act........................................................ 2.22(b)
Financial Statements........................................... 2.6
GAAP........................................................... 2.6
Governmental Entity............................................ 2.4
Hart-Scott-Rodino Act.......................................... 2.4
Indemnified Party.............................................. 6.3(a)
Indemnifying Party............................................. 6.3(a)
Indemnity Escrow Shares........................................ 1.5(c)
Intellectual Property.......................................... 2.12(a)
Letter of Transmittal.......................................... 1.9(a)
Materials of Environmental Concern............................. 2.21(b)
Merger......................................................... 1.1
Merger Documents............................................... 1.3
</TABLE>
28
<PAGE> 202
<TABLE>
<CAPTION>
DEFINED TERM SECTION
--------------------------------------------------------------- -------------
<S> <C>
Most Recent Balance Sheet...................................... 2.8
Most Recent Fiscal Quarter End................................. 2.6
Neutral Auditors............................................... 1.5(b)
Option Plan.................................................... 1.14
OptionHolders.................................................. 1.14
Ordinary Course of Business.................................... Article II
Outstanding Common Stock....................................... 1.5(a)
Outstanding Series A Stock..................................... 1.5(a)
Outstanding Series B Stock..................................... 1.5(a)
Party.......................................................... Introduction
Permit......................................................... 2.23
Products....................................................... 2.22(b)
Proxy Statement................................................ 2.32(a)
Proxy Statement/Prospectus..................................... 2.32(a)
Registration Statement......................................... 2.32(a)
Requisite Stockholder Approval................................. 2.3
Securities Act................................................. 2.2
Security Interest.............................................. 2.4
Series A Agreement............................................. 2.1
Series A Stock................................................. 1.5(a)
Series B Agreement............................................. 2.1
Series B Stock................................................. 2.2
Shareholder Meeting............................................ 2.32(a)
Subsidiary..................................................... 2.4
Surviving Corporation.......................................... 1.1
Taxes.......................................................... 2.9(a)
Tax Returns.................................................... 2.9(a)
Third Party Intellectual Property Rights....................... 2.12(a)
Transitory Subsidiary.......................................... Introduction
Warrants....................................................... 2.2
</TABLE>
ARTICLE IX
MISCELLANEOUS
9.1 PRESS RELEASES AND ANNOUNCEMENTS. No Party shall issue any press
release or public disclosure relating to the subject matter of this Agreement
without the prior approval of the other Parties, which shall not unreasonably be
withheld; provided, however, that any Party may make any public disclosure it
believes in good faith is required by law, regulation or stock exchange Rule (in
which case the disclosing Party shall advise the other Parties and provide them
with a copy of the proposed disclosure prior to making the disclosure).
9.2 NO THIRD PARTY BENEFICIARIES. This Agreement shall not confer any
rights or remedies upon any person other than the Parties and their respective
successors and permitted assigns; provided, however, that the provisions in
Article I concerning issuance of the Buyer Shares are intended for the benefit
of the Company Stockholders.
9.3 ENTIRE AGREEMENT. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, with respect to the subject matter hereof.
29
<PAGE> 203
9.4 SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other Parties; provided that the Transitory Subsidiary may assign its
rights, interests and obligations hereunder to an Affiliate of the Buyer.
9.5 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
9.6 HEADINGS. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.7 NOTICES. All notices, requests, demands, claims, and other
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly delivered two
business days after it is sent by registered or certified mail, return receipt
requested, postage prepaid, or one business day after it is sent via a reputable
nationwide overnight courier service, in each case to the intended recipient as
set forth below:
<TABLE>
<S> <C>
If to the Company: Copy to:
SensorMedics Corporation Riordan & McKinzie
22705 Savi Ranch Parkway California Plaza
Yorba Linda, CA 92687 380 South Grand Avenue
Attention: President Los Angeles, CA 90071
Attention: Janis Salin, Esq.
If to the Buyer or the Transitory Subsidiary:
Thermo Electron Corporation
81 Wyman Street
Waltham, MA 02254
Attention: General Counsel
</TABLE>
Any Party may give any notice, request, demand, claim, or other
communication hereunder using any other means (including personal delivery,
expedited courier, messenger service, telecopy, telex, ordinary mail, or
electronic mail), but no such notice, request, demand, claim, or other
communication shall be deemed to have been duly given unless and until it
actually is received by the party for whom it is intended. Any Party may change
the address to which notices, requests, demands, claims, and other
communications hereunder are to be delivered by giving the other Parties notice
in the manner herein set forth.
9.8 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the internal laws (and not the law of conflicts) of the
Commonwealth of Massachusetts.
9.9 AMENDMENTS AND WAIVERS. The Parties may mutually amend any provision
of this Agreement at any time prior to the Effective Time; provided, however,
that any amendment effected subsequent to the Requisite Stockholder Approval
shall be subject to the restrictions contained in the California Law. No
amendment of any provision of this Agreement shall be valid unless the same
shall be in writing and signed by all of the Parties. No waiver by any Party of
any default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
9.10 SEVERABILITY. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction. If the final judgment of a court of
competent jurisdiction declares that any term or provision hereof is invalid or
unenforceable, the Parties agree that the court making the determination of
invalidity or unenforceability shall have the power to reduce the scope,
duration, or area of the term or provision, to delete specific words or phrases,
or to replace any invalid or unenforceable term or provision with a term or
provision
30
<PAGE> 204
that is valid and enforceable and that comes closest to expressing the intention
of the invalid or unenforceable term or provision, and this Agreement shall be
enforceable as so modified after the expiration of the time within which the
judgment may be appealed.
9.11 EXPENSES. Except as set forth in the Escrow Agreement, each of the
Parties shall bear its own costs and expenses (including legal fees and
expenses) incurred in connection with this Agreement and the transactions
contemplated hereby; provided, however, that if the Merger is consummated, the
Company and the Subsidiaries shall not incur more than an aggregate of $250,000
in legal and accounting fees and expenses in connection with the Merger, and any
fees and expenses incurred by the Company or its Subsidiaries in excess of such
amount shall be recovered by the Buyer pursuant to the Escrow Agreement.
9.12 SPECIFIC PERFORMANCE. Each of the Parties acknowledges and agrees
that one or more of the other Parties would be damaged irreparably in the event
any of the provisions of this Agreement are not performed in accordance with
their specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter, in addition to any other remedy to
which it may be entitled, at law or in equity.
9.13 CONSTRUCTION. The language used in this Agreement shall be deemed to
be the language chosen by the Parties hereto to express their mutual intent, and
no Rule of strict construction shall be applied against any Party. Any reference
to any federal, state, local, or foreign statute or law shall be deemed also to
refer to all rules and regulations promulgated thereunder, unless the context
requires otherwise.
9.14 INCORPORATION OF EXHIBITS AND SCHEDULES. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
31
<PAGE> 205
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
THERMO ELECTRON CORPORATION
By:
----------------------------------------
Title:
----------------------------------------
SC ACQUISITION CORP.
By:
----------------------------------------
Title:
----------------------------------------
SENSORMEDICS CORPORATION
By:
----------------------------------------
Title:
----------------------------------------
COMPANY STOCKHOLDER REPRESENTATIVE
----------------------------------------]
George D. Holmes
32
<PAGE> 206
EXHIBIT A
INDEMNIFICATION AND STOCK ESCROW AGREEMENT
INDEMNIFICATION AND STOCK ESCROW AGREEMENT, dated as of June , 1996 by
and among Thermo Electron Corporation, a Delaware corporation (the "Buyer"),
SensorMedics Corporation, a California corporation (the "Company"), George D.
Holmes (the "Company Stockholder Representative"), and , as escrow
agent (the "Escrow Agent").
WHEREAS, the Buyer and the Company have entered into an Agreement and Plan
of Merger dated June , 1996 (the "Merger Agreement"), contemplating the
acquisition by the Buyer of all of the issued and outstanding shares of capital
stock of the Company (the "Company Shares"); and
WHEREAS, the parties desire that certain shares of the Buyer common stock
to be issued pursuant to the Merger be received, held and disposed of by the
Escrow Agent subject to the terms and conditions herein expressed;
WHEREAS, the execution and delivery of this Agreement is a condition
precedent to the obligation of the Buyer to consummate the transactions
contemplated by the Merger Agreement;
NOW, THEREFORE, as an inducement to the Buyer to consummate the
transactions contemplated by the Merger Agreement and in consideration of these
premises and other good and valuable consideration, the parties hereto hereby
agree as follows:
SECTION 1. DEFINITIONS. Capitalized terms used herein which are
defined in the Merger Agreement but not defined herein shall have the same
meanings herein as therein. "Escrow Termination Date" shall mean the later
of (i) June , 1997 or (ii) the FDA Resolution Date (as defined in Section
5 hereof).
SECTION 2. CONSENT OF COMPANY STOCKHOLDERS. By virtue of the Company
Stockholders' approval of the Merger Agreement, the Company Stockholders
have, without any further act of any Company Stockholder, consented to: (a)
the establishment of the escrow account to secure the Company's
indemnification obligations under Section 4 of this Agreement and the
obligations, if any, of the Company under Section 1.5(b) of the Merger
Agreement, in the manner set forth herein, (b) the appointment of the
Company Stockholder Representative as their representative for purposes of
this Agreement and as attorney-in-fact and as agent for and on behalf of
each Company Stockholder, (c) the taking by the Company Stockholder
Representative of any and all actions and the making of any decisions
required or permitted to be taken or made by him under this Agreement and
(d) all of the other terms, conditions and limitations of this Agreement.
SECTION 3. DEPOSIT OF ESCROW PROPERTY.
(a) The Buyer hereby deposits with Escrow Agent, and Escrow Agent
hereby acknowledges receipt of, two stock certificates evidencing an
aggregate of ( ) shares of the Buyer's common stock,
$1.00 par value per share (the "Escrow Shares"). A certificate
evidencing ( ) Escrow Shares represents the Indemnity
Escrow Shares and a certificate evidencing ( ) Escrow
Shares represents the FDA Shares. All of such certificates have been
issued in the name of the Escrow Agent or its nominee.
(b) In case any distribution (except a cash dividend paid out of
earned surplus) or stock dividend shall be made on or in respect of the
Escrow Shares, or any property shall be distributed upon or with respect
to the Escrow Shares pursuant to the recapitalization, liquidation or
reclassification of the capital structure of the Buyer or pursuant to
the merger, consolidation or reorganization of the Buyer, the money,
stock or property so distributed or paid shall be delivered to and held
by Escrow Agent hereunder. Such money, stock and property, together with
the Escrow Shares, are sometimes referred to hereinafter as the "Escrow
Property." Company Stockholders
A-1
<PAGE> 207
shall be entitled to receive, in proportion to their respective number
of Escrow Shares, all cash dividends paid in respect of the Escrow
Shares out of the earned surplus of the Buyer.
While the Escrow Shares are held by Escrow Agent, Company Stockholders
shall be entitled to direct Escrow Agent as to how to vote the Escrow
Shares, in proportion to their respective number of Escrow Shares, with
respect to matters placed before the shareholders of the Buyer, and Escrow
Agent shall vote accordingly.
SECTION 4. HOLDING AND DISTRIBUTION OF ESCROW PROPERTY.
(a) If the Closing occurs, the Buyer, the Surviving Corporation and
each Subsidiary shall be indemnified from and against any and all
claims, damages, losses, diminution of value, liabilities, costs and
expenses (including, without limitation, settlement costs and any legal,
accounting, consulting or other fees or expenses for investigating or
defending any actions or threatened actions) whether or not involving a
third-party claim (collectively, the "Damages") arising out of,
constituting or related to each and all of the following:
(i) any misrepresentation or breach of any representation or
warranty made by the Company in Article II of the Merger Agreement or
in any statement, certificate or Schedule furnished by the Company
pursuant to the Merger Agreement;
(ii) any breach of any covenant, agreement or obligation of the
Company contained in the Merger Agreement or any other agreement,
instrument or document contemplated by the Merger Agreement; and
(iii) the FDA Matter (as defined in the Proxy
Statement/Prospectus), except for any such Damages described in
clause (iv) below; and
(iv) the monetary amount payable pursuant to a final judgment,
settlement or other final and legally binding obligation resulting
from the resolution of the FDA Matter.
The Buyer shall give the Company Stockholder Representative notice
of any claim, action or proceeding by a third party which is reasonably
likely to result in a claim for indemnification under this Section 4.
Such notice is hereby deemed given with respect to the FDA Matter. The
Company Stockholder Representative shall have the right to defend,
contest, protest and otherwise control the resolution of any such claim,
action or proceeding (unless such claim, action or proceeding relates to
a matter which, if adversely determined, would have an impact on (A) the
Surviving Corporation's or the Buyer's liability in another proceeding,
(B) the goodwill or reputation of the Buyer or the Surviving Corporation
or (C) the future conduct by the Surviving Corporation or the Buyer of
its business or on its Tax or accounting positions, in which case the
next paragraph shall apply), at his expense, but shall keep the Buyer
apprised of material developments. The Buyer shall have the right to
participate in any such legal proceeding, subject to the Company
Stockholder Representative's right of control thereof, at the expense of
the Buyer by counsel of the Buyer's choice. The Company Stockholder
Representative, acting in good faith, shall have the right in its sole
discretion to settle any such claim.
If the claim, action or proceeding is of a type referred to in the
parenthetical contained in the second sentence of the preceding
paragraph, then (i) the Buyer shall have the right, at the Company
Stockholder Representative's expense, to defend, contest, protest and
otherwise control the resolution thereof, but shall keep the Company
Stockholder Representative apprised of material developments and (ii)
the Company Stockholder Representative shall have the right to
participate in any such legal proceeding, subject to the Buyer's right
of control thereof, at the Company Stockholder Representative's expense
and with counsel selected by the Company Stockholder Representative. The
Buyer, acting in good faith, shall have the right in its sole discretion
to settle any such claim. The parties hereby acknowledge that the Buyer
shall have the right to control the defense of the FDA Matter subject to
the terms of this paragraph.
A-2
<PAGE> 208
(b) The Company Stockholders hereby designate and appoint the
Company Stockholder Representative as their representative and
attorney-in-fact through whom all actions relating to this Agreement
after the Closing Date, including those acts as are required, authorized
or contemplated by this Agreement with respect to the settlement of a
claim or the defense thereof, shall be made or directed, and hereby
acknowledge that the Company Stockholder Representative shall be the
only person authorized to take any action so required, authorized or
contemplated by this Agreement on behalf of the Company Stockholders.
The Company Stockholders further acknowledge that the foregoing
appointment and designation shall be deemed to be coupled with an
interest and shall survive the disability, death or incompetency of any
Company Stockholder. The other parties hereto are and will be entitled
to rely on any action so taken or any notice given by the Company
Stockholder Representative and entitled and authorized to give notices
only to the Company Stockholder Representative for any notice
contemplated by this Agreement to be given any such person. The Company
Stockholder Representative shall serve without compensation but shall be
reimbursed for his reasonable out-of-pocket expenses from the Escrow
Property. The Company Stockholder Representative shall have the right to
sell Escrow Property in order to obtain funds to pay such expenses. The
Company Stockholder Representative shall furnish reports as to the
status of the escrow to the Company Stockholders as and when Escrow
Shares are released from the escrow or claims are paid. The Buyer, the
Transitory Subsidiary or the Surviving Corporation shall not have any
liability or responsibility to the Company Stockholder Representative.
The Company Stockholder Representative shall receive and deliver
notices on behalf of the Company Stockholders and take all such action
as in the Company Stockholder Representative's discretion may be
necessary, appropriate, permitted or advisable to be taken under the
terms of this agreement in order to consent to, pay, contest, arbitrate,
litigate or settle any claim or alleged claim asserted hereunder.
The Company Stockholder Representative shall not be personally
liable to the other Company Stockholders for any action taken, suffered
or omitted by him in good faith and reasonably believed by him to be
authorized or within the discretion of the rights or powers conferred
upon him by this Agreement.
In acting as representative of the Company Stockholders, the
Company Stockholder Representative may rely upon, and shall be protected
in acting or refraining from acting upon, an opinion of counsel,
certificate of auditors or other certificate, statement, instrument,
opinion, report, notice, request, consent, order, arbitrator's award,
appraisal, bond or other paper or document reasonably believed by him to
be genuine and to have been signed or presented by the proper party or
parties. The Company Stockholder Representative may consult with counsel
and any advice of such counsel shall be full and complete authorization
and protection in respect to any action taken or suffered or omitted by
him in such capacity in good faith and in accordance with such opinion
of counsel. The Company Stockholder Representative may perform his
duties as Company Stockholder Representative either directly or by or
through his agents or attorneys and the Company Stockholder
Representative shall not be responsible to the other Company
Stockholders for any misconduct or negligence on the part of any agent
or attorney appointed with reasonable care by him hereunder.
Upon receiving notice of the death or incapacity of the Company
Stockholder Representative, the Company Stockholders shall by majority
vote (based on the number of Closing Shares received by each Company
Stockholder) appoint a successor to fill the vacancy. The Company
Stockholders may by such a majority vote remove the Company Stockholder
Representative with or without cause and appoint a successor, provided
that notice thereof is given by the new Company Stockholder
Representative to each of the other parties hereto. The Company
Stockholder Representative may resign if, and only if, he is
simultaneously replaced with a substitute Company Stockholder
Representative reasonably acceptable to the Buyer.
SECTION 5. LIMITATION OF LIABILITY. The right of the Buyer, the
Transitory Subsidiary and the Surviving Corporation to be indemnified
pursuant to Section 4(a) (except pursuant to Section 4(a)(iv))
A-3
<PAGE> 209
shall be limited to the return to the Buyer of the Indemnity Escrow Shares.
The right of the Buyer, the Transitory Subsidiary and the Surviving
Corporation to be indemnified pursuant to Section 4(a)(i) shall not apply
until the sum of the Damages suffered by the Buyer, the Transitory
Subsidiary and the Surviving Corporation on a cumulative basis arising out
of the matters described in Section 4(a)(i) equals or exceeds $250,000, at
which point the Company shall become liable for all such Damages, not just
amounts in excess of $250,000. The right of the Buyer, the Transitory
Subsidiary and the Surviving Corporation to be indemnified pursuant to
Section 4(a)(iv) shall be limited to the return to the Buyer of the FDA
Shares. The right of the Buyer, the Transitory Subsidiary and the Surviving
Corporation to be indemnified pursuant to Section 4(a)(i), (ii) and (iii)
shall be limited to claims that are asserted by the Buyer, the monetary
amount payable by the Buyer, the Transitory Subsidiary or the Surviving
Corporation under a settlement, final judgment or other final and the
Transitory Subsidiary or the Surviving Corporation before the first
anniversary of the Closing Date. The right of the Buyer, the Transitory
Subsidiary and the Surviving Corporation to be indemnified pursuant to
Section 4(a)(iv) shall be limited to claims that are asserted by the Buyer,
the Transitory Subsidiary or the Surviving Corporation before the date that
is 60 days after a legally binding resolution of the FDA Matter (the "FDA
Resolution Date"). Notwithstanding the foregoing, this Section 5 shall not
apply in the event the Company has actual knowledge of a breach of a
representation or warranty as of the Closing Date.
SECTION 6. ESCROW ACCOUNT. It is intended that the assets held in
escrow as above provided shall facilitate the Buyer's and the Surviving
Corporation's ability to recover amounts to which they are entitled as a
result of misrepresentations, breaches of warranties and breaches of
covenants contained in the Merger Agreement or this Agreement and to
satisfy other claims of the Buyer and the Surviving Corporation arising as
under the Merger Agreement or this Agreement, and to satisfy the Company's
obligations under Section 1.5(b) of the Merger Agreement. Accordingly, and
to the extent necessary to provide such protection to the Buyer and the
Surviving Corporation, property held in escrow hereunder shall be available
to satisfy claims of the Buyer and the Surviving Corporation under this
Agreement to the extent provided herein. In the event the Escrow Property
is insufficient to pay all amounts owed to the Buyer, the Transitory
Subsidiary and the Surviving Corporation, including by virtue of the
expiration of the escrow period, no Company Stockholder shall be liable
under this Agreement to pay any amount in addition to such Company
Stockholder's proportionate share of the Escrow Property claimed by the
Buyer prior to the Escrow Termination Date. Once the Escrow Property or
balance thereof is released to the Company Stockholders, the Buyer, the
Transitory Subsidiary and the Surviving Corporation have no right to
recover damages from the Company Stockholders in the absence of actual
knowledge of a breach of a representation or warranty.
SECTION 7. REGISTRATION OF CLAIMS. In the event that the Buyer or
the Surviving Corporation asserts any claim for indemnification against the
Escrow Shares, including any claim under Section 1.5(b) of the Merger
Agreement, it shall deliver to Escrow Agent and the Company Stockholder
Representative a written notice thereof (the "Notice of Claim") setting
forth (a) a demand for payment of a specified amount from the Escrow Shares
or, if such amount can not be specified, the basis upon which the amount
would be determined and (b) a description of the asserted claim and the
basis thereof, and the Buyer shall deliver to the Company Stockholder
Representative thereafter such other information as may be reasonably
requested by the Company Stockholder Representative to evaluate the
asserted claim. It is understood and agreed among the parties hereto that
the Buyer's and the Surviving Corporation's right to assert claims for
indemnification under this Agreement is limited to those matters set forth
in this Agreement, although the Escrow Agent shall have no obligation to
determine or verify whether such condition has been met.
SECTION 8. PAYMENT OF AMOUNTS FROM ESCROW PROPERTY UPON DEMAND
WITHOUT OBJECTION. If the Buyer delivers to the Company Stockholder
Representative and Escrow Agent a Notice of Claim pursuant to Section 4
hereof and if no written objection to such demand is received by Escrow
Agent and the Buyer from the Company Stockholder Representative within 30
days following the delivery of such Notice of Claim to Escrow Agent and the
Company Stockholder Representative, then Escrow Agent shall pay the claim
out of the Escrow Property by forthwith endorsing and delivering to the
Buyer the
A-4
<PAGE> 210
certificates representing the Indemnity Escrow Shares (in the case of a
claim asserted under Section 4(a)(i), (ii) or (iii) hereof, or in the case
of a claim made pursuant to Section 1.5(b) of the Merger Agreement), or the
FDA Shares (in the case of a claim asserted under Section 4(a)(iv) hereof).
The Buyer shall be entitled to retain that number of Escrow Shares which,
when multiplied by the fair market value (as defined below), shall equal
the amount of the claim; provided, however, that Notices of Claim must be
delivered before the Escrow Termination Date. The Buyer shall return one or
more certificates for the excess Escrow Shares to Escrow Agent for
continued holding hereunder. To the extent the value (calculated on the
basis of the fair market value, regardless of actual market value at the
time) of the Indemnity Escrow Shares or FDA Shares, as the case may be,
retained by the Buyer is less than the amount of the claim, Escrow Agent
shall also transfer to the Buyer other Escrow Property, if any, in addition
to such Escrow Shares.
The fair market value shall be $ per share, representing the
reported closing price of the Buyer's Common Stock on the New York Stock
Exchange on June , 1996, as adjusted appropriately to reflect any stock,
splits, stock dividends or similar recapitalizations.
SECTION 9. PAYMENT OF AMOUNTS FROM ESCROW PROPERTY AFTER NOTICE OF
OBJECTION. If the Buyer delivers to the Company Stockholder Representative
and Escrow Agent a Notice of Claim pursuant to Section 4 hereof, and if the
Company Stockholder Representative shall give written objection thereto to
Escrow Agent and the Buyer prior to the expiration of the 30-day period
specified in Section 8, Escrow Agent shall make no payment in respect of
the demand set forth in such Notice of Claim until it shall have received
one of the following:
(a) written instructions signed on behalf of both the Buyer and the
Company Stockholder Representative; or
(b) a final order of a court having jurisdiction over the asserted
claim, after expiration of any applicable appeal period.
Upon receipt of any such instructions or order, Escrow Agent shall pay
such amount from the Escrow Property to the Buyer as may be directed by
such instructions or order; provided, however that (i) the limitations set
forth in Section 8 hereof on the number of Escrow Shares retainable by the
Buyer shall also apply to claims paid under this Section 9, and (ii) all
Escrow Shares delivered to the Buyer shall be valued on the basis of the
fair market value, regardless of the actual market price of the Buyer's
Common Stock on the date such shares are delivered to the Buyer. If the
final order of a court having jurisdiction over the asserted claim, after
expiration of any applicable appeal period, upholds the Company Stockholder
Representative's objection to the Escrow Agent, the Buyer shall reimburse
the Escrow Agent for reasonable attorneys' fees and expenses paid from the
Escrow Property to pursue the objection. If the final order of such court,
after any applicable appeal period, upholds the Buyer's claim, no such
reimbursement shall be made.
SECTION 10. PAYMENT OF ESCROW PROPERTY TO SHAREHOLDERS.
(a) On the June , 1997, Escrow Agent shall deliver to the Buyer
and the Company Stockholder Representative a statement of the remaining
balance, if any, of the Indemnity Escrow Shares (calculated on the basis
of the fair market value, regardless of the actual market price of the
Buyer's Common Stock at that time), and the total amount of all claims
registered pursuant to Section 7 hereof under Section 4(a)(i), (ii) or
(iii) hereof and not theretofore resolved and paid (the excess, if any,
of such remaining balance over the total amount of such claims shall be
referred to as the "Final Indemnity Escrow Balance"). The Buyer and the
Company Stockholder Representative shall review the accuracy of the
Final Indemnity Escrow Balance and notify Escrow Agent within 30 days of
the receipt of the foregoing statement of any asserted discrepancy. Upon
the expiration of the 30-day period after receipt by the Buyer and the
Company Stockholder Representative of such statement, and if Escrow
Agent has not been notified of any discrepancy by the Buyer or the
Company Stockholder Representative within the 30-day period specified in
the preceding sentence, Escrow Agent shall deliver to each Company
Stockholders such Company Stockholder's
A-5
<PAGE> 211
share of the Indemnity Escrow Shares, free and clear of the escrow
created by this Agreement. After the last registered claim under Section
4(a)(i), (ii) and (iii) shall have been resolved pursuant to Section 8
and Section 9 hereof, as the case may be, and paid, the remaining
balance, if any, of the Indemnity Escrow Shares shall be delivered by
Escrow Agent to Company Stockholders, free and clear of the escrow
created by this Agreement; provided, however, that upon the disposition
of any such claim prior to the disposition of all such claims Escrow
Agent shall deliver to Company Stockholders the Indemnity Escrow Shares
in excess of the amount of the remaining aggregate claims as determined
above. All payments by Escrow Agent to Company Stockholders pursuant to
this Agreement shall be made in proportion to the Company Stockholders'
respective interests in the Escrow Shares.
(b) On the Escrow Termination Date, Escrow Agent shall deliver to
the Buyer and the Company Stockholder Representative a statement of the
remaining balance, if any, of the Escrow Property (calculated on the
basis of the fair market value, regardless of the actual market price of
the Buyer's Common Stock at that time), and the total amount of all
claims registered pursuant to Section 7 hereof and not theretofore
resolved and paid (the excess, if any, of such remaining balance over
the total amount of such claims shall be referred to as the "Final
Escrow Balance"). The Buyer and the Company Stockholder Representative
shall review the accuracy of the Final Escrow Balance and notify Escrow
Agent within 30 days of the receipt of the foregoing statement of any
asserted discrepancy. Upon the expiration of the 30-day period after
receipt by the Buyer and the Company Stockholder Representative of such
statement, and if Escrow Agent has not been notified of any discrepancy
by the Buyer or the Company Stockholder Representative within the 30-day
period specified in the preceding sentence, Escrow Agent shall deliver
to each Company Stockholder Escrow Property representing such Company
Stockholder's share of the Final Escrow Balance, free and clear of the
escrow created by this Agreement. After the last registered claim shall
have been resolved pursuant to Section 8 and Section 9 hereof, as the
case may be, and paid, the remaining balance, if any, of the Escrow
Property shall be delivered by Escrow Agent to Company Stockholders,
free and clear of the escrow created by this Agreement; provided,
however, that upon the disposition of any such claim prior to the
disposition of all such claims Escrow Agent shall deliver to Company
Stockholders the Escrow Property in excess of the amount of the
remaining aggregate claims as determined above. All payments by Escrow
Agent to Company Stockholders pursuant to this Agreement shall be made
in proportion to the Company Stockholders' respective interests in the
Escrow Shares.
SECTION 11. RESPONSIBILITY OF ESCROW AGENT. Escrow Agent may act
upon any instrument or other writing believed by it in good faith to be
genuine and to have been signed or presented by the proper person and shall
not be liable to any party hereto in connection with the performance of its
duties hereunder, except for its own negligence or willful misconduct.
Escrow Agent's duties shall be determined only with reference to this
Escrow Agreement and applicable laws and Escrow Agent is not charged with
knowledge of, or any duties or responsibilities in connection with, any
other document or agreement. If in doubt as to its duties and
responsibilities hereunder, Escrow Agent may consult with counsel of its
choice and shall be protected in any action taken or omitted in connection
with the advice or opinion of such counsel.
If any party to this Agreement disagrees on anything connected with
this escrow (a) Escrow Agent will not have to settle the matter, (b) Escrow
Agent may wait for a settlement by appropriate legal proceedings or other
means it may require, and in such event it will not be liable for interest
or damage, (c) if Escrow Agent intervenes in or is made a party to any
legal proceedings, it will be entitled to such reasonable compensation for
services, costs and attorney's fees as the court may award and (d) Escrow
Agent is entitled to hold documents and assets deposited in this escrow
pending settlement of the disagreement by any of the above means.
Escrow Agent is to act as a depositary agent only and is hereby
relieved of any liability in connection with any representations made by
the other parties hereto or any of their agents. Escrow Agent shall not be
responsible for and shall not be under a duty to examine any other
agreement.
A-6
<PAGE> 212
SECTION 12. INDEMNIFICATION AND FEES OF ESCROW AGENT. In
consideration of its acceptance of the appointment as Escrow Agent, the
Escrow Agent and shall be indemnified and held harmless as to any liability
incurred by it to any other person, firm or corporation by reason of its
having accepted the same or in carrying out any of the terms hereof, and
shall be reimbursed for all its out-of-pocket expenses, including, among
other things, reasonable counsel fees and court costs, incurred by reason
of its position hereunder or actions taken pursuant hereto, except in the
event of the negligence or willful misconduct of Escrow Agent. The fees and
charges set forth below for the services of Escrow Agent will be considered
compensation for Escrow Agent's ordinary services as contemplated by this
Agreement. In the event the conditions of the escrow are not promptly
fulfilled or Escrow Agent renders any service not provided for in this
Agreement or there is any assignment of any interest in the subject matter
of this escrow or modification of any interest or if any controversy arises
in connection with it, Escrow Agent will be reasonably compensated for such
extraordinary services, and will be reimbursed for all reasonable costs,
attorney's fees and expenses occasioned thereby. Except as provided in
Section 9, the fees and expenses of Escrow Agent and any other amounts due
the Escrow Agent under this Section 12 shall be reimbursed 50% by Buyer and
50% out of the Escrow Property.
Escrow Agent's initial acceptance fee is $ and Escrow Agent's
annual fee hereunder is $ .
SECTION 13. RESIGNATION OF ESCROW AGENT. Escrow Agent may resign and
be discharged from its duties hereunder at any time by giving not less than
60 days prior written notice of such resignation to the Buyer and the
Company Stockholder Representative, which notice shall specify the date
when such resignation shall take effect. Upon such notice, the Buyer and
the Company Stockholder Representative shall appoint a successor escrow
agent. If the Buyer and the Company Stockholder Representative are unable
to agree upon a successor escrow agent within 30 days after receipt of such
notice, Escrow Agent may apply to a court of competent jurisdiction for
such appointment. Escrow Agent shall continue to serve until its successor
delivers to the Buyer and the Company Stockholder Representative a duly
executed instrument of acceptance of the terms and conditions of this
Agreement and receives the Escrow Property.
SECTION 14. INVESTMENTS. Escrow Agent shall invest the cash portion
of the Escrow Property, if any, in money market accounts at .
Income from any such investment shall be held by Escrow Agent, shall be
reinvested in accordance with this Section 14 and shall be considered part
of the Escrow Property.
SECTION 15. SECURITY INTEREST. To secure the obligations that may be
owed it hereunder, the Buyer shall have a security interest in the Escrow
Property, and for purposes of protection of an enforceable security
interest, possession of the Escrow Property by the Escrow Agent shall be
deemed possession by the Buyer.
SECTION 16. NOTICES AND COMMUNICATIONS. Any notice or other
communications hereunder shall be deemed to have been duly delivered if
delivered by hand or overnight courier service to the party to whom such
notice or other communication is to be delivered at such party's address
set forth below, or sent by certified or registered mail, return receipt
requested, postage prepaid, as follows:
If to the Buyer:
Thermo Electron Corporation
81 Wyman Street
Waltham, Massachusetts 02254
Attention: President
With a copy to:
Thermo Electron Corporation
81 Wyman Street
Waltham, Massachusetts 02254
Attention: General Counsel
A-7
<PAGE> 213
If to the Company, to:
SensorMedics Corporation
22705 Savi Ranch Parkway
Yorba Linda, CA 92687
With a copy to:
Riordan & McKinzie
California Plaza
380 South Grand Avenue
Los Angeles, CA 90071
Attention: Janice Salin, Esquire
and
Thermo Electron Corporation
81 Wyman Street
Waltham, Massachusetts 02254
Attention: General Counsel
If to the Company Stockholder Representative, to:
If to a Company Stockholder, to:
At the Company Stockholder's address set forth on the Buyer's
stock records.
If to Escrow Agent, to:
or to such other address, or to the attention of such other individual, as
any party hereto may designate in writing to the other parties to this
Agreement. Any such notice, request, demand, consent or other communication
shall be deemed to have been given on the earlier of (i) the date of
delivery if by hand or by overnight courier service or (ii) five days after
having been mailed.
SECTION 17. GOVERNING LAW. This Agreement shall be governed by the
law of the Commonwealth of Massachusetts applicable to agreements made and
to be performed wholly within such jurisdiction, without regard to the
conflicts of laws provisions thereof.
SECTION 18. AMENDMENTS. This instrument supersedes any and all prior
agreements among the parties with regard to the matters set forth herein
and may not be altered or amended except by a writing signed by the parties
against whom such alteration or amendment is sought.
SECTION 19. WAIVER. No waiver of any term or provision of this
Agreement shall be effective unless made in a writing signed by the party
against whom the enforcement of the waiver is sought. No waiver of any term
or provision of this Agreement shall be deemed to be a waiver of any other
breach of such term or provision of this Agreement.
SECTION 20. SECTION HEADINGS. The headings in this Agreement are for
the purposes of reference only and shall not limit or otherwise affect any
of the terms or provisions hereof.
SECTION 21. SUCCESSOR AND ASSIGNS. The rights and obligations of the
parties hereto shall inure to the benefit of and shall be binding upon the
successors and assigns of each of them; provided, however, that neither
this Agreement nor any of the rights, interests or obligations hereunder
shall be assigned by any of the parties hereto without the prior written
consent of the other parties hereto.
SECTION 22. COUNTERPARTS. This Agreement may be executed in several
identical counterparts each of which when executed by the parties hereto
and delivered shall be an original, but all of which together shall
constitute a single instrument.
A-8
<PAGE> 214
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first written above.
THERMO ELECTRON CORPORATION
By:
--------------------------------------
Title:
--------------------------------------
SENSORMEDICS CORPORATION
By:
--------------------------------------
Title:
--------------------------------------
COMPANY STOCKHOLDER
REPRESENTATIVE
--------------------------------------
George D. Holmes
[
--------------------------------------]
as Escrow Agent
By:
--------------------------------------
Title:
--------------------------------------
A-9
<PAGE> 215
EXHIBIT C TO APPENDIX A
SENSORMEDICS CORPORATION
AFFILIATE AGREEMENT
June , 1996
SensorMedics Corporation
22705 Savi Ranch Parkway
Yorba Linda, California 92687
Thermo Electron Corporation
81 Wyman Street
Waltham, Massachusetts 02254
Ladies and Gentlemen:
The undersigned Shareholder (the "Shareholder") of SensorMedics
Corporation, a California corporation ("SMC"), understands that SMC has entered
into an Agreement and Plan of Merger (the "Merger Agreement") dated as of June
, 1996 among Thermo Electron Corporation, a Delaware corporation ("Thermo"),
SMC Acquisition Corporation, a Delaware corporation and a wholly-owned
subsidiary of Thermo ("Acquisition"), and SMC. Pursuant to the Merger Agreement,
Acquisition will merge (the "Merger") with and into SMC, following which SMC
will become a wholly-owned subsidiary of Thermo. The Merger Agreement provides
that, on the Effective Date of the Merger (as defined in the Merger Agreement),
all of the outstanding shares of common stock and all shares of Series A
Preferred Stock of SMC as to which an election is made will be converted into
shares of common stock of Thermo (the "Thermo Common Stock") in accordance with
the applicable exchange ratio specified in the Merger Agreement.
The Shareholder has been advised that as of the date hereof, the
Shareholder may be deemed to be an "affiliate" of SMC, as the term "affiliate"
is (i) defined for purposes of paragraphs (c) and (d) of Rule 145 promulgated by
the Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933, as amended (the "Act"), and (ii) used in and for purposes of
Accounting Series Releases 130 and 135, as amended, of the Commission.
The Shareholder understands that the representations, warranties and
covenants set forth herein will be relied upon by Thermo, Acquisition, SMC and
other shareholders of SMC, and their respective counsel and accounting firms.
The Shareholder represents, warrants and agrees with Thermo and SMC as
follows:
1. The Shareholder is the beneficial owner of the shares of SMC
capital stock and options to purchase SMC capital stock indicated on the
last page hereof (the "SMC Securities"), which at the date hereof and at
all times up until the Effective Date will be free and clear of any liens,
claims, options, charges or other encumbrances not described on such page.
Except for the SMC Securities, the Shareholder does not beneficially own
any shares of capital stock of SMC or any other equity securities of SMC or
any other options, warrants or other rights to acquire any equity
securities of SMC. The Shareholder has full power and authority to make,
enter into and carry out the terms of this Agreement.
2. The Shareholder has been advised that the issuance of shares of
Thermo Common Stock to the Shareholder (the "Thermo Shares") in connection
with the Merger has been or will be registered with the Commission under
the Act on a Registration Statement on Form S-4. However, the Shareholder
has also been advised that, since at the time the Merger is to be submitted
for a vote of the shareholders of SMC, the Shareholder may be deemed to be
an affiliate of SMC and the distribution by the Shareholder of any Thermo
Shares will not have been registered under the Act, the Shareholder may not
sell, transfer or otherwise dispose of the Thermo Shares unless (i) such
sale, transfer or other disposition has been registered under the Act, (ii)
such sale, transfer or other disposition is made in compliance with Rule
145
C-1
<PAGE> 216
promulgated by the Commission under the Act, or (iii) such sale, transfer
or other disposition is otherwise exempt from registration under the Act.
3. The Shareholder shall not make any sale, transfer or other
disposition of the Thermo Shares in violation of the Act or the rules and
regulations promulgated thereunder.
4. The Shareholder understands that Thermo is under no obligation to
register the sale, transfer or other disposition of the Thermo Shares, or
any other Thermo Common Stock held on the Shareholder's behalf, under the
Act or to take any other action necessary in order to make compliance with
an exemption from such registration available.
5. Notwithstanding any other provision hereof to the contrary, during
the period commencing on the date hereof and ending at such time as
financial results covering at least thirty days of combined operations of
SMC and Thermo have been published by Thermo in the form of a quarterly
earnings report, an effective registration statement filed with the
Commission, a report to the Commission on Form 10-K, 10-Q or 8-K, or any
other public filing or announcement which includes the combined results of
operations of Thermo and SMC, the Shareholder will not sell, transfer or
otherwise dispose of, or offer or agree to sell, transfer or otherwise
dispose of, or in any other way reduce the risk of the Shareholder's
ownership of or investment in, any SMC Securities, any shares of SMC common
stock or other equity securities of SMC which the Shareholder purchases or
acquires after the execution of this Agreement, the Thermo Shares or any
securities which may be paid as a dividend or otherwise distributed thereon
or with respect thereto or issued or delivered in exchange or substitution
therefor (all such shares and other securities being referred to herein,
collectively, as "Restricted Securities"), or any option, right or other
interest with respect to any Restricted Securities. Without limiting the
foregoing, the Shareholder acknowledges that such restriction prohibits the
acquisition of a "put" option or other hedging instrument with respect to
Thermo Common Stock.
6. Stock transfer instructions will be given to Thermo's transfer
agent with respect to the Thermo Shares and there will be placed on the
certificates for the Thermo Shares, or any substitutions therefor, a legend
stating in substance:
"The shares represented by this certificate were issued in a
transaction to which Rule 145 promulgated under the Securities Act of
1933 applies. The shares represented by this certificate may only be
transferred in accordance with the terms of an agreement dated as of
June , 1996 between the registered holder hereof and Thermo
Electron Corporation, a copy of which agreement is on file at the
principal offices of Thermo Electron Corporation.
7. Unless the transfer by the Shareholder of the Thermo Shares has
been registered under the Act, or is a sale made in compliance with Rule
145, Thermo reserves the right to put a legend on the certificates issued
to any transferee of the Shareholder stating in substance:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933 and were acquired from a person who
received such shares in a transaction to which Rule 145 promulgated
under the Securities Act of 1933 applies. The shares may not be sold,
pledged or otherwise transferred except in accordance with an
exemption from the registration requirements of the Securities Act of
1933."
8. The legends set forth in paragraphs 6 and 7 above shall be removed
by delivery of substitute certificates without the applicable legend if, in
the opinion of counsel to Thermo, (a) such legend is not required for
purposes of the Act or (b) the sale or other disposition of the shares
evidenced by the certificate is permitted by the provisions of Rule
145(d)). In any event, such legend may be removed upon request of the
Shareholder no later than two years after the Merger is consummated, unless
the Shareholder is then an "affiliate" of Thermo within the meaning of Rule
145(d).
9. The Shareholder hereby covenants and agrees to execute and deliver
any additional documents necessary or desirable, in the opinion of Thermo,
to carry out the intent of this Agreement.
C-2
<PAGE> 217
10. Miscellaneous.
10.1 If any term, provisions, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, all other terms, provisions, covenants and restrictions
of this Agreement shall nevertheless remain in full force and effect and
shall in no way be affected, impaired or invalidated.
10.2 This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but, except as otherwise
specifically provided herein, neither this Agreement nor any of the rights,
interests or obligations of the parties hereto may be assigned by either of
the parties without the prior written consent of the other.
10.3 This Agreement may not be modified, amended, altered or
supplemented except upon the execution and delivery of a written agreement
executed by the parties hereto.
10.4 The parties hereto acknowledge that Thermo will be
irreparably harmed and that there will be no adequate remedy at law for a
violation of any of the covenants or agreements of the Shareholder set
forth herein. Therefore, it is agreed that, in addition to any other
remedies that may be available to Thermo upon any such violation, Thermo
shall have the right to enforce such covenants and agreements by specific
performance, injunctive relief or by any other means available to Thermo at
law or in equity.
10.5 All notices, requests, claims,, demands and other
communications hereunder shall be in writing and sufficient if delivered in
person, by cable, telegram or telex, or sent by mail (registered or
certified mail, postage prepaid, return receipt requested) or overnight
courier (prepaid) to the respective parties as follows:
If to SMC: SensorMedics Corporation
22705 Savi Ranch Parkway
Yorba Linda, California 92687
Attention: President
with a copy to: Riordan & McKinzie
300 South Grand Avenue
Suite 2900
Los Angeles, CA 90071
Attention: Janis B. Salin, Esquire
and to:
Thermo Electron Corporation
81 Wyman Street
Waltham, MA 02254
Attention: General Counsel
If to Shareholder: to the address set forth on the last page hereof
or to such other address as any party may have furnished to the other in
writing in accordance herewith, except that notices of change of address
shall only be effective upon receipt.
10.6 This Agreement contains the entire understanding of the
parties in respect of the subject matter hereof, and supersedes all prior
negotiations and understandings between the parties with respect to such
subject matter.
10.7 This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall
constitute one and the same agreement.
C-3
<PAGE> 218
11. Thermo agrees to publish, as promptly as practicable following the
Merger, results covering at least thirty days of combined operations of
Thermo and SMC in the form of a quarterly earnings report, an effective
registration statement filed with the Commission, a report to the
Commission on Form 10-K, 10-Q or 8-K, or any other public filing or
announcement which includes the combined results of operations of Thermo
and SMC; provided, however, that Thermo shall be under no obligation to
publish any such financial information other than with respect to a fiscal
quarter of Thermo.
Very truly yours,
--------------------------------------
(Print Shareholder's Name)
By:
----------------------------------
Title:
--------------------------------
(if applicable)
Shareholders' Address:
--------------------------------------
--------------------------------------
--------------------------------------
C-4
<PAGE> 219
Number of shares of SMC Common Stock
beneficially owned by the
Shareholder: ____________
Number of shares of SMC Common Stock
subject to options beneficially owned
by the Shareholder: ____________
Number of shares of SMC Series A
Preferred Stock beneficially owned by
the Shareholder: ____________
Number of shares of SMC Series B
Preferred Stock beneficially owned by
the Shareholder: ____________
Encumbrances: ____________
Accepted this ______ day
of June, 1996
SENSORMEDICS CORPORATION
By:
------------------------------
Title:
---------------------------
Accepted this ________ day
of June, 1996
THERMO ELECTRON CORPORATION
By:
-----------------------------
Title:
--------------------------
C-5
<PAGE> 220
APPENDIX B
CHAPTER 13 OF THE
CALIFORNIA GENERAL CORPORATION LAW
Section 1300 REORGANIZATION OR SHORT-FORM MERGER; DISSENTING SHARES;
CORPORATE PURCHASE AT FAIR MARKET VALUE; DEFINITIONS. (a) If the approval of the
outstanding shares (Section 152) of a corporation is required for a
reorganization under subdivisions (a) and (b) or subdivision (e) or (f) of
Section 1201, each shareholder of the corporation entitled to vote on the
transaction and each shareholder of a subsidiary corporation in a short-form
merger may, by complying with this chapter, require the corporation in which the
shareholder holds shares to purchase for cash at their fair market value the
shares owned by the shareholder which are dissenting shares as defined in
subdivision (b). The fair market value shall be determined as of the day before
the first announcement of the terms of the proposed reorganization or short-form
merger, excluding any appreciation or depreciation in consequence of the
proposed action, but adjusted for any stock split, reverse stock split, or share
dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the list of OTC margin stocks issued by the
Board of Governors of the Federal Reserve System, and the notice of meeting
of shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
Section 1301 NOTICE TO HOLDERS OF DISSENTING SHARES IN REORGANIZATIONS;
DEMAND FOR PURCHASE; TIME; CONTENTS. (a) If, in the case of a reorganization,
any shareholders of a corporation have a right under Section 1300, subject to
compliance with paragraphs (3) and (4) of subdivision (b) thereof, to require
the corporation to purchase their shares for cash, such corporation shall mail
to each such shareholder a notice of the approval of the reorganization by its
outstanding shares (Section 152) within 10 days after the date of such approval,
accompanied by a copy of Sections 1300, 1302, 1303, 1304 and this section, a
statement of the price determined by the corporation to represent the fair
market value of the dissenting shares, and a brief description of the procedure
to be followed if the shareholder desires to exercise the shareholder's right
under such sections. The statement of price constitutes an offer by the
corporation to purchase at the price stated any dissenting shares as defined in
subdivision (b) of Section 1300, unless they lose their status as dissenting
shares under Section 1309.
B-1
<PAGE> 221
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
Section 1302 SUBMISSION OF SHARE CERTIFICATES FOR ENDORSEMENT;
UNCERTIFICATED SECURITY. Within 30 days after the date on which notice of the
approval by the outstanding shares or the notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder, the shareholder shall submit to the
corporation at its principal office or at the office of any transfer agent
thereof, (a) if the shares are certificated securities, the shareholder's
certificates representing any shares which the shareholder demands that the
corporation purchase, to be stamped or endorsed with a statement that the shares
are dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder demands
that the corporation purchase. Upon subsequent transfers of the dissenting
shares on the books of the corporation, the new certificates, initial
transaction statement, and other written statements issued therefor shall bear a
like statement, together with the name of the original dissenting holder of the
shares.
Section 1303 PAYMENT OF AGREED PRICE WITH INTEREST; AGREEMENT FIXING FAIR
MARKET VALUE; FILING; TIME OF PAYMENT. (a) If the corporation and the
shareholder agree that the shares are dissenting shares and agree upon the price
of the shares, the dissenting shareholder is entitled to the agreed price with
interest thereon at the legal rate on judgments from the date of the agreement.
Any agreements fixing the fair market value of any dissenting shares as between
the corporation and the holders thereof shall be filed with the secretary of the
corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
Section 1304 ACTION TO DETERMINE WHETHER SHARES ARE DISSENTING SHARES OR
FAIR MARKET VALUE; LIMITATION; JOINDER; CONSOLIDATED DETERMINATION OF ISSUES;
APPOINTMENT OF APPRAISERS. (a) If the corporation denies that the shares are
dissenting shares, or the corporation and the shareholder fail to agree upon the
fair market value of the shares, then the shareholder demanding purchase of such
shares as dissenting shares or any interested corporation, within six months
after the date on which notice of the approval by the outstanding shares
(Section 152) or notice pursuant to subdivision (i) of Section 1110 was mailed
to the shareholder, but not thereafter, may file a complaint in the superior
court of the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
B-2
<PAGE> 222
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
Section 1305 REPORT OF APPRAISERS; CONFIRMATION; DETERMINATION BY COURT;
JUDGMENT; PAYMENT; APPEAL; COSTS. (a) If the court appoints an appraiser or
appraisers, they shall proceed forthwith to determine the fair market value per
share. Within the time fixed by the court, the appraisers, or a majority of
them, shall make and file a report in the office of the clerk of the court.
Thereupon, on the motion of any party, the report shall be submitted to the
court and considered on such evidence as the court considers relevant. If the
court finds the report reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
Section 1306 PREVENTION OF IMMEDIATE PAYMENT; STATUS AS CREDITORS;
INTEREST. To the extent that the provisions of Chapter 5 prevent the payment to
any holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
Section 1307 DIVIDENDS ON DISSENTING SHARES. Cash dividends declared and
paid by the corporation upon the dissenting shares after the date of approval
of the reorganization by the outstanding shares (Section 152) and prior to
payment for the shares by the corporation shall be credited against the total
amount to be paid by the corporation therefor.
Section 1308 RIGHTS OF DISSENTING SHAREHOLDERS PENDING VALUATION;
WITHDRAWAL OF DEMAND FOR PAYMENT. Except as expressly limited in this chapter,
holders of dissenting shares continue to have all the rights and privileges
incident to their shares, until the fair market value of their shares is agreed
upon or determined. A dissenting shareholder may not withdraw a demand for
payment unless the corporation consents thereto.
Section 1309 TERMINATION OF DISSENTING SHARE AND SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders thereof
cease to be dissenting shareholders and cease to be entitled to require the
corporation to purchase their shares upon the happening of any of the following:
(a) The corporation abandons the reorganization. Upon abandonment of
the reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
B-3
<PAGE> 223
(b) The shares are transferred prior to their submission for
endorsement in accordance with Section 1302 or are surrendered for
conversion into shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon
the status of the shares as dissenting shares or upon the purchase price of
the shares, and neither files a complaint or intervenes in a pending action
as provided in Section 1304, within six months after the date on which
notice of the approval by the outstanding shares or notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
Section 1310 SUSPENSION OF RIGHT TO COMPENSATION OR VALUATION PROCEEDINGS;
LITIGATION OF SHAREHOLDER'S APPROVAL. If litigation is instituted to test the
sufficiency or regularity of the votes of the shareholders in authorizing a
reorganization, any proceedings under Sections 1304 and 1305 shall be suspended
until final determination of such litigation.
Section 1311 EXEMPT SHARES. This chapter, except Section 1312, does not
apply to classes of shares whose terms and provisions specifically set forth the
amount to be paid in respect to such shares in the event of a reorganization or
merger.
Section 1312 RIGHT OF DISSENTING SHAREHOLDER TO ATTACK, SET ASIDE OR
RESCIND MERGER OR REORGANIZATION; RESTRAINING ORDER OR INJUNCTION; CONDITIONS.
(a) No shareholder of a corporation who has a right under this chapter to demand
payment of cash for the shares held by the shareholder shall have any right at
law or in equity to attack the validity of the reorganization or, short-form
merger, or to have the reorganization or short-form merger set aside or
rescinded, except in an action to test whether the number of shares required to
authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger, or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any such party so controlled.
B-4
<PAGE> 224
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware, as
amended, gives Delaware corporations the power to indemnify each of their
present and former directors or officers under certain circumstances, if such
person acted in good faith and in a manner which he reasonably believed to be in
or not opposed to the best interests of the corporation.
Article Thirteenth of the Registrant's Amended and Restated Certificate of
Incorporation provides that no director of the Registrant shall be liable for
any breach of fiduciary duty, except to the extent that the Delaware General
Corporation Law prohibits the elimination or limitation of liability of
directors for breach of fiduciary duty.
Article Ninth of the Registrant's Amended and Restated Certificate of
Incorporation provides that a director or officer of the Registrant (a) shall be
indemnified by the Registrant against all expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement incurred in connection with any
litigation or other legal proceeding (other than action by or in the right of
the Registrant) brought against him by virtue of his position as a director or
officer of the Registrant if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director of officer of the Registrant if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made with respect to any
matter as to which such person shall have been adjudged to be liable to the
Registrant, unless a court determines that, despite such adjudication but in
view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses may be advanced to a director or
officer at his request, provided that he undertakes to repay the amount advanced
if it is ultimately determined that he is not entitled to indemnification for
such expenses. Indemnification shall be made by the Registrant (unless ordered
by a court) only upon a determination that the applicable standard of conduct
required for indemnification has been met. Article Ninth of the Registrant's
Amended and Restated Certificate of Incorporation further provides that the
indemnification provided therein is not exclusive. The Registrant has
indemnification agreements with its directors and officers that provide for the
maximum indemnification allowed by law.
The Registrant maintains officers' and directors' insurance covering
certain liabilities that may be incurred by officers and directors in the
performance of their duties.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
See the Exhibit Index included immediately preceding the exhibits to this
Registration Statement.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reofferring of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reofferring prospectus will contain the information
called for by the applicable registration form with respect to reofferrings by
persons who may be deemed to be underwriters, in addition to the information
called for by the other items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed pursuant
to the immediately preceding paragraph or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in
II-1
<PAGE> 225
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
<PAGE> 226
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Waltham, Commonwealth of
Massachusetts, on 4th of June, 1996.
THERMO ELECTRON CORPORATION
By: /s/ GEORGE N. HATSOPOULOS
----------------------------------
George N. Hatsopoulos
President
KNOW ALL MEN BY THESE PRESENTS that each individual whose signature appears
below constitutes and appoints John N. Hatsopoulos, Paul F. Kelleher, Seth H.
Hoogasian, Sandra L. Lambert and Jonathan W. Painter, and each of them, as his
or her true and lawful attorneys-in-fact and agents for the undersigned, with
full power of substitution, for and in the name, place and stead of the
undersigned, to sign and file with the Securities and Exchange Commission under
the Securities Act of 1933 any and all amendments (including post-effective
amendments) and exhibits to this Registration Statement and any and all
applications and other documents to be filed with the Securities and Exchange
Commission pertaining to the registration of the securities covered hereby, with
full power and authority to do and perform any and all acts and things
whatsoever requisite and necessary or desirable.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ----------------------------------- --------------
<C> <S> <C>
/s/ GEORGE N. HATSOPOULOS President, Chief Executive Officer, June 4, 1996
- ------------------------------------------ Chairman of the Board of
George N. Hatsopoulos Directors
/s/ JOHN N. HATSOPOULOS Executive Vice President and Chief June 4, 1996
- ------------------------------------------ Financial Officer
John N. Hatsopoulos
/s/ PAUL F. KELLEHER Vice President, Finance (Chief June 4, 1996
- ------------------------------------------ Accounting Officer)
Paul F. Kelleher
/s/ JOHN M. ALBERTINE Director June 4, 1996
- ------------------------------------------
John M. Albertine
/s/ PETER O. CRISP Director June 4, 1996
- ------------------------------------------
Peter O. Crisp
/s/ ELIAS P. GYFTOPOULOS Director June 4, 1996
- ------------------------------------------
Elias P. Gyftopoulos
</TABLE>
II-3
<PAGE> 227
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ----------------------------------- --------------
<C> <S> <C>
/s/ FRANK JUNGERS Director June 4, 1996
- ------------------------------------------
Frank Jungers
/s/ ROBERT A. MCCABE Director June 4, 1996
- ------------------------------------------
Robert A. McCabe
/s/ FRANK E. MORRIS Director June 4, 1996
- ------------------------------------------
Frank E. Morris
/s/ DONALD E. NOBLE Director June 4, 1996
- ------------------------------------------
Donald E. Noble
/s/ HUTHAM S. OLAYAN Director June 4, 1996
- ------------------------------------------
Hutham S. Olayan
/s/ ROGER D. WELLINGTON Director June 4, 1996
- ------------------------------------------
Roger D. Wellington
</TABLE>
II-4
<PAGE> 228
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NO.
- ------------ ---------------------------------------------------------------- -------------------
<C> <S> <C>
2.1 Agreement and Plan of Merger dated as of June , 1996, among
SensorMedics Corporation, Thermo Electron Corporation and SMC
Acquisition Corp., including the principal exhibits thereto.
Schedules to the Agreement and Plan of Merger are not filed, but
will be provided supplementally to the Commission upon
request.........................................................
3.1 Restated Certificate of Incorporation of the Registrant, as
amended (filed as Exhibit 3(i) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended July 2, 1994 [File No.
1-8002] and incorporated herein by reference)...................
3.2 Certificate of Amendment to Restated Certificate of
Incorporation, as amended, dated May 22, 1996...................
3.3 By-laws of the Registrant, as amended (filed as Exhibit 3.2 to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended January 1, 1994 [File No. 1-8002] and incorporated herein
by reference)...................................................
4.1 Fiscal Agency Agreement dated July 29, 1992 between the
Registrant and Chemical Bank, pertaining to the Registrant's
4 5/8% Senior Convertible Debentures due 1997 (filed as Exhibit
19 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 27, 1992 [File No. 1-8002] and incorporated
herein by reference)............................................
Fiscal Agency Agreement dated as of April 15, 1994 between the
Registrant and Chemical Bank, pertaining to the Registrant's 5%
Senior Convertible Debentures due 2001 (filed as Exhibit 4.1 to
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended April 2, 1994 [File No. 1-8002] and incorporated herein by
reference)......................................................
Fiscal Agency Agreement dated as of January 3, 1996 between the
Registrant and Chemical Bank pertaining to the Registrant's
4 1/4% Subordinated Convertible Debentures due 2003 (filed as
Exhibit 4.1 to the Registrant's Annual Report on Form 10-K for
the year ended December 30, 1995 [File No. 1-8002] and
incorporated herein by reference)...............................
The Registrant agrees, pursuant to Item 601(b)(4)(iii)(A) of
Regulation S-K, to furnish to the Commission upon request, a
copy of each instrument with respect to other long-term debt of
the Registrant or its consolidated subsidiaries.................
4.2 Rights Agreement dated as of January 19, 1996 between the
Registrant and The First National Bank of Boston, which includes
as Exhibit A the Form of Certificate of Designations, as Exhibit
B the Form of Rights Certificate, and as Exhibit C the Summary
of Rights to Purchase Preferred Stock (filed as Exhibit 1 to the
Registrant's Registration Statement on Form 8-A, declared
effective by the Commission on January 31, 1996 [File No.
1-8002] and incorporated herein by reference)...................
5.1* Opinion of Seth H. Hoogasian, Esq...............................
8.1* Opinion of Riordan & McKinzie...................................
</TABLE>
<PAGE> 229
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NO.
- ------------ ---------------------------------------------------------------- -------------------
<C> <S> <C>
10.1 Thermo Electron Corporate Charter as amended and restated
effective January 3, 1993 (filed as Exhibit 10.1 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended January 2, 1993 [File No. 1-8002] and incorporated herein
by reference)...................................................
10.2 Form of Severance Benefit Agreement with officers (filed as
Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 29, 1990 [File No. 1-8002] and
incorporated herein by reference)...............................
10.3 Form of Indemnification Agreement with directors and officers
(filed as Exhibit 10.16 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 29, 1990 [File No.
1-8002] and incorporated herein by reference)...................
10.4 Loan and Reimbursement Agreement dated as of December 1, 1991
among North County Resource Recovery Associates; Union Bank of
Switzerland; National Westminster Bank PLC and Banque Paribas,
New York Branch, as lead managers; Credit Local de France as
co-lead manager; and Union Bank of Switzerland as issuing bank
and as agent (filed as Exhibit 10.39 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 2, 1993
[File No. 1-8002] and incorporated herein by reference).........
10.5 Amended and Restated Reimbursement Agreement dated as of
December 31, 1993 among Chemical Trust Company of California as
Owner Trustee; Delano Energy Company Inc.; ABN AMRO Bank N.V.,
Boston Branch, for itself and as Agent; The First National Bank
of Boston, as Co-agent; Barclays Bank PLC, as Co-agent; Societe
Generale, as Co-agent; and BayBank, as Lead Manager (filed as
Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended January 1, 1994 [File No. 1-8002] and
incorporated herein by reference)...............................
10.6 Amended and Restated Participation Agreement dated as of
December 31, 1991 among Delano Energy Company Inc.; Thermo
Ecotek Corporation (formerly Thermo Energy Systems Corporation);
Chemical Trust Company of California, as Owner Trustee; ABN AMRO
Bank N.V., Boston Branch, as Co-agent; Bank of Montreal, as
Co-agent; Barclays Bank PLC, as Co-agent; Society Generale, as
Co-agent; BayBank, as Lead Manager; and ABN AMRO Bank N.V.,
Cayman Island Branch, and joined in by the Registrant (filed as
Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended January 1, 1994 [File No. 1-8002] and
incorporated herein by reference)...............................
10.7 Turnkey Engineering, Procurement, Construction and Initial
Operation Agreement for a deinking pulp facility dated as of
November 1, 1994 between the Registrant, as contractor, and
Great Lakes Pulp Partners I, L.P., as owner (filed as Exhibit
10.7 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994 [File No. 1-8002] and
incorporated herein by reference). Pursuant to Item 601(b)(2) of
Regulation S-K, schedules to this Agreement have been omitted.
The Company hereby undertakes to furnish supplementally a copy
of such schedules to the Commission upon request................
</TABLE>
<PAGE> 230
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NO.
- ------------ ---------------------------------------------------------------- -------------------
<C> <S> <C>
10.8 Incentive Stock Option Plan of the Registrant (filed as Exhibit
4(d) to the Registrant's Registration Statement on Form S-8
[Reg. No. 33-8993] 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
9,035,156 shares, after adjustment to reflect share increases
approved in 1984 and 1986, share decrease approved in 1989, and
3-for-2 stock splits effected in October 1986, October 1993 and
May 1995). .....................................................
10.9 Nonqualified Stock Option Plan of the Registrant (filed as
Exhibit 4(e) to the Registrant's Registration Statement on Form
S-8 [Reg. No. 33-8993] and incorporated herein by reference).
(Plan amended in 1984 to extend expiration date to December 14,
1994; maximum number of shares issuable in the aggregate under
this plan and the Registrant's Incentive Stock Option Plan is
9,035,156 shares, after adjustment to reflect share increases
approved in 1984 and 1986, share decrease approved in 1989, and
3-for-2 stock splits effected in October 1986, October 1993 and
May 1995). .....................................................
10.10 Deferred Compensation for Directors of the Registrant (filed as
Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended January 3, 1987 [File No. 1-8002] and
incorporated herein by reference). (Maximum number of shares
issuable is 452,812 shares, after adjustment to reflect share
increases approved in 1986 and 1992 and 3-for-2 stock splits
effected in October 1986, October 1993 and May 1995). ..........
10.11 Equity Incentive Plan of the Registrant (filed as Exhibit 10.1
to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended July 2, 1994 [File No. 1-8002] and incorporated
herein by reference). (Plan amended in 1989 to restrict exercise
price for SEC reporting persons to not less than 50% of fair
market value or par value; maximum number of shares issuable is
7,050,000 shares, after adjustment to reflect 3-for-2 stock
splits effected in October 1993 and May 1995 and share increase
approved in 1994). .............................................
10.12 Amended and Restated Directors' Stock Option Plan of the
Registrant (filed as Exhibit 10.25 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994
[File No. 1-8002] 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 the
Registrant's subsidiaries for services rendered to such
affiliated corporations. Such plans were filed as Exhibits 10.15
through 10.17 and 10.19 through 10.74 to the Registration
Statement on Form S-1 (Registration No. 333-2924) of Trex
Medical Corporation filed March 29, 1996 and are incorporated
herein by reference.
11 Computation of earnings per share for the three years ended
December 30, 1995. .............................................
11.1 Computation of earnings per share for the three months ended
April 1, 1995 and March 30, 1996. ..............................
</TABLE>
<PAGE> 231
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NO.
- ------------ ---------------------------------------------------------------- -------------------
<C> <S> <C>
21 Subsidiaries of the Registrant (filed as Exhibit 21 to the
Registrant's Annual Report on Form 10-K for the year ended
December 30, 1995 [File No. 1-8002] and incorporated herein by
reference. .....................................................
23 Consent of Arthur Andersen LLP. ................................
23.1 Consent of Arthur Andersen LLP. ................................
23.2* Consent of Seth H. Hoogasian, Esq. (contained in Exhibit
5.1). ..........................................................
23.3* Consent of Riordan & McKinzie (contained in Exhibit 8.1). ......
24.1 Power of Attorney (see page II -- 3 of this Registration
Statement). ....................................................
99.1 Form of Proxy for Special Meeting of Shareholders. .............
99.2 Valuation and Qualifying Accounts for the three years ended
December 30, 1995 (filed on Schedule II to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
30, 1995
[File No. 1-8002] and incorporated herein by reference). .......
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 2.1
DRAFT OF 6/4/96
AGREEMENT AND PLAN OF MERGER
Agreement entered into as of June __, 1996 by and among Thermo
Electron Corporation, a Delaware corporation (the "Buyer"), SMC Acquisition
Corp., a Delaware corporation and a wholly-owned subsidiary of the Buyer (the
"Transitory Subsidiary"), and SensorMedics Corporation, a California corporation
(the "Company"). The Buyer, the Transitory Subsidiary and the Company are
referred to collectively herein as the "Parties."
This Agreement contemplates a tax-free merger of the
Transitory Subsidiary into the Company. In such merger, the stockholders of the
Company will receive capital stock of the Buyer in exchange for their capital
stock of the Company.
Now, therefore, in consideration of the representations,
warranties and covenants herein contained, the Parties agree as follows.
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section
1.3 below), in accordance with this Agreement, the General Corporation Law of
the State of California (the "California Law") and the Delaware General
Corporation Law (the "Delaware Law"), the Transitory Subsidiary shall be merged
with and into the Company (the "Merger"), the separate existence of the
Transitory Subsidiary shall cease and the Company shall continue as the
surviving corporation. The Company is hereinafter sometimes referred to as the
"Surviving Corporation." At the election of the Buyer, any direct or indirect
wholly-owned subsidiary of the Buyer organized under the laws of a state of the
United States may be substituted for the Transitory Subsidiary as a constituent
corporation in the Merger for purposes of this Section 1.1. At the election of
the Buyer, the Merger may be structured so that the Company shall be merged with
and into the Transitory Subsidiary with the result that the Transitory
Subsidiary shall be the "Surviving Corporation." If the Buyer elects to
structure the Merger so that the Transitory Subsidiary, rather than the Company,
is the Surviving Corporation, (a) the inaccuracy of any representation or
warranty of the Company which is premised on the assumption that the Company
shall be the Surviving Corporation, which representation or warranty becomes
inaccurate solely as the result of the Transitory Subsidiary, rather than the
Company, being the Surviving Corporation, shall not be deemed to be a breach of
such representation or warranty and shall not release Buyer and the Transitory
Subsidiary from their duties and obligations under this Agreement and (b) the
other provisions of this Agreement relating to the Merger (including without
limitation Section 1.4) shall be deemed to be appropriately modified to reflect
such alternative structure.
<PAGE> 2
1.2 Effect of the Merger. At the Effective Time, the Surviving
Corporation shall continue its corporate existence under the laws of the State
of California and the Merger shall have the effects set forth in Section 259 of
the Delaware Law and Section 1107 of the California Law.
1.3 Consummation of the Merger. At the Closing (as defined in
Section 1.6), the Parties will cause the Merger to be consummated by delivering
to the Secretary of State of the State of Delaware a certificate of merger and
by delivering to the Secretary of State of the State of California an agreement
of merger, together with officer's certificates, each in such form or forms as
may be required by, and executed and acknowledged in accordance with, the
relevant provisions of the Delaware Law and the California Law (such documents
being referred to collectively as the "Merger Documents"), and shall make all
other filings and recordings required by the Delaware Law and the California Law
in connection with the Merger. The Merger shall become effective at the time of
filing of the appropriate Merger Documents with the Secretary of State of the
State of California, or at such later time, which shall be as soon as reasonably
practicable, specified as the effective time in the Merger Documents (the
"Effective Time").
1.4 Articles of Incorporation; Bylaws; Directors and Officers.
The Articles of Incorporation and By-laws of the Surviving Corporation shall be
the Articles of Incorporation and By-laws of the Company as in effect
immediately prior to the Effective Time until thereafter amended as provided
under the California Law. The directors of the Transitory Subsidiary immediately
prior to the Effective Date will be the initial directors of the Surviving
Corporation, and the officers of the Company immediately prior to the Effective
Date will be the initial officers of the Surviving Corporation, in each case
until their successors are elected and qualified.
1.5 Conversion of Company Shares.
(a) At the Effective Time, by virtue of the Merger and
without any action on the part of the Transitory Subsidiary, the Company, the
Surviving Corporation or the holder of any of the of the following securities:
(i) Subject to Section 1.5(b), (c) and (d), each share
of the Company's common stock, no par value (the "Company Common Stock"), issued
and outstanding immediately prior to the Effective Time (the "Outstanding Common
Stock") (other than shares to be canceled pursuant to clause (iii) below), shall
be canceled and extinguished and be converted into and become the right to
receive .2864 shares of the common stock, $1.00 par value, of the Buyer (the
"Buyer Common Stock"). The fraction of a share of Buyer Common Stock into which
a share of Company Common Stock is to be converted pursuant to the preceding
sentence is referred to herein as the "Common Stock Exchange Ratio."
2.
<PAGE> 3
(ii) Subject to Section 1.5(b), (c) and (d), each
share of the Company's Series A Preferred Stock, no par value ("Series A
Stock"), issued and outstanding immediately prior to the Effective Time (the
"Outstanding Series A Stock") shall be canceled and extinguished and be
converted into the right to receive, at the election of the holder thereof,
either (A) .0411 shares of Buyer Common Stock or (B) $1.74 in cash pursuant to
Section A.4. of Article Four of the Company's Amended and Restated Articles of
Incorporation.
(iii) Each share of the Company's Series B Preferred
Stock, no par value ("Series B Stock"), issued and outstanding immediately prior
to the Effective Time (the "Outstanding Series B Stock") shall be canceled and
extinguished and be converted into the right to receive $12.51 in cash pursuant
to Section A.4. of Article Four of the Company's Amended and Restated Articles
of Incorporation. The Outstanding Common Stock, Outstanding Series A Stock and
Outstanding Series B Stock are sometimes collectively referred to herein as the
"Company Shares."
(iv) Each Company Share that is issued and outstanding
immediately prior to the Effective Time and owned by the Buyer, the Transitory
Subsidiary or the Company or any direct or indirect subsidiary of the Buyer, the
Transitory Subsidiary or the Company, shall be canceled and retired, and no
payment shall be made with respect thereto.
(v) Each share of the Transitory Subsidiary's capital
stock issued and outstanding immediately prior to the Effective Time shall be
converted into and become one validly issued, fully paid and nonassessable share
of the same class of capital stock of the Surviving Corporation.
(vi) The adoption of this Agreement and the approval
of the Merger by the holders of Company Shares shall constitute their
ratification and approval of all actions taken, and all instruments, documents
and certificate executed, and all amendments to the charter or by-laws of the
Company required, by or on behalf of the Company to give effect to the Merger
and the transactions contemplated hereby.
(b) Post-Closing Adjustment. The number of shares of Buyer
Common Stock issuable in consideration for the Company Shares shall be subject
to adjustment after the Closing Date as follows:
(i) Within 60 days after the Closing Date (as defined
in Section 1.6), the Buyer shall prepare and deliver to George D. Holmes, as
representative of the Company Stockholders (as defined in paragraph (ii) below)
(the "Company Stockholder Representative"), a balance sheet reflecting the net
assets of the Company as of the Closing Date (the "Draft Closing Balance
Sheet"). The Buyer shall prepare the Draft Closing
3.
<PAGE> 4
Balance Sheet in accordance with GAAP (as defined in Section 2.6 below). For
purposes of this Agreement, "net assets" shall mean total assets of the Company
minus total liabilities of the Company (excluding any liability to Cowen & Co.
under the Engagement Letter dated _________, 1995 (the "Engagement letter") and
excluding the Bonus Pool Amount (as defined in Section 2.19)).
(ii) The Company Stockholder Representative shall
deliver to the Buyer within 60 days after receiving the Draft Closing Balance
Sheet a detailed statement describing his objections (if any) thereto. Failure
of the Company Stockholder Representative so to object to the Draft Closing
Balance Sheet shall constitute acceptance thereof, whereupon the Draft Closing
Balance Sheet shall be deemed to be the "Closing Balance Sheet". The Buyer and
the Company Stockholder Representative shall use reasonable efforts to resolve
any such objections, but if they do not reach a final resolution within 30 days
after the Buyer has received the statement of objections, the Buyer and the
Company Stockholder Representative shall select an internationally recognized
accounting firm mutually acceptable to them (the "Neutral Auditors") to resolve
any remaining objections. If the Buyer and the Company Stockholder
Representative are unable to agree on the choice of Neutral Auditors, they shall
select as Neutral Auditors a "big six" accounting firm other than Arthur
Andersen LLP by lot. The Neutral Auditors shall determine whether the objections
raised by the Company Stockholder Representative are valid. The Draft Closing
Balance Sheet shall be adjusted in accordance with the Neutral Auditor's
determination and, as so adjusted, shall be the Closing Balance Sheet. Such
determination by the Neutral Auditors shall be conclusive and binding upon the
Buyer and the stockholders of the Company as of the Effective Time (the "Company
Stockholders"). The Buyer, on one hand, and the Company Stockholders, on the
other, shall share equally the fees and expenses of the Neutral Auditors. The
Company Stockholders' portion of such fees and expenses shall be deducted from
the Indemnity Escrow Shares (as defined in Section 1.5(c)), as provided in the
Escrow Agreement (as defined in Section 1.7).
(iii) During the period of any dispute referred to
above, the Buyer shall cooperate fully with the Company Stockholder
Representative and the Company Stockholder Representative's accountants. The
Company Stockholder Representative shall have access to all books and records
and other information of the Company reasonably necessary for the evaluation of
the Draft Closing Balance Sheet; provided, however, that any such access shall
be allowed only in such manner as not to interfere unreasonably with the
operations of the Company.
(iv) If the net tangible assets as shown on the
Closing Balance Sheet are less than $11,651,000, then a number of Indemnity
Escrow Shares (as defined in Section 15(c)) having a fair market value (as
defined in the Escrow Agreement) equal to such shortfall shall be deducted from
the Indemnity Escrow Shares and returned by
4.
<PAGE> 5
the Escrow Agent to the Buyer as provided in the Escrow Agreement, and such
shares shall not be issued in consideration for the Company Shares in the
Merger.
(v) The adoption of this Agreement and the approval of
the Merger by the stockholders of the Company shall constitute approval of the
appointment of the Company Stockholder Representative and ratification of all
actions taken by the Company Stockholder Representative pursuant to this Section
1.5(b).
(c) Notwithstanding anything to the contrary in Section
1.5(a) or (b), in no event will or more than __ shares of Buyer Common Stock be
issued in consideration for the Company Shares (including any Company Shares
held by holders of Dissenting Shares (as defined in Section 1.5(d)). In the
event that the number of shares of Buyer Common Stock issuable in consideration
for the Company Shares (after giving effect to any adjustment caused by the
preceding sentence or Section 1.5(b)), is determined as a result of the
preceding sentence, then the number of shares of Buyer Common Stock that would
be issued to the Company Stockholders but for the preceding sentence shall be
reduced pro rata based upon the number of shares of Buyer Common Stock that each
Company Stockholder would have been entitled to receive but for the preceding
sentence. The shares of Buyer Common Stock issuable in consideration for the
Company Shares (after giving effect to any adjustment caused by the first
sentence of this Section 1.5(c)) (the "Buyer Shares", shall be subject to
equitable adjustment in the event of any stock split, stock dividend, reverse
stock split or similar event affecting the Buyer Common Stock between the date
of this Agreement and the Effective Time. At Closing (as defined in Section 1.6
below) (i) ten percent of the Buyer Shares (the "Indemnity Escrow Shares") and
(ii) ___Buyer Shares (the "FDA Shares" and, together with the Indemnity Escrow
Shares, the "Escrow Shares") shall be withheld from the payment that Company
Stockholders are entitled to receive pursuant to this Section 1.5, and placed in
an escrow account as described in Section 1.12. Such withholding shall be made
pro rata based on the number of Buyer Shares that each Company Stockholder would
have been entitled to receive but for the creation of such escrow. The shares of
Buyer Common Stock issued at Closing are referred to as the "Closing Shares."
(d) (i) Company Shares held by a holder who, subject to
and in accordance with Section 1300 et seq. of the California Law, has demanded
and perfected his right to an appraisal of his Company Shares and has not
effectively withdrawn or lost his right to such appraisal ("Dissenting Shares"),
shall not be converted into a right to receive Buyer Shares or cash, as the case
may be, and such holder shall be entitled only to such rights as are granted by
Section 1300 et seq. of the California Law. If after the Effective Time such
holder withdraws, with the consent of the Surviving Corporation, or loses his
right to appraisal for his Company Shares, such Company Shares shall be treated
as if they had been converted as of the Effective Time into the right to receive
the Buyer Shares, issuable in respect of such Company Shares pursuant to Section
1.5.
5.
<PAGE> 6
(ii) The Company shall give the Buyer and the
Transitory Subsidiary prompt notice of any demands for purchase, or notices of
intent to demand purchase, received by the Company with respect to Company
Shares, and the Buyer and the Transitory Subsidiary shall have the right to
control all negotiations and proceedings with respect to such demands. The
Company shall not, except with the prior written consent of the Buyer and the
Transitory Subsidiary or as otherwise required by law, make any payment with
respect to, or settle, or offer to settle, any such demands.
1.6 The Closing. The closing of the transactions contemplated
by this Agreement (the "Closing") shall take place at the offices of the Buyer
in Waltham, Massachusetts, commencing at 9:00 a.m. local time on _____________,
1996, or, if all of the conditions to the obligations of the Parties to
consummate the transactions contemplated hereby have not been satisfied or
waived by such date, on such mutually agreeable later date as soon as
practicable after the satisfaction or waiver of all conditions to the
obligations of the Parties to consummate the transactions contemplated hereby
(the "Closing Date").
1.7 Actions at the Closing. At the Closing, (a) the Company
shall deliver to the Buyer and the Transitory Subsidiary the various
certificates, instruments and documents referred to in Section 5.2, (b) the
Buyer and the Transitory Subsidiary shall deliver to the Company the various
certificates, instruments and documents referred to in Section 5.3, (c) the
Company and the Transitory Subsidiary shall file the Merger Documents as
provided in Section 1.3, and (d) the Buyer, the Company Stockholder
Representative and the Escrow Agent (as defined therein) shall execute and
deliver the Indemnification and Stock Escrow Agreement attached hereto as
Exhibit A (the "Escrow Agreement") and the Buyer shall deliver to the Escrow
Agent certificates for the Escrow Shares being placed in escrow on the Closing
Date pursuant to Section 1.12.
1.8 Additional Action. The Surviving Corporation may, at any
time after the Effective Time, take any action, including executing and
delivering any document, in the name and on behalf of either the Company or the
Transitory Subsidiary, in order to consummate the transactions contemplated by
this Agreement.
1.9 Exchange of Shares
(a) Promptly following the Closing Date, Boston Equiserve,
L.P., the Buyer's stock transfer agent (the "Exchange Agent"), shall transmit to
each Company Stockholder a form of letter of transmittal (the "Letter of
Transmittal") and instructions for use in effecting the surrender of each
certificate representing Company Shares (a "Certificate") held by such Company
Stockholder in exchange for the Closing Shares or cash, as the case may be,
represented by such Company Shares. Upon the proper surrender of such
Certificates and a duly executed Letter of Transmittal and any required tax
6.
<PAGE> 7
certifications, in accordance with such instructions, to the Exchange Agent, the
Exchange Agent shall deliver a certificate for the Buyer Shares that such
Company Stockholder is entitled to receive, minus Escrow Shares as provided in
Section 1.5(c), and/or a check for any cash that such Company Stockholder is
entitled to receive. It shall be a condition of such payment and delivery that
the surrendered Certificate be properly endorsed or otherwise in proper form for
transfer and that the person requesting such shall pay any transfer or other
taxes required by reason of such payment or delivery or establish to the
satisfaction of the Exchange Agent, the Buyer and/or the Surviving Corporation
that such tax has been paid or is not applicable. Until so surrendered for
exchange, each Certificate heretofore representing Company Shares (other than
Dissenting Shares) shall, subject to Section 1.12 hereof, be deemed for all
purposes to evidence the right to receive Buyer Shares or cash as described in
accordance with Section 1.5 above; provided, however, that unless and until any
such outstanding Certificate is so surrendered, the holder of such outstanding
Certificate shall cease to have any rights as a stockholder of the Company,
except such rights, if any, as such holder may have with respect to Dissenting
Shares and shall not be entitled to receive any consideration from the Surviving
Corporation and/or the Buyer with respect to the Company Shares represented by
such Certificate. Each Company Stockholder upon surrender of each such
Certificate to the Exchange Agent, shall receive promptly in exchange for each
such Certificate the Buyer Shares and/or cash to which such holder is entitled
pursuant to this Agreement.
(b) In the event any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed, the Buyer shall issue
in exchange for such lost, stolen or destroyed Certificate the Buyer Shares or
cash issuable in exchange therefor as provided in Section 1.5. The Buyer may, in
its discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed Certificate to give the Buyer a bond in
such sum as it may direct as indemnity against any claim that may be made
against the Buyer with respect to the Certificate alleged to have been lost,
stolen or destroyed.
1.10 Dividends. No dividends or other distributions that are
payable to the holders of record of Buyer Common Stock as of a date on or after
the Closing Date shall be paid to former Company Stockholders entitled by reason
of the Merger to receive Buyer Shares until such holders surrender their
Certificates in accordance with Section 1.9. Upon such surrender, the Buyer
shall pay or deliver to the persons in whose name the certificates representing
such Buyer Shares are issued any dividends or other distributions that are
payable to the holders of record of Buyer Common Stock as of a date on or after
the Closing Date and which were paid or delivered between the Effective Time and
the time of such surrender; provided that no such person shall be entitled to
receive any interest on such dividends or other distributions.
7.
<PAGE> 8
1.11 Fractional Shares. No certificates or scrip representing
fractional Buyer Shares shall be issued to former Company Stockholders upon the
surrender for exchange of Certificates, and such former Company Stockholders
shall not be entitled to any voting rights, rights to receive any dividends or
distributions or other rights as a stockholder of the Buyer with respect to any
fractional Buyer Shares that would otherwise be issued to such former Company
Stockholders. In lieu of any fractional Buyer Shares that would otherwise be
issued, each former Company Stockholder that would have been entitled to receive
a fractional Buyer Share shall, upon proper surrender of such person's
Certificates, receive a cash payment equal to the closing price per share of the
Buyer Common Stock on the New York Stock Exchange on the trading day immediately
preceding the Closing Date, multiplied by the fraction of a share that such
Company Stockholder would otherwise be entitled to receive.
1.12 Escrow.
(a) On the Closing Date, the Buyer shall deliver to the
Escrow Agent certificates (issued in the name of the Escrow Agent or its
nominee) representing the Escrow Shares, as described in Section 1.5(c). The
Escrow Shares shall be held by the Escrow Agent under the Escrow Agreement
pursuant to the terms thereof. The Escrow Shares shall be held as a trust fund
and shall not be subject to any lien, attachment, trustee process or any other
judicial process of any creditor of any party, and shall be held and disbursed
solely for the purposes and in accordance with the terms of the Escrow
Agreement. It is intended that the assets held in escrow as above provided shall
facilitate the ability of the Buyer and the Surviving Corporation to recover
amounts to which they are entitled under this Agreement or the Escrow Agreement
as a result of misrepresentations, breaches of warranties and breaches of
covenants contained in this Agreement and to satisfy claims of the Buyer and the
Surviving Corporation arising as a result of this Agreement or the Escrow
Agreement and to satisfy the Company's obligations under Section 1.5(b) hereof.
Accordingly, and to the extent necessary to provide such protection to the Buyer
and the Surviving Corporation, property held in escrow thereunder shall be
available to satisfy claims of the Buyer and the Surviving Corporation under
this Agreement or the Escrow Agreement to the extent provided in such
agreements.
(b) The adoption of this Agreement and the approval of
the Merger by the Company Stockholders shall constitute approval of the Escrow
Agreement and of all of the arrangements relating thereto, including without
limitation the placement of the Escrow Shares in escrow and the appointment of
the Company Stockholder Representative.
1.13 Closing of Transfer Books. At the Effective Time, the
stock transfer books of the Company shall be closed and no transfer of Company
Shares shall thereafter be made. If, after the Effective Time, Certificates are
presented to the Surviving Corporation
8.
<PAGE> 9
they shall be canceled and exchanged for Buyer Shares or cash in accordance with
Section 1.5, subject to Section 1.12 and to applicable law in the case of
Dissenting Shares.
1.14 Stock Options. At or prior to the Effective Time, Buyer
and the Company shall take all action necessary to cause the assumption by the
Buyer as of the Effective Time of the options to purchase Company Common Stock
outstanding as of the Effective Time (the "Company Options"). Each of the
Company Options shall be converted without any action on the part of the holder
thereof into an option to purchase shares of Buyer Common Stock (the "Buyer
Options") as of the Effective Time. The number of shares of Buyer Common Stock
that each record holder of an option agreement which represents a Company Option
(the "Optionholders") shall be entitled to receive upon the exercise of such
option shall be a number of whole and fractional shares of Buyer Common Stock
determined by multiplying the number of shares of Company Common Stock subject
to such option, determined immediately before the Effective Time, by the Common
Stock Exchange Ratio. The option exercise price of each share of Buyer Common
Stock subject to any Buyer Option shall be the amount (rounded up to the nearest
whole cent) obtained by dividing the exercise price per share of Company Common
Stock at which the assumed Company Option was exercisable immediately before the
Effective Time by the Common Stock Exchange Ratio. The assumption and conversion
of Company Options to Buyer Options as provided herein shall not give the
Optionholders additional benefits which they did not have immediately prior to
the Effective Time, result in any acceleration of any vesting schedule for any
Company Option, other than any acceleration of the vesting schedules pursuant to
the terms of the Company's 1984 Stock Option Plan (as restated through May 1,
1995) (the "Option Plan"), or relieve the Optionholders of any obligations or
restrictions applicable to their options or the shares obtainable upon exercise
of the options. Only whole shares of Buyer Common Stock shall be issued upon
exercise of any Buyer Option and in lieu of receiving any fractional share of
Buyer Common Stock, the holder of such option shall receive in cash the fair
market value of the fractional share, net of the applicable exercise price of
the fractional share and applicable withholding taxes.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Buyer that the
statements contained in this Article II are true and correct, except as set
forth in the disclosure schedule attached hereto as Exhibit B (the "Disclosure
Schedule"). The Disclosure Schedule shall be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Article
II, and the disclosures in any paragraph of the Disclosure Schedule shall
qualify only the corresponding paragraph in this Article II. Each individual
representation and warranty contained herein shall be interpreted and enforced
separately and no representation or warranty contained herein shall be construed
as limiting any other representation and
9.
<PAGE> 10
warranty contained herein. The Buyer shall be assumed to have relied upon the
representations and warranties contained herein, notwithstanding any
investigation of the Company made by the Buyer prior to the Closing. The term
"ordinary course of business", when used in this Article II, shall mean the
ordinary course of business of the Company consistent with its past custom and
practice (including with respect to frequency and amount).
2.1 Organization, Qualification and Corporate Power. The
Company is a corporation duly organized, validly existing and in corporate and
tax good standing under the laws of the state of California. The Company is duly
qualified to conduct business and is in corporate and tax good standing under
the laws of each jurisdiction in which the nature of its businesses or the
ownership or leasing of its properties requires such qualification. The Company
has all requisite corporate power and authority to carry on the businesses in
which it is engaged and to own and use the properties owned and used by it. The
Company has furnished to the Buyer true and complete copies of its Articles of
Incorporation and By-laws, each as amended and as in effect on the date hereof.
The Company is not in default under or in violation of any provision of its
Amended and Restated Articles of Incorporation or By-laws or any other
instrument, document or agreement setting forth the terms and conditions of any
shares of capital stock or other securities of the Company, or the rights and
obligations of any holder of such shares or other securities, including, without
limitation, the Securities Purchase Agreement dated as of December 23, 1983
among the Company and the Purchasers named in Exhibits 1 and 2 thereto (the
"Series A Agreement"), and the Series B Preferred Stock Purchase Agreement dated
as of September 28, 1984 among the Company and the Purchasers listed in the
Schedule of Purchasers thereto, as amended (the "Series B Agreement").
2.2 Capitalization. The authorized capital stock of the
Company consists of (i) 25,000,000 shares of Company Common Stock, of which
1,970,622 shares are issued and outstanding and (ii) 8,000,000 shares of
preferred stock, no par value, of which (a) 3,820,000 shares have been
designated Series A Stock, of which 3,820,000 shares are issued and outstanding
and (b) 1,668,985 shares have been designated as Series B Stock, of which
1,187,414 shares are issued and outstanding. The Series A Stock is not
convertible into shares of Company Common Stock except upon the initial public
offering of the Company Common Stock. The shares of Series B Stock issued and
outstanding are convertible into an aggregate of ________ shares of Company
Common Stock, representing the conversion of each share of Series B Stock into
___ shares of Company Common Stock and the conversion of accrued dividends on
the Series B Stock at a rate of one share of Company Common Stock for each
$10.52 of accrued dividends. The liquidation preferences (including any
accumulated but unpaid dividends through June 28, 1996) for the Series A Stock
and the Series B Stock would be $1.74 and $12.51, respectively, per share. Under
the terms of the Series A Stock and the Series B Stock, the Merger will be
considered to be a liquidation of the Company. Section 2.2 of the Disclosure
Schedule sets forth a complete and accurate list of (i) all stockholders of the
Company, indicating the type and number of
10.
<PAGE> 11
shares held by each stockholder, and (ii) all Optionholders and all holders of
outstanding warrants to purchase capital stock of the Company ("Warrants")
indicating the type and number of shares subject to each Company Option and
Warrant and the exercise price and vesting status of each Company Option and
Warrant. All of the issued and outstanding shares of Company Common Stock,
Series A Stock and Series B Stock are, and all shares of Company Common Stock
that may be issued upon exercise of Company Options and Warrants or upon
conversion of Series B Stock will be, upon such exercise or conversion, duly
authorized, validly issued, fully paid, nonassessable and free of all preemptive
rights. Each of the Warrants, upon consummation of the Merger, will be
exercisable in accordance with their terms without any action on the part of the
Surviving Corporation or the holder thereof, for that number of shares of Buyer
Common Stock that such holder would have been entitled to receive if he had
exercised such warrant in full immediately prior to the Effective Time. Except
as set forth in Section 2.2 of the Disclosure Schedule, there are no outstanding
or authorized shares of capital stock or other securities or options, warrants,
rights, agreements or commitments to which the Company is a party or which are
binding upon the Company providing for the issuance, disposition or acquisition
of any of its capital stock or other securities. There are no outstanding or
authorized stock appreciation, phantom stock or similar rights with respect to
the Company. There are no agreements, voting trusts, proxies, or understandings
with respect to the voting or registration under the Securities Act of 1933 (the
"Securities Act"), of any shares of any capital stock of Company. All of the
issued and outstanding shares of Company Common Stock, Series A Stock and Series
B Stock and other outstanding securities of the Company were issued in
compliance with applicable federal and state securities laws.
2.3 Authorization of Transaction. The Company has all
requisite power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. The execution and delivery of this Agreement
and, subject to the adoption of this Agreement and the approval of the Merger by
(a) the holders of a majority of the shares of Company Common Stock and Series B
Stock (as converted) issued and outstanding and entitled to vote, voting
together as a single class, (b) the holders of 75% of the shares of Series A
Stock issued and outstanding and entitled to vote and (c) the holders of 75% of
the shares of the Series B Stock issued and outstanding and entitled to vote
(the "Requisite Stockholder Approval"), the performance by the Company of this
Agreement and the consummation by the Company of the transactions contemplated
hereby have been duly and validly authorized by all necessary corporate action
on the part of the Company. This Agreement has been duly and validly executed
and delivered by the Company and constitutes a valid and binding obligation of
the Company, enforceable against the Company in accordance with its terms. The
Board of Directors of the Company has, after due consideration of its fiduciary
duties, (i) determined that this Agreement and the transactions contemplated
hereby, including the Merger, are fair to and in the best interests of the
Company and the shareholders of the Company, (ii) approved this Agreement and
the transactions contemplated hereby, including
11.
<PAGE> 12
the Merger and (iii) resolved to recommend approval and adoption of this
Agreement and the Merger by the shareholders of the Company.
2.4 Noncontravention. Subject to compliance with the
applicable requirements of the Securities Act and any applicable state
securities laws, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "Hart-Scott-Rodino Act"), and the filing of the Merger Documents
with the Secretary of State of the State of California and the Secretary of
State of the State of Delaware, neither the execution and delivery of this
Agreement by the Company, nor the consummation by the Company of the
transactions contemplated hereby, will (a) require on the part of the Company or
any corporation with respect to which the Company, directly or indirectly, has
the power to vote or direct the voting of sufficient securities to elect a
majority of the directors (any of the foregoing being referred to herein as a
"Subsidiary") any filing with, or any permit, authorization, consent or approval
of, any court, arbitrational tribunal, administrative agency or commission or
other governmental or regulatory authority or agency (a "Governmental Entity"),
(b) conflict with or violate any provision of the charter or By-laws of the
Company or any Subsidiary, (c) conflict with, result in a breach of, constitute
(with or without due notice or lapse of time or both) a default under, result in
the acceleration of, create in any party the right to accelerate, terminate,
modify or cancel, or require any notice, consent or waiver under, any contract,
lease, sublease, license, sublicense, franchise, permit, indenture, agreement or
mortgage for borrowed money, instrument of indebtedness, Security Interest (as
defined below) or other arrangement to which the Company or any Subsidiary is a
party or by which the Company or any Subsidiary is bound or to which any of
their assets is subject, (d) result in the imposition of any Security Interest
upon any assets of the Company or any Subsidiary or (e) violate any order, writ,
injunction, decree, statute, Rule or regulation applicable to the Company, any
Subsidiary or any of their properties or assets or (f) entitle any employee of
the Company or any Subsidiary to severance or other payments or to any increase
in compensation or benefits. For purposes of this Agreement, "Security Interest"
means any mortgage, pledge, security interest, encumbrance, charge, or other
lien (whether arising by contract or by operation of law), other than (i)
mechanic's, materialmen's, and similar liens, (ii) liens arising under worker's
compensation, unemployment insurance, social security, retirement, and similar
legislation, and (iii) liens on goods in transit incurred pursuant to
documentary letters of credit, in each case arising in the ordinary course of
business of the Company or any Subsidiary and not material to the Company and
its Subsidiaries taken as a whole. Section 2.4 of the Disclosure Schedule sets
forth a true, correct and complete list of all consents and approvals of
non-governmental third parties that are required in connection with the
consummation by the Company and the Subsidiaries of the transactions
contemplated by this Agreement.
2.5 Subsidiaries. Section 2.5 of the Disclosure Schedule sets
forth for each Subsidiary (a) its name and jurisdiction of incorporation, (b)
the number of shares of authorized capital stock of each class of its capital
stock, (c) the number of issued and
12.
<PAGE> 13
outstanding shares of each class of its capital stock, the names of the holders
thereof and the number of shares held by each such holder, (d) the number of
shares of its capital stock held in treasury, and (e) its directors and
officers. Each Subsidiary is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation. Each
Subsidiary is duly qualified to conduct business and is in corporate and tax
good standing under the laws of each jurisdiction in which the nature of its
businesses or the ownership or leasing of its properties requires such
qualification. Each Subsidiary has all requisite corporate power and authority
to carry on the businesses in which it is engaged and to own and use the
properties owned and used by it. The Company has delivered to the Buyer correct
and complete copies of the charter and By-laws of each Subsidiary, as amended to
date. No Subsidiary is in default under or in violation of any provision of its
charter or By-laws. All of the issued and outstanding shares of capital stock of
each Subsidiary are duly authorized, validly issued, fully paid, nonassessable
and free of preemptive rights. All shares of each Subsidiary that are held of
record or owned beneficially by either the Company or any Subsidiary are held or
owned free and clear of any restrictions on transfer (other than restrictions
under the Securities Act and state securities laws), claims, Security Interests,
options, warrants, rights, contracts, calls, commitments, equities and demands.
There are no outstanding or authorized options, warrants, rights, agreements or
commitments to which the Company or any Subsidiary is a party or which are
binding on any of them providing for the issuance, disposition or acquisition of
any capital stock of any Subsidiary. There are no outstanding stock
appreciation, phantom stock or similar rights with respect to any Subsidiary.
There are no voting trusts, proxies, or other agreements or understandings with
respect to the voting of any capital stock of any Subsidiary. The Company does
not control directly or indirectly or have any direct or indirect equity
participation in any corporation, partnership, trust, or other business
association which is not a Subsidiary.
2.6 Reports and Financial Statements. The Company has provided
to the Buyer (i) the audited consolidated balance sheets and statements of
income, changes in stockholders' equity and cash flows for each of the last
three fiscal years for the Company and the Subsidiaries (or such shorter periods
as such Subsidiaries have been in existence); and (ii) the unaudited
consolidated balance sheet and statements of income, changes in stockholders'
equity and cash flows as of and for the quarter ended as of March 31, 1996 (the
"Most Recent Fiscal Quarter End"). Such financial statements (collectively, the
"Financial Statements") have been prepared in accordance with United States
generally accepted accounting principles ("GAAP") applied on a consistent basis
throughout the periods covered thereby, fairly present the financial condition,
results of operations and cash flows of the Company and the Subsidiaries as of
the respective dates thereof and for the periods referred to therein and are
consistent with the books and records of the Company and the Subsidiaries,
provided, however, that the Financial Statements referred to in clause (ii)
above are subject to normal recurring year-end adjustments (which will not be
material) and do not include footnotes.
13.
<PAGE> 14
2.7 Absence of Certain Changes. Since the Most Recent Fiscal
Quarter End, (a) there has not been any material adverse change in the assets,
business, prospects, financial condition or results of operations of the Company
or any Subsidiary, nor has there occurred any event or development which could
reasonably be foreseen to result in such a material adverse change in the
future, and (b) neither the Company nor any Subsidiary has taken any of the
actions set forth in paragraphs (a) through (p) of Section 4.6.
2.8 Undisclosed Liabilities. Neither the Company nor any of
its Subsidiaries has any liability, whether absolute or contingent, liquidated
or unliquidated, accrued and unaccrued and whether due or to become due), except
for (a) liabilities shown on the balance sheet referred to in clause (ii) of
Section 2.6 (the "Most Recent Balance Sheet"), (b) liabilities which have arisen
since the Most Recent Fiscal Quarter End in the ordinary course of business and
which are similar in nature and amount to the liabilities which arose during the
comparable period of time in the immediately preceding fiscal year and (c)
contractual liabilities incurred in the ordinary course of business which are
not required by GAAP to be reflected on a balance sheet.
2.9 Tax Matters.
(a) Each of the Company and the Subsidiaries has filed in
a timely manner (including permitted exceptions) all Tax Returns (as defined
below) that it was required to file and all such Tax Returns were correct and
complete in all material respects. Each of the Company and the Subsidiaries has
paid all Taxes (as defined below) that are shown to be due on any such Tax
Returns. The unpaid Taxes of the Company and the Subsidiaries for tax periods
through the date of the Most Recent Balance Sheet do not exceed the accruals and
reserves for Taxes set forth on the Most Recent Balance Sheet. Neither the
Company nor any Subsidiary has any actual or potential liability for any Tax
obligation of any taxpayer (including without limitation any affiliated group of
corporations or other entities that included the Company or any Subsidiary
during a prior period) other than the Company and the Subsidiaries. All Taxes
that the Company or any Subsidiary is or was required by law to withhold or
collect have been duly withheld or collected and, to the extent required, have
been paid to the proper Governmental Entity. There are no liens for taxes on the
assets of the Company or any Subsidiary. For purposes of this Agreement, "Taxes"
means all taxes, charges, fees, levies or other similar assessments or
liabilities, including without limitation income, gross receipts, ad valorem,
premium, value-added, excise, real property, personal property, sales, use,
transfer, withholding, employment, payroll and franchise taxes imposed by the
United States of America or any state, local or foreign government, or any
agency thereof, or other political subdivision of the United States or any such
government, and any interest, fines, penalties, assessments or additions to tax
resulting from, attributable to or incurred in connection with any tax or any
contest or dispute thereof. For purposes of this Agreement, "Tax Returns" means
all reports, returns, declarations,
14.
<PAGE> 15
statements or other information required to be supplied to a taxing authority in
connection with Taxes.
(b) The Company has delivered to the Buyer correct and
complete copies of all federal income Tax Returns, examination reports and
statements of deficiencies assessed against or agreed to by any of the Company
or any Subsidiary since January 1, 1989. The federal income Tax Returns of the
Company have been audited by the Internal Revenue Service or are closed by the
applicable statute of limitations for all taxable years through __________. No
examination or audit of any Tax Returns of the Company or any Subsidiary by any
Governmental Entity is currently in progress or, to the knowledge of the Company
and the Subsidiaries, threatened or contemplated. Neither the Company nor any
Subsidiary has waived any statute of limitations with respect to taxes or agreed
to an extension of time with respect to a tax assessment or deficiency.
(c) Neither the Company nor any Subsidiary is a
"consenting corporation" within the meaning of Section 341(f) of the Internal
Revenue Code of 1986 (the "Code") and none of the assets of the Company nor the
Subsidiaries are subject to an election under Section 341(f) of the Code.
Neither the Company nor any Subsidiary has been a United States real property
holding corporation within the meaning of Section 897(c)(2) of the Code during
the applicable period specified in Section 897(c)(l)(A)(ii) of the Code. Neither
the Company nor any Subsidiary is a party to any Tax allocation or sharing
agreement.
(d) Neither the Company nor any Subsidiary is or has ever
been a member of an "affiliated group" of corporations (within the meaning of
Section 1504 of the Code), other than a group of which only the Company and the
Subsidiaries are members. Neither the Company nor any Subsidiary has made an
election under Treasury Reg. Section 1.1502-20(g). Neither the Company nor any
Subsidiary is or has been required to make a basis reduction pursuant to
Treasury Reg. Section 1.1502-20(b) or Treasury Reg. Section 1.337(d)-2T(b).
(e) All material elections with respect to Taxes as of the
date hereof are set forth in Section 2.9 of the Disclosure Schedule. None of the
assets of the Company nor any Subsidiary is property that the Company or any
Subsidiary is required to treat as being owned by any other person pursuant to
the "safe harbor lease" provisions of former Section 168(f)(8) of the Code. None
of the assets of the Company nor any Subsidiary directly or indirectly secures
any debt the interest on which is tax exempt under Section 103(a) of the Code.
None of the assets of the Company nor any Subsidiary is "tax exempt use
property" within the meaning of Section 168(h) of the Code. Neither the Company
nor any Subsidiary has agreed to make or is required to make any adjustment
under Section 481 of the Code by reason of a change in accounting method or
otherwise. Neither the Company nor any Subsidiary has participated in an
international boycott within
15.
<PAGE> 16
the meaning of Section 999 of the Code. Neither the Company nor any Subsidiary
has or has had a permanent establishment in any foreign country, as defined in
any applicable treaty or convention between the United States and such foreign
country. Neither the Company nor any Subsidiary is a party to any joint venture,
partnership or other arrangement or contract that could be treated as a
partnership for federal income tax purposes.
2.10 Assets. Each of the Company and the Subsidiaries owns or
leases all tangible assets necessary for the conduct of its businesses as
presently conducted and as presently proposed to be conducted. Each such
tangible asset is free from material defects, has been maintained in accordance
with normal industry practice, is in good operating condition and repair
(subject to normal wear and tear) and is suitable for the purposes for which it
presently is used. No asset of the Company (tangible or intangible) is subject
to any Security Interest.
2.11 Owned Real Property. None of the Company nor any
Subsidiary owns any real property.
2.12 Intellectual Property.
(a) Each of the Company and the Subsidiaries owns, or is
licensed or otherwise possesses legally enforceable rights to use, all
Intellectual Property (as defined below) that is used to conduct its business as
currently conducted or planned to be conducted. For purposes of this Agreement,
the term "Intellectual Property" means all (i) patents, patent applications,
patent disclosures and all related continuation, continuation-in-part,
divisional, reissue, reexamination, utility, model, certificate of invention and
design patents, patent applications, registrations and applications for
registrations, (ii) trademarks, service marks, trade dress, logos, trade names
and corporate names and registrations and applications for registration thereof,
(iii) copyrights and registrations and applications for registration thereof,
(iv) mask works and registrations and applications for registration thereof, (v)
computer software, data and documentation, (vi) trade secrets and confidential
business information, whether patentable or unpatentable and whether or not
reduced to practice, know-how, manufacturing and production processes and
techniques, research and development information, copyrightable works,
financial, marketing and business data, pricing and cost information, business
and marketing plans and customer and supplier lists and information, (vii) other
proprietary rights relating to any of the foregoing and (viii) copies and
tangible embodiments thereof. Section 2.12 of the Disclosure Schedule lists (i)
all patents and patent applications and all trademarks, registered copyrights,
trade names and service marks which are used in the business of the Company or
the Subsidiaries, including the jurisdictions in which each such Intellectual
Property right has been issued or registered or in which any such application
for such issuance or registration has been filed, (ii) all material written
licenses, sublicenses and other agreements to which the Company or a Subsidiary
is a party and pursuant to which any person is authorized to use any
Intellectual Property rights, and
16.
<PAGE> 17
(iii) all material written licenses, sublicenses and other agreements as to
which the Company or a Subsidiary is a party and pursuant to which the Company
or a Subsidiary is authorized to use any third party patents, trademarks or
copyrights, including software ("Third Party Intellectual Property Rights")
which are used in the business of the Company or any Subsidiary or which form a
part of any product or service of the Company or any Subsidiary. The Company has
made available to the Buyer correct and complete copies of all such patents,
registrations, applications, licenses and agreements (as amended to date) and
related documentation. Except pursuant to the Contracts listed on Section 2.14
of the Disclosure Schedule and except pursuant to the licenses listed on Section
2.12 of the Disclosure Schedule, neither the Company nor any Subsidiary has
agreed to indemnify any person or entity for or against any infringement,
misappropriation or other conflict with respect to any item of Intellectual
Property that the Company or any Subsidiary owns or uses. Neither the Company
nor any Subsidiary is a party to any oral license, sublicense or agreement
which, if reduced to written form, would be required to be listed in Section
2.12 of the Disclosure Schedule under the terms of this Section 2.12(a).
(b) Neither the Company nor any of the Subsidiaries is,
nor will any of them be as a result of the execution and delivery of this
Agreement or the performance of the Company's obligations under this Agreement,
in breach of any license, sublicense or other agreement relating to the
Intellectual Property or Third Party Intellectual Property Rights.
(c) Neither the Company nor any of the Subsidiaries has
been named in any suit, action or proceeding which involves a claim of
infringement of any Intellectual Property right of any third party. The
manufacturing, marketing, licensing or sale of the products or performance of
the service offerings of the Company and the Subsidiaries do not infringe any
Intellectual Property right of any third party; and to the knowledge of the
Company and the Subsidiaries, the Intellectual Property rights of the Company
and the Subsidiaries are not being infringed by activities, products or services
of any third party.
2.13 Real Property Leases. Section 2.13 of the Disclosure
Schedule lists and describes briefly all real property leased or subleased to
the Company or any Subsidiary and lists the term of such lease or sublease, any
extension and expansion options, and the rent payable thereunder. The Company
has delivered to the Buyer correct and complete copies of the leases and
subleases (as amended to date) listed in Section 2.13 of the Disclosure
Schedule. With respect to each lease and sublease listed in Section 2.13 of the
Disclosure Schedule:
(a) the lease or sublease is legal, valid, binding,
enforceable and in full force and effect;
17.
<PAGE> 18
(b) the lease or sublease will continue to be legal,
valid, binding, enforceable and in full force and effect immediately following
the Closing in accordance with the terms thereof as in effect prior to the
Closing;
(c) no party to the lease or sublease is in breach or
default, and no event has occurred which, with notice or lapse of time, would
constitute a breach or default or permit termination, modification, or
acceleration thereunder;
(d) there are no disputes, oral agreements or forbearance
programs in effect as to the lease or sublease;
(e) neither the Company nor any Subsidiary has assigned,
transferred, conveyed, mortgaged, deeded in trust or encumbered any interest in
the leasehold or subleasehold;
(f) all facilities leased or subleased thereunder are
supplied with utilities and other services necessary for the operation of said
facilities;
(g) to the knowledge of the Company, the owner of the
facility leased or subleased has good and clear record and marketable title to
the parcel of real property, free and clear of any Security Interest, easement,
covenant or other restriction, except for recorded easements, covenants, and
other restrictions which do not impair the intended use, occupancy or value of
the property subject thereto; and
(h) the Company and the Subsidiaries have obtained
non-disturbance agreements from the holder of each superior Security Interest
and ground lease in connection with each such lease or sublease (each of which
is listed in Section 2.13 of the Disclosure Schedule); and the representations
and warranties set forth in clauses (a) through (d) of this Section 2.13 with
respect to leases and subleases are true and correct with respect to such
nondisturbance agreements.
2.14 Contracts. Section 2.14 of the Disclosure Schedule lists
the following written arrangements to which the Company or any Subsidiary is a
party:
(a) any written arrangement pursuant to which any party
is indemnified for or against any liability under Environmental Laws (as defined
in Section 2.21 below);
(b) any written arrangement (or group of related written
arrangements) for the lease of personal property from or to third parties
providing for lease payments in excess of $50,000 per annum;
18.
<PAGE> 19
(c) any written arrangement (or group of related written
arrangements) for the purchase or sale of raw materials, commodities, supplies,
products or other personal property or for the furnishing or receipt of services
(i) which calls for performance over a period of more than one year, (ii) which
involves more than the sum of $50,000, or (iii) in which the Company or any
Subsidiary has granted manufacturing rights, "most favored nation" pricing
provisions or marketing or distribution rights relating to any products or
territory or has agreed to purchase a minimum quantity of goods or services or
has agreed to purchase goods or services exclusively from a certain party;
(d) any written arrangement establishing a partnership or
joint venture;
(e) any written arrangement (or group of related written
arrangements) under which it has created, incurred, assumed, or guaranteed (or
may create, incur, assume, or guarantee) indebtedness (including capitalized
lease obligations) involving more than $50,000 or under which it has imposed (or
may impose) a Security Interest on any of its assets, tangible or intangible;
(f) any written arrangement concerning confidentiality or
noncompetition;
(g) any written arrangement involving any stockholder of
the Company or their affiliates, as defined in Rule 12b-2 under the Securities
Exchange Act of 1934 (as amended, the "Exchange Act") ("Affiliates");
(h) any written arrangement under which the consequences
of a default or termination could have a material adverse effect on the assets,
business, financial condition, results of operations or future prospects of the
Company and the Subsidiaries taken as a whole; and
(i) any other written arrangement (or group of related
written arrangements) either involving more than $50,000 or not entered into in
the Ordinary Course of Business.
The Company has delivered to the Buyer a correct and complete
copy of each written arrangement (as amended to date) listed in Section 2.14 of
the Disclosure Schedule. With respect to each written arrangement so listed: (i)
the written arrangement is legal, valid, binding and enforceable and in full
force and effect; (ii) the written arrangement will continue to be legal, valid,
binding and enforceable and in full force and effect immediately following the
Closing in accordance with the terms thereof as in effect prior to the Closing;
and (iii) no party is in material breach or default, and no event has occurred
which with notice or lapse of time would constitute a material breach or default
or permit termination,
19.
<PAGE> 20
modification, or acceleration, under the written arrangement. Neither the
Company nor any Subsidiary is a party to any oral contract, agreement or other
arrangement which, if reduced to written form, would be required to be listed in
Section 2.14 of the Disclosure Schedule under the terms of this Section 2.14.
2.15 Accounts Receivable. All accounts receivable of the
Company and the Subsidiaries reflected on the Most Recent Balance Sheet (except
for those that have been collected since the Most Recent Fiscal Quarter End) are
valid receivables subject to no setoffs or counterclaims and are current and
collectible (within 90 days after the date on which it first became due and
payable), net of the applicable reserve for bad debts on the Most Recent Balance
Sheet. All accounts receivable reflected in the financial or accounting records
of the Company that have arisen since the Most Recent Fiscal Quarter End (except
for those that have been collected since the Most Recent Fiscal Quarter End) are
valid receivables subject to no setoffs or counterclaims and are collectible,
net of a reserve for bad debts in an amount proportionate to the reserve shown
on the Most Recent Balance Sheet.
2.16 Powers of Attorney. There are no outstanding powers of
attorney executed on behalf of the Company or any Subsidiary.
2.17 Insurance. Section 2.17 of the Disclosure Schedule sets
forth the following information with respect to each insurance policy (including
fire, theft, casualty, general liability, workers compensation, business
interruption, environmental, product liability and automobile insurance policies
and bond and surety arrangements) to which the Company or any Subsidiary has
been a party, a named insured, or otherwise the beneficiary of coverage at any
time within the past five years:
(a) the name of the insurer, the name of the policyholder
and the name of each covered insured;
(b) the policy number and the period of coverage;
(c) the scope (including an indication of whether the
coverage was on a claims made, occurrence, or other basis) and amount (including
a description of how deductibles and ceilings are calculated and operate) of
coverage; and
(d) a description of any retroactive premium adjustments
or other loss-sharing arrangements.
Each such insurance policy (i) is enforceable and in full
force and effect; and (ii) will continue to be enforceable and in full force and
effect immediately following the Closing in accordance with the terms thereof as
in effect prior to the Closing. Neither the Company nor any Subsidiary (A) is in
breach or default (including with respect to the
20.
<PAGE> 21
payment of premiums or the giving of notices) under such policy, and no event
has occurred which, with notice or the lapse of time, would constitute such a
breach or default or permit termination, modification or acceleration, under
such policy; (B) has received any notice from the insurer disclaiming coverage
or reserving rights with respect to a particular claim or such policy in
general; or (C) has incurred any loss, damage, expense or liability covered by
any such insurance policy for which it has not properly asserted a claim under
such policy. Each of the Company and the Subsidiaries is covered by insurance in
scope and amount customary and reasonable for the businesses in which it is
engaged.
2.18 Litigation. Section 2.18 of the Disclosure Schedule
identifies, and contains a brief description of, (a) any unsatisfied judgment,
order, decree, stipulation or injunction and (b) any claim, complaint, action,
suit, proceeding, hearing or investigation of or in any Governmental Entity or
before any arbitrator to which the Company or any Subsidiary is a party or, to
the knowledge of the Company and the Subsidiaries, is threatened to be made a
party or which would otherwise have an adverse impact on the business or assets
of the Company. None of the complaints, actions, suits, proceedings, hearings,
and investigations set forth in Section 2.18 of the Disclosure Schedule could
have a material adverse effect on the assets, business, financial condition,
results of operations or future prospects of the Company and the Subsidiaries
taken as a whole.
2.19 Employees. Section 2.19 of the Disclosure Schedule
contains a list of all employees of the Company and each Subsidiary, indicating,
with respect to each such employee, his or her position, annual rate of
compensation, bonus for the last fiscal year of the Company, method for
calculating bonus for the current fiscal year and any other arrangement under
which cash compensation is payable by the Company. Each such employee has
entered into a confidentiality/assignment of inventions agreement with the
Company or a Subsidiary, a copy of which has previously been delivered to the
Buyer. To the knowledge of the Company and its Subsidiaries, no employee has any
plans to terminate employment with the Company or any Subsidiary. Neither the
Company nor any Subsidiary is a party to or bound by any collective bargaining
agreement, nor has any of them experienced any strikes, grievances, claims of
unfair labor practices or other collective bargaining disputes. The Company and
the Subsidiaries have no knowledge of any organizational effort made or
threatened, either currently or within the past two years, by or on behalf of
any labor union with respect to employees of the Company or any Subsidiary.
Under the bonus pool adopted by the Board of Directors of the Company at a
meeting held October __, 1995, the Company will be obligated to pay to certain
of its employees an aggregate of not more than $8.3 million (the "Bonus Pool
Amount") upon consummation of the Merger.
21.
<PAGE> 22
2.20 Employee Benefits.
(a) Section 2.20(a) of the Disclosure Schedule contains a
complete and accurate list of all Employee Benefit Plans (as defined below)
maintained, or contributed to, by the Company, any Subsidiary, or any ERISA
Affiliate (as defined below). For purposes of this Agreement, "Employee Benefit
Plan" means any "employee pension benefit plan" (as defined in Section 3(2) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), any
"employee welfare benefit plan" (as defined in Section 3(1) of ERISA), and any
other written or oral plan, agreement or arrangement involving direct or
indirect compensation, including without limitation insurance coverage,
severance benefits, disability benefits, deferred compensation, bonuses, stock
options, stock purchase, phantom stock, stock appreciation or other forms of
incentive compensation or post-retirement compensation. For purposes of this
Agreement, "ERISA Affiliate" means any entity which is a member of (i) a
controlled group of corporations (as defined in Section 414(b) of the Code),
(ii) a group of trades or businesses under common control (as defined in Section
414(c) of the Code), or (iii) an affiliated service group (as defined under
Section 414(m) of the Code or the regulations under Section 414(o) of the Code),
any of which includes the Company or a Subsidiary. Complete and accurate copies
of (i) all Employee Benefit Plans which have been reduced to writing, (ii)
written summaries of all unwritten Employee Benefit Plans, (iii) all related
trust agreements, insurance contracts and summary plan descriptions, and (iv)
all annual reports filed on IRS Form 5500, 5500C or 5500R for the last five plan
years for each Employee Benefit Plan, have been delivered to the Buyer. Each
Employee Benefit Plan has been administered in all material respects in
accordance with its terms and each of the Company, the Subsidiaries and the
ERISA Affiliates has in all material respects met its obligations with respect
to such Employee Benefit Plan and has made all required contributions thereto.
The Company and all Employee Benefit Plans are in compliance in all material
respects with the currently applicable provisions of ERISA and the Code and the
regulations thereunder.
(b) There are no investigations by any Governmental
Entity, termination proceedings or other claims (except claims for benefits
payable in the normal operation of the Employee Benefit Plans and proceedings
with respect to qualified domestic relations orders), suits or proceedings
against or involving any Employee Benefit Plan or asserting any rights or claims
to benefits under any Employee Benefit Plan that could give rise to any material
liability.
(c) All the Employee Benefit Plans that are intended to
be qualified under Section 401(a) of the Code have received determination
letters from the Internal Revenue Service to the effect that such Employee
Benefit Plans are qualified and the plans and the trusts related thereto are
exempt from federal income taxes under Sections 401(a) and 501(a), respectively,
of the Code, no such determination letter has been revoked and revocation has
not been threatened, and no such Employee Benefit Plan has been amended
22.
<PAGE> 23
since the date of its most recent determination letter or application therefor
in any respect, and no act or omission has occurred, that would adversely affect
its qualification or materially increase its cost.
(d) Neither the Company, any Subsidiary, nor any ERISA
Affiliate has ever maintained an Employee Benefit Plan subject to Section 412 of
the Code or Title IV of ERISA.
(e) At no time has the Company, any Subsidiary or any
ERISA Affiliate been obligated to contribute to any "multi-employer plan" (as
defined in Section 4001(a)(3) of ERISA).
(f) There are no unfunded obligations under any Employee
Benefit Plan providing benefits after termination of employment to any employee
of the Company or any Subsidiary (or to any beneficiary of any such employee),
including but not limited to retiree health coverage and deferred compensation,
but excluding continuation of health coverage required to be continued under
Section 4980B of the Code and insurance conversion privileges under state law.
(g) No act or omission has occurred and no condition
exists with respect to any Employee Benefit Plan maintained by the Company, any
Subsidiary or any ERISA Affiliate that would subject the Company, any Subsidiary
or any ERISA Affiliate to any material fine, penalty, tax or liability of any
kind imposed under ERISA or the Code.
(h) No Employee Benefit Plan is funded by, associated
with, or related to a "voluntary employee's beneficiary association" within the
meaning of Section 501(c)(9) of the Code.
(i) No Employee Benefit Plan, plan documentation or
agreement, summary plan description or other written communication distributed
generally to employees by its terms prohibits the Company from amending or
terminating any such Employee Benefit Plan.
(j) Section 2.20(j) of the Disclosure Schedule discloses
each: (i) agreement with any director, executive officer or other key employee
of the Company or any Subsidiary (A) the benefits of which are contingent, or
the terms of which are materially altered, upon the occurrence of a transaction
involving the Company or any Subsidiary of the nature of any of the transactions
contemplated by this Agreement, (B) providing any term of employment or
compensation guarantee or (C) providing severance benefits or other benefits
after the termination of employment of such director, executive officer or key
employee; (ii) agreement, plan or arrangement under which any person may receive
payments from the Company or any Subsidiary that may be subject to the tax
imposed by Section 4999 of the
23.
<PAGE> 24
Code or included in the determination of such person's "parachute payment" under
Section 280G of the Code; and (iii) agreement or plan binding the Company or any
Subsidiary, including without limitation any stock option plan, stock
appreciation right plan, restricted stock plan, stock purchase plan, severance
benefit plan, or any Employee Benefit Plan, any of the benefits of which will be
increased, or the vesting of the benefits of which will be accelerated, by the
occurrence of any of the transactions contemplated by this Agreement or the
value of any of the benefits of which will be calculated on the basis of any of
the transactions contemplated by this Agreement.
2.21 Environmental Matters.
(a) Each of the Company and the Subsidiaries has complied
with all Environmental Laws (as defined below) applicable to their business
operations. For purposes of this Agreement, "Environmental Law" means any
federal, state or local law, statute, Rule or regulation or the common law
relating to the environment or occupational health and safety, including without
limitation any statute, regulation or order pertaining to (i) treatment,
storage, disposal, generation and transportation of Materials of Environmental
Concern (as defined below); (ii) air, water and noise pollution; (iii)
groundwater and soil contamination; (iv) the release or threatened release into
the environment of Materials of Environmental Concern, including without
limitation emissions, discharges, injections, spills, escapes or dumping of
pollutants, contaminants or chemicals; (v) the protection of wild life, marine
sanctuaries and wetlands, including without limitation all endangered and
threatened species; (vi) storage tanks, vessels and containers; (vii)
underground and other storage tanks or vessels, abandoned, disposed or discarded
barrels, containers and other closed receptacles; (viii) health and safety of
employees and other persons; and (ix) manufacture, processing, use,
distribution, treatment, storage, disposal, transportation or handling of
Materials of Environmental Concern. As used above, the terms "release" and
"environment" shall have the meaning set forth in the federal Comprehensive
Environmental Compensation, Liability and Response Act of 1980, as amended
("CERCLA").
(b) There have been no releases of any Materials of
Environmental Concern into the environment at any parcel of real property or any
facility formerly or currently owned or leased by the Company or a Subsidiary.
There has been no release of Materials of Environmental Concern for which
liability can be imposed on the Company or the Subsidiary under any
Environmental Law. For purposes of this Agreement, "Materials of Environmental
Concern" means any chemicals, pollutants or contaminants, hazardous substances
(as such term is defined under CERCLA), solid wastes and hazardous wastes (as
such terms are defined under the federal Resource Conservation and Recovery
Act), toxic materials, industrial materials, oil or petroleum and petroleum
products, or any other material subject to regulation under any Environmental
Law.
24.
<PAGE> 25
(c) There is no pending or, to the knowledge of the
Company and the Subsidiaries, threatened civil or criminal litigation, written
notice of violation or noncompliance, formal administrative or judicial
proceeding, claim, cause of action, liability, investigation, citation, order,
consent order, consent decree, inquiry or information request by any
Governmental Entity, involving the Company or any Subsidiary relating to any of
the following: (i) violation of any Environmental Law; (ii) violation of any
permit, license or registration issued under any Environmental Law; (iii) the
disposal, discharge or release of Materials of Environmental Concern, whether or
not in compliance with Environmental Laws; (iv) the generation, storage,
treatment, transportation, reclamation, recycling or other handling of Materials
of Environmental Concern, whether or not in compliance with Environmental Laws;
(v) the ownership, operation or use of any landfill, surface impoundment, pit,
pond, lagoon, underground injection well, waste pile, land treatment unit,
wastewater treatment plant, air pollution control equipment, or any other unit
used for the storage, disposal, handling or treatment of Materials of
Environmental Concern; (vi) the exacerbation of previously existing
environmental contamination; or (vii) exposure to any Materials of Environmental
Concern, noises, odors, or vibrations at or from any real property or facility
formerly or currently owned or leased by the Company or a Subsidiary. Without
limiting the foregoing, none of the Company nor any Subsidiary has been named a
"potentially responsible party" under any Environmental Law or has received any
correspondence or notice that it may be named a "potentially responsible party."
(d) The Company and the Subsidiaries possess all permits,
licenses and/or registrations required under Environmental Laws for their
business operations, and all such permits, licenses and/or registrations are
valid and in full force and effect. Set forth in Section 2.21(d) of the
Disclosure Schedule is a list of all violations by the Company and its
Subsidiaries of any terms, conditions or requirements of such permits, licenses
and/or registrations since the date of incorporation of the Company.
(e) Set forth in Section 2.21(e) of the Disclosure
Schedule is a list of all environmental, health and safety reports,
investigations, audits, assessments, surveys and analyses, relating to premises
currently or previously owned or occupied by the Company or a Subsidiary which
the Company has possession of or access to. Complete and accurate copies of each
such report, or the results of each such investigation have been provided to the
Buyer.
(f) To the knowledge of the Company and its Subsidiaries,
all entities, including without limitation transporters, treatment, storage and
disposal facilities, and remediation companies, used by the Company or a
Subsidiary, for the transportation, storage, disposal, treatment or other
handling of Materials of Environmental Concern possess all permits, licenses and
registrations required under Environmental Laws. None of the Company or any of
its Subsidiaries have or will have any liability as a result of any act or
omission by any of such entities. To the knowledge of the Company, there is no
previous,
25.
<PAGE> 26
pending or threatened civil or criminal litigation, written notice of violation
or noncompliance, formal administrative or judicial proceeding, investigation,
citation, order, consent order, consent decree, inquiry or information request
by any Governmental Entity, relating to such entities for any violations of
Environmental Laws.
2.22 Legal Compliance.
(a) Each of the Company and the Subsidiaries, and the
conduct and operation of their respective businesses, are in compliance in all
material respects with all laws (including rules and regulations thereunder) of
any federal, state, local or foreign government, or any Governmental Entity,
which are applicable to the Company or such Subsidiary or business, and none of
the Company or any Subsidiaries has received any notice from any Governmental
Entity that it is in violation of, or has violated any such laws (including
rules and regulations thereunder).
(b) For purposes of this Section 2.22(b), the "Products"
shall mean all products manufactured or sold at any time by the Company. The
Company, and each Product in current commercial distribution, is currently duly
registered (in case of the Company) and listed (in case of each such Product)
with the U.S. Food and Drug Administration ("FDA") under section 360 of the
Federal Food, Drug and Cosmetic Act, 21 U.S.C. 301 et seq. (the "FDC Act") and
the applicable rules and regulations thereunder. Each Product in current
commercial distribution is a Class II medical device as defined under 21 U.S.C.
360c (a)(1)(B) and the applicable rules and regulations thereunder and was first
marketed in its present form and design prior to May 28, 1976 or is covered by a
premarket notification submission to the FDA in compliance with 21 U.S.C. 360(k)
and the applicable rules and regulations thereunder. The Company is currently in
compliance with, and each Product in current commercial distribution is
manufactured, prepared, assembled and processed in compliance with, the Good
Manufacturing Practices for Medical Devices set forth in 21 C.F.R. part 820. The
Company is in compliance with the recordkeeping and FDA reporting requirements
for Medical Devices Reporting set forth in 21 C.F.R. Part 803. The premises of
the Company and its records relating to the Products were most recently
inspected by the FDA on _______, 19__, and a true and complete copy of the
report of such inspection has been furnished to Buyer. The Company has corrected
all deficiencies noted therein and has implemented all recommendations made
therein. Since _____, 19__, the FDA has not inspected such premises and records.
The Company is not subject to any enforcement proceedings by the FDA and no
proceedings have been threatened. The Company has not introduced in commercial
distribution during the period of six calendar years immediately preceding the
date hereof any Products which were upon their shipment by the Company
adulterated or misbranded in violation of 21 U.S.C. 331. The Company has not
recalled any Product since January 1, 1991 and, to the best knowledge of the
Company, there is no basis for any such recall.
26.
<PAGE> 27
2.23 Permits. Section 2.23 of the Disclosure Schedule sets
forth a list of all permits, licenses, registrations, certificates, orders or
approvals from any Governmental Entity (including without limitation those
issued or required under Environmental Laws and those relating to the occupancy
or use of owned or leased real property) ("Permits") issued to or held by the
Company or any Subsidiary. Such listed Permits are the only Permits that are
required for the Company and the Subsidiaries to conduct their respective
businesses as presently conducted or as proposed to be conducted, except for
those the absence of which would not have any material adverse effect on the
assets, business, financial condition, results of operations or future prospects
of the Company and the Subsidiaries taken as a whole. Each such Permit is in
full force and effect and, to the best of the knowledge of the Company or any
Subsidiary, no suspension or cancellation of such Permit is threatened and there
is no basis for believing that such Permit will not be renewable upon
expiration. Each such Permit will continue in full force and effect following
the Closing.
2.24 Certain Business Relationships With Affiliates. No
Affiliate of the Company or of any Subsidiary (a) owns any property or right,
tangible or intangible, which is used in the business of the Company or any
Subsidiary, (b) has any claim or cause of action against the Company or any
Subsidiary, or (c) owes any money to, or is owed by money by, the Company or any
Subsidiary. Section 2.24 of the Disclosure Schedule describes any transactions
or relationships between the Company and any Affiliate thereof which are
reflected in the statements of operations of the Company included in the
Financial Statements.
2.25 Brokers' Fees. Neither the Company nor any Subsidiary has
any liability or obligation to pay any fees or commissions to any broker, finder
or agent with respect to the transactions contemplated by this Agreement except
that the Company is obligated to pay Cowen & Co. the fees described in Section
2.25 of the Disclosure Schedule. Except for such fees, the Company shall have no
liability to Cowen & Co. under the Engagement Letter or otherwise arising out of
the transactions contemplated hereby or thereby.
2.26 Books and Records. The minute books and other similar
records of the Company and each Subsidiary contain true and complete records of
all actions taken at any meetings of the Company's or such Subsidiary's
stockholders, Board of Directors or any committee thereof and of all written
consents executed in lieu of the holding of any such meeting. The books and
records of the Company and each Subsidiary accurately reflect in all material
respects the assets, liabilities, business, financial condition and results of
operations of the Company or such Subsidiary and have been maintained in
accordance with good business and bookkeeping practices.
2.27 Customers and Suppliers. No material purchase order or
commitment of the Company or any Subsidiary is in excess of normal requirements,
nor are prices
27.
<PAGE> 28
provided therein in excess of current market prices for the products or services
to be provided thereunder. No material supplier of the Company or any Subsidiary
has indicated within the past year that it will stop, or decrease the rate of,
supplying materials, products or services to them and no material customer of
the Company or any Subsidiary has indicated within the past year that it will
stop, or decrease the rate of, buying, leasing or licensing materials, products
or services from them. Section 2.27 of the Disclosure Schedule sets forth a list
of (a) each customer that accounted for more than 5% of the consolidated
revenues of the Company during the last full fiscal year or the interim period
through the Most Recent Fiscal Quarter End and the amount of revenues accounted
for by such customer during each such period and (b) each supplier that is the
sole supplier of any significant product or component to the Company or a
Subsidiary.
2.28 Banking Facilities.
(a) Section 2.28 of the Disclosure Schedule sets forth a
true, correct and complete list of: (i) each bank, savings and loan or similar
financial institution at which the Company or any Subsidiary has an account,
safety deposit box, line of credit or credit facility and the numbers of the
accounts or safety deposit boxes maintained by the Company or any Subsidiary
thereat and details, including terms, of any line of credit or credit facility;
and (ii) the names of all persons authorized to draw on each such account or to
have access to any such safety deposit box facility, together with a description
of the authority (and conditions thereof, if any) of each such person with
respect thereto.
(b) All of the outstanding indebtedness (secured or
unsecured) for borrowed money of the Company may be prepaid without the consent
or approval of, or prior notice to, any other person, and without payment of any
premium or penalty.
2.29 Suretyships. Except as set forth in Section 2.29 of the
Disclosure Schedule, none of the Company or any Subsidiary has any obligation or
liability (whether actual, accrued, accruing, contingent or otherwise) as
guarantor, surety, co-signer, endorser, co-maker, indemnitor or otherwise in
respect of the obligation of any person, corporation, partnership, joint
venture, association, organization or other entity, except as endorser or maker
of checks or letters of credit, respectively, endorsed or made in the ordinary
course of business.
2.30 Backlog. The Company's backlog of binding purchase orders
as of April 30, 1996 was at least $______.
2.31 Government Contracts. The Company has not been suspended
or debarred from bidding on contracts or subcontracts with any Governmental
Entity; no such suspension or debarment has been initiated or, to the Company's
knowledge, threatened; and the consummation of the transactions contemplated by
this Agreement will not result in any
28.
<PAGE> 29
such suspension or debarment. The Company has not been audited or investigated
and is not now being audited or investigated by the U.S. Government Accounting
Office, the U.S. Department of Defense or any of its agencies, the Defense
Contract Audit Agency, the U.S. Department of Justice, the Inspector General of
any U.S. Governmental Entity, any similar agencies or instrumentalities of any
foreign Governmental Entity, or any price contractor with a Governmental Entity
nor, to the Company's knowledge, has any such audit or investigation been
threatened. To the Company's knowledge, there is no valid basis for (a) the
suspension or debarment of the Company from bidding on contracts or subcontracts
with any Governmental Entity or (b) any claim pursuant to an audit or
investigation by any of the entities named in the foregoing sentence. The
Company has no agreements, contracts or commitments which require it to obtain
or maintain a security clearance with any Governmental Entity.
2.32 Registration Statement; Proxy Statement.
(a) None of the information supplied or to be supplied by
the Company for inclusion or incorporation by reference in (i) the Registration
Statement on Form S-4 to be filed with the Securities and Exchange Commission
(the "Commission") by the Buyer in connection with the submission of this
Agreement to the Company's stockholders and the issuance of Buyer Shares in the
Merger (together with any amendments or supplements thereto, the "Registration
Statement") or (ii) the proxy statement relating to the meeting of the Company's
shareholders (the "Shareholder Meeting") to be held in connection with the
Merger (the "Proxy Statement" and, together with the prospectus contained in the
Registration Statement, the "Proxy Statement/Prospectus") will, at the
respective times filed with the Commission and, in addition (A) in the case of
the Proxy Statement/Prospectus, at the date it or any amendments or supplements
thereto are mailed to stockholders, at the time of the Shareholder Meeting and
at the Effective Time, and (B) in the case of the Registration Statement, when
it becomes effective under the Securities Act and the Effective Time, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement will comply as to form in all material respects
with the applicable provisions of the Exchange Act and the rules and regulations
thereunder. If at any time prior to the Effective Time any event relating to the
Company or any of its respective Affiliates, officers or directors should be
discovered by the Company which should be set forth in an amendment to the
Registration Statement or a supplement to the Proxy Statement/Prospectus, the
Company shall promptly inform the Buyer. Notwithstanding the foregoing, the
Company makes no representation or warranty with respect to any information
supplied by the Buyer or the Transitory Subsidiary which is contained in any of
the foregoing documents.
29.
<PAGE> 30
(b) The Company has not taken any action that constitutes
an "offer", "offer to sell, "offer for sale" or "sale" of Buyer Shares within
the meaning of Rule 145 under the Securities Act.
2.33 Continuity of Interest. To the best of the Company's
knowledge, there is no plan or intention on the part of the Company Stockholders
to sell, exchange or otherwise dispose of a number of Buyer Shares received in
the Merger that would reduce the Company Stockholders' ownership of Buyer Common
Stock to a number of shares having a value, as of the Effective Time, of less
than fifty (50%) percent of the value of all of the Company Shares as of the
Effective Time. For purposes of this representation, Company Shares surrendered
by dissenters or exchanged for cash or in lieu of fractional shares of Buyer
Common Stock will be treated as outstanding Company Shares at the Effective
Time. Moreover, shares of Buyer Common Stock held by the Company Stockholders
and otherwise sold, redeemed, or disposed of prior or subsequent to the Merger
will be considered in making this representation. The Company has caused each
person who it identified as an Affiliate to deliver to Buyer and each Affiliate
has, concurrently with the signing of this Agreement, signed an affiliate
agreement in the form attached hereto as Exhibit C (an "Affiliate Agreement")
providing, among other things, that such person has no plan or intention and
will not sell, pledge, transfer or otherwise dispose of Buyer Shares or in any
way reduce their risk relative to any such shares, until such time as financial
results covering at least 30 days of combined operations of the Buyer and the
Company have been published within the meaning of Section 201.01 of the
Codification of Financial Reporting Policies and the Commission and except in
compliance with the applicable provisions of the Securities Act, and the rules
and regulations thereunder.
2.34 Pooling Accounting. The Company and the Company
Stockholders have taken no actions that would prevent the Buyer from accounting
for the Merger as a pooling-of-interests for accounting purposes.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE BUYER
AND THE TRANSITORY SUBSIDIARY
Each of the Buyer and the Transitory Subsidiary represents and
warrants to the Company as follows:
3.1 Organization. Each of the Buyer and the Transitory
Subsidiary is a corporation duly organized, validly existing and in good
standing under the laws of the state of its incorporation.
30.
<PAGE> 31
3.2 Capitalization. The authorized capital stock of the Buyer
consists of 350,000,000 shares of Buyer Common Stock, of which 136,074,091
shares were issued and outstanding and 83,791 shares were held in the treasury
of the Buyer as of March 30, 1996 (after giving effect to a three-for-two stock
split effected June 5, 1996), and 50,000 shares of preferred stock, $1.00 par
value, of which 40,000 shares have been designated Series B Junior Participating
Preferred Stock, none of which are issued and outstanding. All of the issued and
outstanding shares of Buyer Common Stock are duly authorized, validly issued,
fully paid, nonassessable and free of all preemptive rights. All of the Buyer
Shares will be, when issued in accordance with this Agreement, duly authorized,
validly issued, fully paid, nonassessable and free of all preemptive rights.
3.3 Authorization of Transaction. Each of the Buyer and the
Transitory Subsidiary has all requisite power and authority to execute and
deliver this Agreement and (in the case of the Buyer) the Escrow Agreement and
to perform its obligations hereunder and thereunder. The execution and delivery
of this Agreement and (in the case of the Buyer) the Escrow Agreement by the
Buyer and the Transitory Subsidiary, the performance of this Agreement and (in
the case of the Buyer) the Escrow Agreement and the consummation of the
transactions contemplated hereby and thereby by the Buyer and the Transitory
Subsidiary have been duly and validly authorized by all necessary corporate
action on the part of the Buyer and the Transitory Subsidiary. This Agreement
has been duly and validly executed and delivered by the Buyer and the Transitory
Subsidiary and constitutes a valid and binding obligation of the Buyer and the
Transitory Subsidiary, enforceable against them in accordance with its terms.
3.4 Noncontravention. Subject to compliance with the
applicable requirements of the Securities Act and any applicable state
securities laws, the Hart-Scott-Rodino Act and the filing of the Merger
Documents with the Secretary of State of the State of California and the
Secretary of State of the State of Delaware, neither the execution and delivery
of this Agreement or (in the case of the Buyer) the Escrow Agreement by the
Buyer or the Transitory Subsidiary, nor the consummation by the Buyer or the
Transitory Subsidiary of the transactions contemplated hereby or thereby, will
(a) conflict or violate any provision of the charter or By-laws of the Buyer or
the Transitory Subsidiary, (b) require on the part of the Buyer or the
Transitory Subsidiary any filing with, or permit, authorization, consent or
approval of, any Governmental Entity, (c) conflict with, result in breach of,
constitute (with or without due notice or lapse of time or both) a default
under, result in the acceleration of, create in any party any right to
accelerate, terminate, modify or cancel, or require any notice, consent or
waiver under, any contract, lease, sublease, license, sublicense, franchise,
permit, indenture, agreement or mortgage for borrowed money, instrument of
indebtedness, Security Interest or other arrangement to which the Buyer or the
Transitory Subsidiary is a party or by which either is bound or to which any of
their assets are subject, or (d) violate any order, writ, injunction, decree,
statute, Rule or regulation applicable to the Buyer or the Transitory Subsidiary
or any of their properties or assets.
31.
<PAGE> 32
3.5 Reports and Financial Statements. The Buyer has previously
furnished to the Company complete and accurate copies, as amended or
supplemented, of (a) its Annual Report on Form 10-K for the fiscal year ended
December 30, 1995 as filed with the Commission, and (b) all other reports filed
by the Buyer under Section 13 of the Securities Exchange Act of 1934 (the
"Exchange Act") with the Commission since December 30, 1995 (such reports are
collectively referred to herein as the "Buyer Reports"). The Buyer Reports
constitute all of the documents required to be filed by the Buyer under Section
13 of the Exchange Act with the Commission since December 30, 1995. As of their
respective dates, the Buyer Reports did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The audited financial statements and
unaudited interim financial statements of the Buyer included in the Buyer
Reports (i) comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the
Commission with respect thereto, (ii) have been prepared in accordance with GAAP
applied on a consistent basis throughout the periods covered thereby (except as
may be indicated therein or in the notes thereto, and in the case of quarterly
financial statements, as permitted by Form 10-Q under the Exchange Act), (iii)
fairly present the consolidated financial condition, results of operations and
cash flows of the Buyer as of the respective dates thereof and for the periods
referred to therein, and (iv) are consistent with the books and records of the
Buyer.
3.6 Brokers' Fees. Neither the Buyer nor the Transitory
Subsidiary has any liability or obligation to pay any fees or commissions to any
broker, finder or agent with respect to the transactions contemplated by this
Agreement.
3.7 Registration Statement; Proxy Statement/Prospectus.
Subject to the accuracy of the representations of the Company in Section
2.32(a), the Registration Statement shall not, at the time it is declared
effective by the Commission and at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements including therein,
in light of the circumstances under which they were made, not misleading.
Subject to the accuracy of the representations of the Company in Section
2.32(a), the Proxy Statement/Prospectus will not, at the date it or any
amendments or supplements thereto are mailed to stockholders, at the time of the
Shareholder Meeting and at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. If at any time prior to
the Effective Time any event relating to the Buyer, the Transitory Subsidiary or
any of their respective Affiliates, officers or directors should be discovered
by the Buyer or the Transitory Subsidiary which should be set forth in an
amendment to the Registration Statement or a supplement to the Proxy
Statement/Prospectus, the Buyer or the Transitory Subsidiary will promptly
inform the Company. Notwithstanding the foregoing, the Buyer makes no
representation or warranty
32.
<PAGE> 33
with respect to any information supplied by the Company which is contained in,
or furnished in connection with the preparation of, the Registration Statement
or the Proxy Statement/Prospectus.
ARTICLE IV
COVENANTS
4.1 Best Efforts. Each of the Parties shall use its best
efforts, to the extent commercially reasonable, to take all actions and to do
all things necessary, proper or advisable to consummate the transactions
contemplated by this Agreement; provided, however, that notwithstanding anything
in this Agreement to the contrary, the Buyer shall not be required to sell or
dispose of or hold separately (through a trust or otherwise) any assets or
businesses of the Buyer or its Affiliates.
4.2 Notices and Consents. The Company shall use its best
efforts to obtain, at its expense, all such waivers, permits, consents,
approvals or other authorizations from third parties and Governmental Entities,
and to effect all such registrations, filings and notices with or to third
parties and Governmental Entities, as may be required by or with respect to the
Company in connection with the transactions contemplated by this Agreement
(including without limitation those listed in Section 2.4 of the Disclosure
Schedule).
4.3 Preparation of Registration Statement. The Company and the
Buyer shall cooperate to prepare and file the Registration Statement as soon as
practicable after the execution hereof. The Company and the Buyer shall use
their respective best efforts to respond promptly to any comments of the
Commission with respect to the Registration Statement and to cause the
Registration Statement to become effective as promptly as practicable.
4.4 Distribution of Proxy Statement/Prospectus; Shareholders'
Approval. The Company shall take all action necessary in accordance with
applicable law to convene the Shareholder Meeting at the earliest possible time
after the Registration Statement is declared effective for the purpose of
approving the Merger (taking into account the timeframe resulting from
incorporation by reference of the Buyer's Exchange Act filings into the
Registration Statement). The Company shall submit the Proxy Statement/Prospectus
to its shareholders, and its Board of Directors shall recommend to the
shareholders, and continue to recommend until the completion of the Shareholder
Meeting, the adoption of this Agreement and the approval of the Merger. The
Company shall use all reasonable efforts to solicit proxies from its
shareholders and otherwise to obtain all votes and approvals of the shareholders
necessary for the approval and adoption of the Merger under California Law and
its Articles of Incorporation and By-laws.
33.
<PAGE> 34
4.5 Hart-Scott-Rodino Act. Each of the Parties has filed the
Notification and Report Forms and related material required to be filed with the
Federal Trade Commission and the Antitrust Division of the United States
Department of Justice under the Hart-Scott-Rodino Act, and each shall use its
best efforts to obtain an early termination of the applicable waiting period,
and shall make any further filings or information submissions pursuant thereto
that may be necessary, proper or advisable; provided, however, that the Buyer
shall not be obligated to respond to formal requests for additional information
or documentary material pursuant to 16 C.F.R. 803.20 under the Hart-Scott-Rodino
Act except to the extent it elects to do so in its sole discretion.
4.6 Tax-Free Treatment. None of the Parties shall take any
action, directly or indirectly, that would prevent the Merger from qualifying as
a tax-free reorganization under Section 368(a) of the Code.
4.7 Operation of Business. Except as contemplated by this
Agreement, during the period from the date of this Agreement to the Effective
Time, the Company shall (and shall cause each Subsidiary to) conduct its
operations in the ordinary course of business and in compliance with all
applicable laws and regulations and, to the extent consistent therewith, use all
reasonable efforts to preserve intact its current business organization, keep
its physical assets in good working condition, keep available the services of
its current officers and employees and preserve its relationships with
customers, suppliers and others having business dealings with it to the end that
its goodwill and ongoing business shall not be impaired in any material respect.
Without limiting the generality of the foregoing, prior to the Effective Time or
termination of this Agreement pursuant to Section 7.1 hereof, neither the
Company nor any Subsidiary shall, without the written consent of the Buyer:
(a) issue, sell, deliver or agree or commit to issue,
sell or deliver (whether through the issuance or granting of options, warrants,
commitments, subscriptions, rights to purchase or otherwise) or authorize the
issuance, sale or delivery of, or redeem or repurchase, any stock of any class
or any other securities or any rights, warrants or options to acquire any such
stock or other securities (except pursuant to the conversion or exercise of
Series B Stock, Company Options or Warrants outstanding on the date hereof in
accordance with their terms), or amend any of the terms of any such stock,
securities, rights, warrants or options;
(b) split, combine or reclassify any shares of its
capital stock; or declare, set aside or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect of
its capital stock;
(c) create, incur or assume any debt not currently
outstanding (including obligations in respect of capital leases) except in the
ordinary course of business; assume, guarantee, endorse or otherwise become
liable or responsible (whether directly,
34.
<PAGE> 35
contingently or otherwise) for the obligations of any other person or entity; or
make any loans, advances or capital contributions to, or investments in, any
other person or entity;
(d) enter into, adopt or amend any Employee Benefit Plan
or any employment or severance agreement or arrangement of the type described in
Section 2.20(j) or (except for normal increases in the ordinary course of
business) increase in any manner the compensation or fringe benefits of, or
modify the employment terms of, its directors, officers or employees, generally
or individually, or pay any benefit not required by the terms in effect on the
date hereof of any existing Employee Benefit Plan;
(e) acquire, sell, lease, encumber or dispose of any
assets or property (including without limitation any shares or other equity
interests in or securities of any Subsidiary or any corporation, partnership,
association or other business organization or division thereof), other than
purchases and sales of assets in the ordinary course of business;
(f) amend its charter or By-laws;
(g) change in any material respect its accounting
methods, principles or practices, except insofar as may be required by a
generally applicable change in GAAP;
(h) discharge or satisfy any Security Interest or pay any
obligation or liability other than in the ordinary course of business;
(i) mortgage or pledge any of its property or assets or
subject any such assets to any Security Interest other than in the ordinary
course of business;
(j) sell, assign, transfer or license any Intellectual
Property, other than in the ordinary course of business;
(k) enter into any material contract or, amend,
terminate, take or omit to take any action that would constitute a violation of
or default under, or waive any rights under, any contract or agreement listed in
Section 2.14 of the Disclosure Schedule;
(l) make or commit to make any capital expenditure in
excess of $25,000 per item;
(m) make any tax election or, except in the ordinary
course of business, settle or compromise any federal, state, local or foreign
tax liability;
35.
<PAGE> 36
(n) take any action, directly or indirectly, that would
prevent the Buyer from accounting for the Merger and other transactions
contemplated by this Agreement as a pooling-of-interests for accounting
purposes.
(o) take any action or fail to take any action permitted
by this Agreement with the knowledge that such action or failure to take action
would result in (i) any of the representations and warranties of the Company set
forth in this Agreement becoming untrue or (ii) any of the conditions to the
Merger set forth in Article V not being satisfied; or
(p) agree in writing or otherwise to take any of the
foregoing actions.
4.8 Full Access. The Company shall (and shall cause each
Subsidiary to) permit representatives of the Buyer to have full access (at all
reasonable times, and in a manner so as not to interfere with the normal
business operations of the Company and the Subsidiaries) to all premises,
properties, financial and accounting records, contracts, other records and
documents, and personnel, of or pertaining to the Company and each Subsidiary.
4.9 Notice of Breaches. The Company shall promptly deliver to
the Buyer written notice of any event or development that would (a) render any
statement, representation or warranty of the Company in this Agreement
(including the Disclosure Schedule) inaccurate or incomplete in any material
respect, or (b) constitute or result in a breach by the Company of, or a failure
by the Company to comply with, any agreement or covenant in this Agreement
applicable to such party. The Buyer or the Transitory Subsidiary shall promptly
deliver to the Company written notice of any event or development that would (i)
render any statement, representation or warranty of the Buyer or the Transitory
Subsidiary in this Agreement inaccurate or incomplete in any material respect,
or (ii) constitute or result in a breach by the Buyer or the Transitory
Subsidiary of, or a failure by the Buyer or the Transitory Subsidiary to comply
with, any agreement or covenant in this Agreement applicable to such party. No
such disclosure shall be deemed to avoid or cure any such misrepresentation or
breach.
4.10 Exclusivity. The Company shall not, and the Company shall
use its best efforts to cause its Affiliates and each of its officers,
directors, employees, representatives and agents not to, directly or indirectly,
(a) encourage, solicit, initiate, engage or participate in discussions or
negotiations with any person or entity (other than the Buyer) concerning any
merger, consolidation, sale of material assets, tender offer, recapitalization,
accumulation of Company shares of the Company's capital stock, proxy
solicitation or other business combination involving the Company, any Subsidiary
or any division of the Company or any Subsidiary or (b) provide any non-public
information
36.
<PAGE> 37
concerning the business, properties or assets of the Company or any Subsidiary
to any person or entity (other than the Buyer).
ARTICLE V
CONDITIONS TO CONSUMMATION OF MERGER
5.1 Conditions to Each Party's Obligations. The respective
obligations of each Party to consummate the Merger are subject to the
satisfaction of the following conditions:
(a) this Agreement and the Merger shall have received the
Requisite Stockholder Approval;
(b) all applicable waiting periods (and any extensions
thereof) under the Hart-Scott-Rodino Act shall have expired or otherwise been
terminated;
(c) no action, suit or proceeding shall be pending or
threatened by or before any Governmental Entity wherein an unfavorable judgment,
order, decree, stipulation or injunction would (i) prevent consummation of any
of the transactions contemplated by this Agreement, (ii) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation or (iii) affect adversely the right of the Buyer to own, operate or
control any of the assets and operations of the Surviving Corporation and the
Subsidiaries following the Merger, and no such judgment, order, decree,
stipulation or injunction shall be in effect;
(d) the Registration Statement shall have become effective
and no stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that purpose shall have been
initiated or threatened by the Commission; and
(e) the Buyer Shares shall have been authorized for
listing on the New York Stock Exchange subject to official notice of issuance.
5.2 Conditions to Obligations of the Buyer and the Transitory
Subsidiary. The obligation of each of the Buyer and the Transitory Subsidiary to
consummate the Merger is subject to the satisfaction of the following additional
conditions:
(a) the holders of at least ninety-five percent (95%) of
the outstanding shares of each of the Company Common Stock, Series A Stock and
Series B Stock shall have voted in favor of the Merger;
37.
<PAGE> 38
(b) the Company and the Subsidiaries shall have obtained
all of the waivers, permits, consents, approvals or other authorizations, and
effected all of the registrations, filings and notices, referred to in Section
4.2;
(c) the representations and warranties of the Company set
forth in Article II shall be true and correct when made on the date hereof and
shall be true and correct as of the Effective Time as if made as of the
Effective Time, except for representations and warranties made as of a specific
date, which shall be true and correct as of such date;
(d) the Company shall have performed or complied with its
agreements and covenants required to be performed or complied with under this
Agreement as of or prior to the Effective Time;
(e) the Company shall have delivered to the Buyer and the
Transitory Subsidiary a certificate (without qualification as to knowledge or
materiality or otherwise) to the effect that each of the conditions specified in
clauses (a) through (d) of this Section 5.2 is satisfied in all respects;
(f) the Buyer and the Transitory Subsidiary shall have
received from Riordan & McKinzie, counsel to the Company, an opinion dated as of
the Closing Date in the form set forth in Exhibit D attached hereto (including
without limitation an opinion to the effect that when the Merger is consummated
in accordance with the terms of this Agreement, the Merger should be treated for
Federal income tax purposes as a tax-free reorganization within the meaning of
Section 368(a) of the Code, in the form attached hereto as Exhibit E (the "Tax
Opinion"));
(g) the Buyer and the Transitory Subsidiary shall have
received the resignations, effective as of the Effective Time, of each director
and officer of the Company and the Subsidiaries specified by the Buyer in
writing at least five business days prior to the Closing;
(h) all agreements between the Company and the Company
Stockholders (other than employment agreements and stock option agreements),
including, without limitation, the Series A Agreement and the Series B
Agreement, shall have been terminated prior or shall terminate effective upon
the Effective Time with the effect that the Company shall have no further
obligation or liability thereunder;
(i) all the terms, covenants and conditions of the
Affiliate Agreements to be complied with and performed by the Company or any
shareholder, officer or director of the Company as of or before the Effective
Time shall have been complied with and performed in all material respects;
38.
<PAGE> 39
(j) all Warrants contingently issuable to the customers of
the Company shall have been canceled and terminated with the consent of the
holders thereof;
(k) 95% of the shares of Series B Stock issued and
outstanding at the record date for the Shareholder Meeting shall have been
converted into Company Common Stock prior to the Effective Time; and
(l) all actions to be taken by the Company in connection
with the consummation of the transactions contemplated hereby and all
certificates, opinions, instruments and other documents required to effect the
transactions contemplated hereby shall be reasonably satisfactory in form and
substance to the Buyer and the Transitory Subsidiary.
5.3 Conditions to Obligations of the Company. The obligation
of the Company to consummate the Merger is subject to the satisfaction of the
following additional conditions:
(a) the representations and warranties of the Buyer and
the Transitory Subsidiary set forth in Article III shall be true and correct
when made on the date hereof and shall be true and correct as of the Effective
Time as if made as of the Effective Time, except for representations and
warranties made as of a specific date, which shall be true and correct as of
such date;
(b) each of the Buyer and the Transitory Subsidiary shall
have performed or complied with its agreements and covenants required to be
performed or complied with under this Agreement as of or prior to the Effective
Time;
(c) each of the Buyer and the Transitory Subsidiary shall
have delivered to the Company a certificate (without qualification as to
knowledge or materiality or otherwise) to the effect that each of the conditions
specified in clauses (a) and (b) of this Section 5.3 is satisfied in all
respects;
(d) the Company shall have received from the Buyer's
general counsel, an opinion dated as of the Closing Date in the form attached
hereto as Exhibit F;
(e) the Company shall have received the Tax Opinion from
Riordan & McKinzie; and
(f) all actions to be taken by the Buyer and the
Transitory Subsidiary in connection with the consummation of the transactions
contemplated hereby and all certificates, opinions, instruments and other
documents required to effect the transactions contemplated hereby shall be
reasonably satisfactory in form and substance to the Company.
39.
<PAGE> 40
ARTICLE VI
INDEMNIFICATION
6.1 By the Buyer. If the Closing occurs, the Buyer hereby
agrees to indemnify and hold harmless the Company from and against all claims,
damages, losses, diminution of value, liabilities, costs and expenses
(including, without limitation, settlement costs and any legal, accounting,
consulting and other fees or expenses for investigating or defending any actions
or threatened actions) whether or not involving a third-party claim
(collectively, the "Damages") arising out of or related to each and all of the
following:
(a) any misrepresentation or breach of any representation
or warranty made by the Buyer in this Agreement or in any statement, certificate
or schedule furnished by the Buyer pursuant to this Agreement; and
(b) any breach of any covenant, agreement or obligation of
the Buyer contained in this Agreement or any other agreement, instrument or
document contemplated by this Agreement.
6.2 Limitation on Damages. The right of the Company to be
indemnified pursuant to Section 6.1 (a) shall not apply until the sum of the
Damages suffered by the Company on a cumulative basis equals or exceeds
$250,000, and at which point the Buyer shall become liable for all Damages, not
just amounts in excess of $250,000, and (ii) shall be only for claims that are
asserted by the Company before the first anniversary of the Closing Date. In no
event shall the Buyer's liability hereunder exceed an amount equal to (i) the
aggregate number of Indemnity Escrow Shares multiplied by (ii) the fair market
value of such Indemnity Escrow Shares (as determined in accordance with the
Escrow Agreement). Notwithstanding the foregoing, this Section 6.2 shall not
apply in the event the Buyer has actual knowledge of a breach of a
representation or warranty.
ARTICLE VII
TERMINATION
7.1 Termination of Agreement. The Parties may terminate this
Agreement prior to the Effective Time (whether before or after Requisite
Stockholder Approval) as provided below:
(a) the Parties may terminate this Agreement by mutual
written consent;
(b) the Buyer may terminate this Agreement by giving
written notice to the Company in the event the Company is in breach, and the
Company may
40.
<PAGE> 41
terminate this Agreement by giving written notice to the Buyer and the
Transitory Subsidiary in the event the Buyer or the Transitory Subsidiary is in
breach, of any material representation, warranty or covenant contained in this
Agreement, and such breach is not remedied within 10 days of delivery of written
notice thereof;
(c) any Party may terminate this Agreement by giving
written notice to the other Parties at any time after the Company Stockholders
have voted on whether to approve this Agreement and the Merger in the event this
Agreement and the Merger fail to receive the Requisite Stockholder Approval;
(d) any Party may terminate this Agreement if (i) there
shall be an order of a court in effect to prevent consummation of this Agreement
or (ii) there shall be any action taken, or any statute, rule, regulation or
order enacted, promulgated, issued or deemed applicable to this Agreement or the
transactions contemplated hereby, by any Governmental Entity that would make the
consummation of this Agreement illegal;
(e) the Buyer may terminate this Agreement by giving
written notice to the Company if the Closing shall not have occurred on or
before June 28, 1996 by reason of the failure of any condition precedent under
Section 5.1 or 5.2 hereof (unless the failure results from a breach by the Buyer
or the Transitory Subsidiary of any representation, warranty or covenant
contained in this Agreement); or
(f) the Company may terminate this Agreement by giving
written notice to the Buyer and the Transitory Subsidiary if the Closing shall
not have occurred on or before June 28, 1996 by reason of the failure of any
condition precedent under Section 5.1 or 5.3 hereof (unless the failure results
from a breach by the Company of any representation, warranty or covenant
contained in this Agreement).
7.2 Effect of Termination. If any Party terminates this
Agreement pursuant to Section 7.1, all obligations of the Parties hereunder
shall terminate without any liability of any Party to any other Party (except
for any liability of any Party for breaches of this Agreement).
ARTICLE VIII
DEFINITIONS
For purposes of this Agreement, each of the following defined
terms is defined in the Section of this Agreement indicated below.
41.
<PAGE> 42
<TABLE>
<CAPTION>
Defined Term Section
------------ -------
<S> <C>
Affiliate 2.14(g)
Affiliate Agreement 2.33
Bonus Pool Amount 2.19
Buyer Introduction
Buyer Common Stock 1.5(a)
Buyer Options 1.14
Buyer Reports 3.5
Buyer Shares 1.5(a)
California Law 1.1
CERCLA 2.21(a)
Certificates 1.9(a)
Closing 1.6
Closing Balance Sheet 1.5(b)
Closing Date 1.6
Closing Shares 1.5(b)
Code 2.9(c)
Commission 2.32(a)
Common Stock Exchange Ratio 1.5(a)
Company Introduction
Company Common Stock 1.5(a)
Company Options 1.14
Company Shares 1.5(a)
Company Stockholder 1.5(b)
Company Stockholder Representative 1.5(b)
Damages 6.1
Delaware Law 1.1
Disclosure Schedule Article II
Dissenting Shares 1.5(d)
Draft Closing Balance Sheet 1.5(b)
Effective Time 1.3
Employee Benefit Plan 2.20(a)
Engagement Letter 1.5(b)
Environmental Law 2.21(a)
ERISA 2.20(a)
ERISA Affiliate 2.20(a)
Escrow Agreement 1.7
Escrow Agent 1.7
Escrow Shares 1.5(c)
Exchange Act 3.5
Exchange Agent 1.9
</TABLE>
42.
<PAGE> 43
<TABLE>
<CAPTION>
Defined Term Section
------------ -------
<S> <C>
FDA 2.22(b)
FDA Shares 1.5(c)
FDC Act 2.22(b)
Financial Statements 2.6
GAAP 2.6
Governmental Entity 2.4
Hart-Scott-Rodino Act 2.4
Indemnified Party 6.3(a)
Indemnifying Party 6.3(a)
Indemnity Escrow Shares 1.5(c)
Intellectual Property 2.12(a)
Letter of Transmittal 1.9(a)
Materials of Environmental Concern 2.21(b)
Merger 1.1
Merger Documents 1.3
Most Recent Balance Sheet 2.8
Most Recent Fiscal Quarter End 2.6
Neutral Auditors 1.5(b)
Option Plan 1.14
OptionHolders 1.14
Ordinary Course of Business Article II
Outstanding Common Stock 1.5(a)
Outstanding Series A Stock 1.5(a)
Outstanding Series B Stock 1.5(a)
Party Introduction
Permit 2.23
Products 2.22(b)
Proxy Statement 2.32(a)
Proxy Statement/Prospectus 2.32(a)
Registration Statement 2.32(a)
Requisite Stockholder Approval 2.3
Securities Act 2.2
Security Interest 2.4
Series A Agreement 2.1
Series A Stock 1.5(a)
Series B Agreement 2.1
Series B Stock 2.2
Shareholder Meeting 2.32(a)
Subsidiary 2.4
Surviving Corporation 1.1
Taxes 2.9(a)
Tax Returns 2.9(a)
</TABLE>
43.
<PAGE> 44
<TABLE>
<CAPTION>
Defined Term Section
------------ -------
<S> <C>
Third Party Intellectual Property Rights 2.12(a)
Transitory Subsidiary Introduction
Warrants 2.2
</TABLE>
ARTICLE IX
MISCELLANEOUS
9.1 Press Releases and Announcements. No Party shall issue any
press release or public disclosure relating to the subject matter of this
Agreement without the prior approval of the other Parties, which shall not
unreasonably be withheld; provided, however, that any Party may make any public
disclosure it believes in good faith is required by law, regulation or stock
exchange Rule (in which case the disclosing Party shall advise the other Parties
and provide them with a copy of the proposed disclosure prior to making the
disclosure).
9.2 No Third Party Beneficiaries. This Agreement shall not
confer any rights or remedies upon any person other than the Parties and their
respective successors and permitted assigns; provided, however, that the
provisions in Article I concerning issuance of the Buyer Shares are intended for
the benefit of the Company Stockholders.
9.3 Entire Agreement. This Agreement (including the documents
referred to herein) constitutes the entire agreement among the Parties and
supersedes any prior understandings, agreements, or representations by or among
the Parties, written or oral, with respect to the subject matter hereof.
9.4 Succession and Assignment. This Agreement shall be binding
upon and inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior written
approval of the other Parties; provided that the Transitory Subsidiary may
assign its rights, interests and obligations hereunder to an Affiliate of the
Buyer.
9.5 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
9.6 Headings. The section headings contained in this Agreement
are inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
44.
<PAGE> 45
9.7 Notices. All notices, requests, demands, claims, and other
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly delivered two
business days after it is sent by registered or certified mail, return receipt
requested, postage prepaid, or one business day after it is sent via a reputable
nationwide overnight courier service, in each case to the intended recipient as
set forth below:
If to the Company: Copy to:
SensorMedics Corporation Riordan & McKinzie
22705 Savi Ranch Parkway California Plaza
Yorba Linda, CA 92687 380 South Grand Avenue
Attention: President Los Angeles, CA 90071
Attention: Janis Salin, Esq.
If to the Buyer or the Transitory Subsidiary:
Thermo Electron Corporation
81 Wyman Street
Waltham, MA 02254
Attention: General Counsel
Any Party may give any notice, request, demand, claim, or
other communication hereunder using any other means (including personal
delivery, expedited courier, messenger service, telecopy, telex, ordinary mail,
or electronic mail), but no such notice, request, demand, claim, or other
communication shall be deemed to have been duly given unless and until it
actually is received by the party for whom it is intended. Any Party may change
the address to which notices, requests, demands, claims, and other
communications hereunder are to be delivered by giving the other Parties notice
in the manner herein set forth.
9.8 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the law of conflicts) of
the Commonwealth of Massachusetts.
9.9 Amendments and Waivers. The Parties may mutually amend any
provision of this Agreement at any time prior to the Effective Time; provided,
however, that any amendment effected subsequent to the Requisite Stockholder
Approval shall be subject to the restrictions contained in the California Law.
No amendment of any provision of this Agreement shall be valid unless the same
shall be in writing and signed by all of the Parties. No waiver by any Party of
any default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or subsequent
45.
<PAGE> 46
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
9.10 Severability. Any term or provision of this Agreement
that is invalid or unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and provisions
hereof or the validity or enforceability of the offending term or provision in
any other situation or in any other jurisdiction. If the final judgment of a
court of competent jurisdiction declares that any term or provision hereof is
invalid or unenforceable, the Parties agree that the court making the
determination of invalidity or unenforceability shall have the power to reduce
the scope, duration, or area of the term or provision, to delete specific words
or phrases, or to replace any invalid or unenforceable term or provision with a
term or provision that is valid and enforceable and that comes closest to
expressing the intention of the invalid or unenforceable term or provision, and
this Agreement shall be enforceable as so modified after the expiration of the
time within which the judgment may be appealed.
9.11 Expenses. Except as set forth in the Escrow Agreement,
each of the Parties shall bear its own costs and expenses (including legal fees
and expenses) incurred in connection with this Agreement and the transactions
contemplated hereby; provided, however, that if the Merger is consummated, the
Company and the Subsidiaries shall not incur more than an aggregate of $250,000
in legal and accounting fees and expenses in connection with the Merger, and any
fees and expenses incurred by the Company or its Subsidiaries in excess of such
amount shall be recovered by the Buyer pursuant to the Escrow Agreement.
9.12 Specific Performance. Each of the Parties acknowledges
and agrees that one or more of the other Parties would be damaged irreparably in
the event any of the provisions of this Agreement are not performed in
accordance with their specific terms or otherwise are breached. Accordingly,
each of the Parties agrees that the other Parties shall be entitled to an
injunction or injunctions to prevent breaches of the provisions of this
Agreement and to enforce specifically this Agreement and the terms and
provisions hereof in any action instituted in any court of the United States or
any state thereof having jurisdiction over the Parties and the matter, in
addition to any other remedy to which it may be entitled, at law or in equity.
9.13 Construction. The language used in this Agreement shall
be deemed to be the language chosen by the Parties hereto to express their
mutual intent, and no Rule of strict construction shall be applied against any
Party. Any reference to any federal, state, local, or foreign statute or law
shall be deemed also to refer to all rules and regulations promulgated
thereunder, unless the context requires otherwise.
46.
<PAGE> 47
9.14 Incorporation of Exhibits and Schedules. The Exhibits and
Schedules identified in this Agreement are incorporated herein by reference and
made a part hereof.
IN WITNESS WHEREOF, the Parties hereto have executed this
Agreement as of the date first above written.
THERMO ELECTRON CORPORATION
By:
---------------------------------
Title:
------------------------------
SC ACQUISITION CORP.
By:
---------------------------------
Title:
------------------------------
SENSORMEDICS CORPORATION
By:
---------------------------------
Title:
------------------------------
COMPANY STOCKHOLDER REPRESENTATIVE
]
-----------------------------------
George D. Holmes
47.
<PAGE> 48
Draft of 6/3/96
EXHIBIT A
INDEMNIFICATION AND STOCK ESCROW AGREEMENT
INDEMNIFICATION AND STOCK ESCROW AGREEMENT, dated as of June
__, 1996 by and among Thermo Electron Corporation, a Delaware corporation (the
"Buyer"), SensorMedics Corporation, a California corporation (the "Company"),
George D. Holmes (the "Company Stockholder Representative"), and _____________,
as escrow agent (the "Escrow Agent").
WHEREAS, the Buyer and the Company have entered into an
Agreement and Plan of Merger dated June __, 1996 (the "Merger Agreement"),
contemplating the acquisition by the Buyer of all of the issued and outstanding
shares of capital stock of the Company (the "Company Shares"); and
WHEREAS, the parties desire that certain shares of the Buyer
common stock to be issued pursuant to the Merger be received, held and disposed
of by the Escrow Agent subject to the terms and conditions herein expressed;
WHEREAS, the execution and delivery of this Agreement is a
condition precedent to the obligation of the Buyer to consummate the
transactions contemplated by the Merger Agreement;
NOW, THEREFORE, as an inducement to the Buyer to consummate
the transactions contemplated by the Merger Agreement and in consideration of
these premises and other good and valuable consideration, the parties hereto
hereby agree as follows:
Section 1. Definitions. Capitalized terms used herein which
are defined in the Merger Agreement but not defined herein shall have the same
meanings herein as therein. "Escrow Termination Date" shall mean the later of
(i) June __, 1997 or (ii) the FDA Resolution Date (as defined in Section 5
hereof).
Section 2. Consent of Company Stockholders. By virtue of the
Company Stockholders' approval of the Merger Agreement, the Company Stockholders
have, without any further act of any Company Stockholder, consented to: (a) the
establishment of the escrow account to secure the Company's indemnification
obligations under Section 4 of this Agreement and the obligations, if any, of
the Company under Section 1.5(b) of the Merger Agreement, in the manner set
forth herein, (b) the appointment of the Company Stockholder
A-1
<PAGE> 49
Representative as their representative for purposes of this Agreement and as
attorney-in-fact and as agent for and on behalf of each Company Stockholder, (c)
the taking by the Company Stockholder Representative of any and all actions and
the making of any decisions required or permitted to be taken or made by him
under this Agreement and (d) all of the other terms, conditions and limitations
of this Agreement.
Section 3. Deposit of Escrow Property.
(a) The Buyer hereby deposits with Escrow Agent, and Escrow
Agent hereby acknowledges receipt of, two stock certificates evidencing an
aggregate of ___________ (______) shares of the Buyer's common stock, $1.00 par
value per share (the "Escrow Shares"). A certificate evidencing ____________
(_______) Escrow Shares represents the Indemnity Escrow Shares and a certificate
evidencing ____________ (_______) Escrow Shares represents the FDA Shares. All
of such certificates have been issued in the name of the Escrow Agent or its
nominee.
(b) In case any distribution (except a cash dividend paid out
of earned surplus) or stock dividend shall be made on or in respect of the
Escrow Shares, or any property shall be distributed upon or with respect to the
Escrow Shares pursuant to the recapitalization, liquidation or reclassification
of the capital structure of the Buyer or pursuant to the merger, consolidation
or reorganization of the Buyer, the money, stock or property so distributed or
paid shall be delivered to and held by Escrow Agent hereunder. Such money, stock
and property, together with the Escrow Shares, are sometimes referred to
hereinafter as the "Escrow Property." Company Stockholders shall be entitled to
receive, in proportion to their respective number of Escrow Shares, all cash
dividends paid in respect of the Escrow Shares out of the earned surplus of the
Buyer.
While the Escrow Shares are held by Escrow Agent, Company
Stockholders shall be entitled to direct Escrow Agent as to how to vote the
Escrow Shares, in proportion to their respective number of Escrow Shares, with
respect to matters placed before the shareholders of the Buyer, and Escrow Agent
shall vote accordingly.
Section 4. Holding and Distribution of Escrow Property.
(a) If the Closing occurs, the Buyer, the Surviving
Corporation and each Subsidiary shall be indemnified from and against any and
all claims, damages, losses, diminution of value, liabilities, costs and
expenses (including, without limitation, settlement costs and any legal,
accounting, consulting or other fees or expenses for investigating or defending
any actions or threatened actions) whether or not involving a third-party claim
(collectively, the "Damages") arising out of, constituting or related to each
and all of the following:
A-2
<PAGE> 50
(i) any misrepresentation or breach of any
representation or warranty made by the Company in Article II of the Merger
Agreement or in any statement, certificate or Schedule furnished by the Company
pursuant to the Merger Agreement;
(ii) any breach of any covenant, agreement or
obligation of the Company contained in the Merger Agreement or any other
agreement, instrument or document contemplated by the Merger Agreement; and
(iii) the FDA Matter (as defined in the Proxy
Statement/Prospectus), except for any such Damages described in clause (iv)
below; and
(iv) the monetary amount payable pursuant to a final
judgment, settlement or other final and legally binding obligation resulting
from the resolution of the FDA Matter.
The Buyer shall give the Company Stockholder Representative
notice of any claim, action or proceeding by a third party which is reasonably
likely to result in a claim for indemnification under this Section 4. Such
notice is hereby deemed given with respect to the FDA Matter. The Company
Stockholder Representative shall have the right to defend, contest, protest and
otherwise control the resolution of any such claim, action or proceeding (unless
such claim, action or proceeding relates to a matter which, if adversely
determined, would have an impact on (A) the Surviving Corporation's or the
Buyer's liability in another proceeding, (B) the goodwill or reputation of the
Buyer or the Surviving Corporation or (C) the future conduct by the Surviving
Corporation or the Buyer of its business or on its Tax or accounting positions,
in which case the next paragraph shall apply), at his expense, but shall keep
the Buyer apprised of material developments. The Buyer shall have the right to
participate in any such legal proceeding, subject to the Company Stockholder
Representative's right of control thereof, at the expense of the Buyer by
counsel of the Buyer's choice. The Company Stockholder Representative, acting in
good faith, shall have the right in its sole discretion to settle any such
claim.
If the claim, action or proceeding is of a type referred to in
the parenthetical contained in the second sentence of the preceding paragraph,
then (i) the Buyer shall have the right, at the Company Stockholder
Representative's expense, to defend, contest, protest and otherwise control the
resolution thereof, but shall keep the Company Stockholder Representative
apprised of material developments and (ii) the Company Stockholder
Representative shall have the right to participate in any such legal proceeding,
subject to the Buyer's right of control thereof, at the Company Stockholder
Representative's expense and with counsel selected by the Company Stockholder
Representative. The Buyer, acting in good faith, shall have the right in its
sole discretion to settle any such claim. The parties hereby acknowledge that
the Buyer shall have the right to control the defense of the FDA Matter subject
to the terms of this paragraph.
A-3
<PAGE> 51
(b) The Company Stockholders hereby designate and appoint the
Company Stockholder Representative as their representative and attorney-in-fact
through whom all actions relating to this Agreement after the Closing Date,
including those acts as are required, authorized or contemplated by this
Agreement with respect to the settlement of a claim or the defense thereof,
shall be made or directed, and hereby acknowledge that the Company Stockholder
Representative shall be the only person authorized to take any action so
required, authorized or contemplated by this Agreement on behalf of the Company
Stockholders. The Company Stockholders further acknowledge that the foregoing
appointment and designation shall be deemed to be coupled with an interest and
shall survive the disability, death or incompetency of any Company Stockholder.
The other parties hereto are and will be entitled to rely on any action so taken
or any notice given by the Company Stockholder Representative and entitled and
authorized to give notices only to the Company Stockholder Representative for
any notice contemplated by this Agreement to be given any such person. The
Company Stockholder Representative shall serve without compensation but shall be
reimbursed for his reasonable out-of-pocket expenses from the Escrow Property.
The Company Stockholder Representative shall have the right to sell Escrow
Property in order to obtain funds to pay such expenses. The Company Stockholder
Representative shall furnish reports as to the status of the escrow to the
Company Stockholders as and when Escrow Shares are released from the escrow or
claims are paid. The Buyer, the Transitory Subsidiary or the Surviving
Corporation shall not have any liability or responsibility to the Company
Stockholder Representative.
The Company Stockholder Representative shall receive and
deliver notices on behalf of the Company Stockholders and take all such action
as in the Company Stockholder Representative's discretion may be necessary,
appropriate, permitted or advisable to be taken under the terms of this
agreement in order to consent to, pay, contest, arbitrate, litigate or settle
any claim or alleged claim asserted hereunder.
The Company Stockholder Representative shall not be personally
liable to the other Company Stockholders for any action taken, suffered or
omitted by him in good faith and reasonably believed by him to be authorized or
within the discretion of the rights or powers conferred upon him by this
Agreement.
In acting as representative of the Company Stockholders, the
Company Stockholder Representative may rely upon, and shall be protected in
acting or refraining from acting upon, an opinion of counsel, certificate of
auditors or other certificate, statement, instrument, opinion, report, notice,
request, consent, order, arbitrator's award, appraisal, bond or other paper or
document reasonably believed by him to be genuine and to have been signed or
presented by the proper party or parties. The Company Stockholder Representative
may consult with counsel and any advice of such counsel shall be full and
complete authorization and protection in respect to any action taken or suffered
or omitted by him in such capacity in good faith and in accordance with such
opinion of counsel. The Company Stockholder Representative may perform his
duties as Company Stockholder
A-4
<PAGE> 52
Representative either directly or by or through his agents or attorneys and the
Company Stockholder Representative shall not be responsible to the other Company
Stockholders for any misconduct or negligence on the part of any agent or
attorney appointed with reasonable care by him hereunder.
Upon receiving notice of the death or incapacity of the
Company Stockholder Representative, the Company Stockholders shall by majority
vote (based on the number of Closing Shares received by each Company
Stockholder) appoint a successor to fill the vacancy. The Company Stockholders
may by such a majority vote remove the Company Stockholder Representative with
or without cause and appoint a successor, provided that notice thereof is given
by the new Company Stockholder Representative to each of the other parties
hereto. The Company Stockholder Representative may resign if, and only if, he is
simultaneously replaced with a substitute Company Stockholder Representative
reasonably acceptable to the Buyer.
Section 5. Limitation of Liability. The right of the Buyer,
the Transitory Subsidiary and the Surviving Corporation to be indemnified
pursuant to Section 4(a) (except pursuant to Section 4(a)(iv)) shall be limited
to the return to the Buyer of the Indemnity Escrow Shares. The right of the
Buyer, the Transitory Subsidiary and the Surviving Corporation to be indemnified
pursuant to Section 4(a)(i) shall not apply until the sum of the Damages
suffered by the Buyer, the Transitory Subsidiary and the Surviving Corporation
on a cumulative basis arising out of the matters described in Section 4(a)(i)
equals or exceeds $250,000, at which point the Company shall become liable for
all such Damages, not just amounts in excess of $250,000. The right of the
Buyer, the Transitory Subsidiary and the Surviving Corporation to be indemnified
pursuant to Section 4(a)(iv) shall be limited to the return to the Buyer of the
FDA Shares. The right of the Buyer, the Transitory Subsidiary and the Surviving
Corporation to be indemnified pursuant to Section 4(a)(i), (ii) and (iii) shall
be limited to claims that are asserted by the Buyer, the monetary amount payable
by the Buyer, the Transitory Subsidiary or the Surviving Corporation under a
settlement, final judgment or other final and the Transitory Subsidiary or the
Surviving Corporation before the first anniversary of the Closing Date. The
right of the Buyer, the Transitory Subsidiary and the Surviving Corporation to
be indemnified pursuant to Section 4(a)(iv) shall be limited to claims that are
asserted by the Buyer, the Transitory Subsidiary or the Surviving Corporation
before the date that is 60 days after a legally binding resolution of the FDA
Matter (the "FDA Resolution Date"). Notwithstanding the foregoing, this Section
5 shall not apply in the event the Company has actual knowledge of a breach of a
representation or warranty as of the Closing Date.
Section 6. Escrow Account. It is intended that the assets held
in escrow as above provided shall facilitate the Buyer's and the Surviving
Corporation's ability to recover amounts to which they are entitled as a result
of misrepresentations, breaches of warranties and breaches of covenants
contained in the Merger Agreement or this Agreement and to satisfy other claims
of the Buyer and the Surviving Corporation arising as under the Merger
A-5
<PAGE> 53
Agreement or this Agreement, and to satisfy the Company's obligations under
Section 1.5(b) of the Merger Agreement. Accordingly, and to the extent necessary
to provide such protection to the Buyer and the Surviving Corporation, property
held in escrow hereunder shall be available to satisfy claims of the Buyer and
the Surviving Corporation under this Agreement to the extent provided herein. In
the event the Escrow Property is insufficient to pay all amounts owed to the
Buyer, the Transitory Subsidiary and the Surviving Corporation, including by
virtue of the expiration of the escrow period, no Company Stockholder shall be
liable under this Agreement to pay any amount in addition to such Company
Stockholder's proportionate share of the Escrow Property claimed by the Buyer
prior to the Escrow Termination Date. Once the Escrow Property or balance
thereof is released to the Company Stockholders, the Buyer, the Transitory
Subsidiary and the Surviving Corporation have no right to recover damages from
the Company Stockholders in the absence of actual knowledge of a breach of a
representation or warranty.
Section 7. Registration of Claims. In the event that the Buyer
or the Surviving Corporation asserts any claim for indemnification against the
Escrow Shares, including any claim under Section 1.5(b) of the Merger Agreement,
it shall deliver to Escrow Agent and the Company Stockholder Representative a
written notice thereof (the "Notice of Claim") setting forth (a) a demand for
payment of a specified amount from the Escrow Shares or, if such amount can not
be specified, the basis upon which the amount would be determined and (b) a
description of the asserted claim and the basis thereof, and the Buyer shall
deliver to the Company Stockholder Representative thereafter such other
information as may be reasonably requested by the Company Stockholder
Representative to evaluate the asserted claim. It is understood and agreed among
the parties hereto that the Buyer's and the Surviving Corporation's right to
assert claims for indemnification under this Agreement is limited to those
matters set forth in this Agreement, although the Escrow Agent shall have no
obligation to determine or verify whether such condition has been met.
Section 8. Payment of Amounts from Escrow Property Upon Demand
Without Objection. If the Buyer delivers to the Company Stockholder
Representative and Escrow Agent a Notice of Claim pursuant to Section 4 hereof
and if no written objection to such demand is received by Escrow Agent and the
Buyer from the Company Stockholder Representative within 30 days following the
delivery of such Notice of Claim to Escrow Agent and the Company Stockholder
Representative, then Escrow Agent shall pay the claim out of the Escrow Property
by forthwith endorsing and delivering to the Buyer the certificates representing
the Indemnity Escrow Shares (in the case of a claim asserted under Section
4(a)(i), (ii) or (iii) hereof, or in the case of a claim made pursuant to
Section 1.5(b) of the Merger Agreement), or the FDA Shares (in the case of a
claim asserted under Section 4(a)(iv) hereof). The Buyer shall be entitled to
retain that number of Escrow Shares which, when multiplied by the fair market
value (as defined below), shall equal the amount of the claim; provided,
however, that Notices of Claim must be delivered before the Escrow Termination
Date. The Buyer shall return one or more certificates for the excess Escrow
Shares to Escrow Agent for continued holding hereunder. To the extent the value
(calculated
A-6
<PAGE> 54
on the basis of the fair market value, regardless of actual market value at the
time) of the Indemnity Escrow Shares or FDA Shares, as the case may be, retained
by the Buyer is less than the amount of the claim, Escrow Agent shall also
transfer to the Buyer other Escrow Property, if any, in addition to such Escrow
Shares.
The fair market value shall be $_______ per share,
representing the reported closing price of the Buyer's Common Stock on the New
York Stock Exchange on June __, 1996, as adjusted appropriately to reflect any
stock, splits, stock dividends or similar recapitalizations.
Section 9. Payment of Amounts from Escrow Property After
Notice of Objection. If the Buyer delivers to the Company Stockholder
Representative and Escrow Agent a Notice of Claim pursuant to Section 4 hereof,
and if the Company Stockholder Representative shall give written objection
thereto to Escrow Agent and the Buyer prior to the expiration of the 30-day
period specified in Section 8, Escrow Agent shall make no payment in respect of
the demand set forth in such Notice of Claim until it shall have received one of
the following:
(a) written instructions signed on behalf of both the Buyer
and the Company Stockholder Representative; or
(b) a final order of a court having jurisdiction over the
asserted claim, after expiration of any applicable appeal period.
Upon receipt of any such instructions or order, Escrow Agent
shall pay such amount from the Escrow Property to the Buyer as may be directed
by such instructions or order; provided, however that (i) the limitations set
forth in Section 8 hereof on the number of Escrow Shares retainable by the Buyer
shall also apply to claims paid under this Section 9, and (ii) all Escrow Shares
delivered to the Buyer shall be valued on the basis of the fair market value,
regardless of the actual market price of the Buyer's Common Stock on the date
such shares are delivered to the Buyer. If the final order of a court having
jurisdiction over the asserted claim, after expiration of any applicable appeal
period, upholds the Company Stockholder Representative's objection to the Escrow
Agent, the Buyer shall reimburse the Escrow Agent for reasonable attorneys' fees
and expenses paid from the Escrow Property to pursue the objection. If the final
order of such court, after any applicable appeal period, upholds the Buyer's
claim, no such reimbursement shall be made.
Section 10. Payment of Escrow Property to Shareholders.
(a) On the June __, 1997, Escrow Agent shall deliver to the
Buyer and the Company Stockholder Representative a statement of the remaining
balance, if any, of the Indemnity Escrow Shares (calculated on the basis of the
fair market value, regardless of the actual market price of the Buyer's Common
Stock at that time), and the total amount of all
A-7
<PAGE> 55
claims registered pursuant to Section 7 hereof under Section 4(a)(i), (ii) or
(iii) hereof and not theretofore resolved and paid (the excess, if any, of such
remaining balance over the total amount of such claims shall be referred to as
the "Final Indemnity Escrow Balance"). The Buyer and the Company Stockholder
Representative shall review the accuracy of the Final Indemnity Escrow Balance
and notify Escrow Agent within 30 days of the receipt of the foregoing statement
of any asserted discrepancy. Upon the expiration of the 30-day period after
receipt by the Buyer and the Company Stockholder Representative of such
statement, and if Escrow Agent has not been notified of any discrepancy by the
Buyer or the Company Stockholder Representative within the 30-day period
specified in the preceding sentence, Escrow Agent shall deliver to each Company
Stockholders such Company Stockholder's share of the Indemnity Escrow Shares,
free and clear of the escrow created by this Agreement. After the last
registered claim under Section 4(a)(i), (ii) and (iii) shall have been resolved
pursuant to Section 8 and Section 9 hereof, as the case may be, and paid, the
remaining balance, if any, of the Indemnity Escrow Shares shall be delivered by
Escrow Agent to Company Stockholders, free and clear of the escrow created by
this Agreement; provided, however, that upon the disposition of any such claim
prior to the disposition of all such claims Escrow Agent shall deliver to
Company Stockholders the Indemnity Escrow Shares in excess of the amount of the
remaining aggregate claims as determined above. All payments by Escrow Agent to
Company Stockholders pursuant to this Agreement shall be made in proportion to
the Company Stockholders' respective interests in the Escrow Shares.
(b) On the Escrow Termination Date, Escrow Agent shall
deliver to the Buyer and the Company Stockholder Representative a statement of
the remaining balance, if any, of the Escrow Property (calculated on the basis
of the fair market value, regardless of the actual market price of the Buyer's
Common Stock at that time), and the total amount of all claims registered
pursuant to Section 7 hereof and not theretofore resolved and paid (the excess,
if any, of such remaining balance over the total amount of such claims shall be
referred to as the "Final Escrow Balance"). The Buyer and the Company
Stockholder Representative shall review the accuracy of the Final Escrow Balance
and notify Escrow Agent within 30 days of the receipt of the foregoing statement
of any asserted discrepancy. Upon the expiration of the 30-day period after
receipt by the Buyer and the Company Stockholder Representative of such
statement, and if Escrow Agent has not been notified of any discrepancy by the
Buyer or the Company Stockholder Representative within the 30-day period
specified in the preceding sentence, Escrow Agent shall deliver to each Company
Stockholder Escrow Property representing such Company Stockholder's share of the
Final Escrow Balance, free and clear of the escrow created by this Agreement.
After the last registered claim shall have been resolved pursuant to Section 8
and Section 9 hereof, as the case may be, and paid, the remaining balance, if
any, of the Escrow Property shall be delivered by Escrow Agent to Company
Stockholders, free and clear of the escrow created by this Agreement; provided,
however, that upon the disposition of any such claim prior to the disposition of
all such claims Escrow Agent shall deliver to Company Stockholders the Escrow
Property in excess of the amount of the remaining aggregate claims as determined
above. All payments by
A-8
<PAGE> 56
Escrow Agent to Company Stockholders pursuant to this Agreement shall be made in
proportion to the Company Stockholders' respective interests in the Escrow
Shares.
Section 11. Responsibility of Escrow Agent. Escrow Agent may
act upon any instrument or other writing believed by it in good faith to be
genuine and to have been signed or presented by the proper person and shall not
be liable to any party hereto in connection with the performance of its duties
hereunder, except for its own negligence or willful misconduct. Escrow Agent's
duties shall be determined only with reference to this Escrow Agreement and
applicable laws and Escrow Agent is not charged with knowledge of, or any duties
or responsibilities in connection with, any other document or agreement. If in
doubt as to its duties and responsibilities hereunder, Escrow Agent may consult
with counsel of its choice and shall be protected in any action taken or omitted
in connection with the advice or opinion of such counsel.
If any party to this Agreement disagrees on anything connected
with this escrow (a) Escrow Agent will not have to settle the matter, (b) Escrow
Agent may wait for a settlement by appropriate legal proceedings or other means
it may require, and in such event it will not be liable for interest or damage,
(c) if Escrow Agent intervenes in or is made a party to any legal proceedings,
it will be entitled to such reasonable compensation for services, costs and
attorney's fees as the court may award and (d) Escrow Agent is entitled to hold
documents and assets deposited in this escrow pending settlement of the
disagreement by any of the above means.
Escrow Agent is to act as a depositary agent only and is
hereby relieved of any liability in connection with any representations made by
the other parties hereto or any of their agents. Escrow Agent shall not be
responsible for and shall not be under a duty to examine any other agreement.
Section 12. Indemnification and Fees of Escrow Agent. In
consideration of its acceptance of the appointment as Escrow Agent, the Escrow
Agent and shall be indemnified and held harmless as to any liability incurred by
it to any other person, firm or corporation by reason of its having accepted the
same or in carrying out any of the terms hereof, and shall be reimbursed for all
its out-of-pocket expenses, including, among other things, reasonable counsel
fees and court costs, incurred by reason of its position hereunder or actions
taken pursuant hereto, except in the event of the negligence or willful
misconduct of Escrow Agent. The fees and charges set forth below for the
services of Escrow Agent will be considered compensation for Escrow Agent's
ordinary services as contemplated by this Agreement. In the event the conditions
of the escrow are not promptly fulfilled or Escrow Agent renders any service not
provided for in this Agreement or there is any assignment of any interest in the
subject matter of this escrow or modification of any interest or if any
controversy arises in connection with it, Escrow Agent will be reasonably
compensated for such extraordinary services, and will be reimbursed for all
reasonable costs, attorney's fees and expenses occasioned thereby. Except as
provided in Section 9, the fees
A-9
<PAGE> 57
and expenses of Escrow Agent and any other amounts due the Escrow Agent under
this Section 12 shall be reimbursed 50% by Buyer and 50% out of the Escrow
Property.
Escrow Agent's initial acceptance fee is $_____ and Escrow
Agent's annual fee hereunder is $______.
Section 13. Resignation of Escrow Agent. Escrow Agent may
resign and be discharged from its duties hereunder at any time by giving not
less than 60 days prior written notice of such resignation to the Buyer and the
Company Stockholder Representative, which notice shall specify the date when
such resignation shall take effect. Upon such notice, the Buyer and the Company
Stockholder Representative shall appoint a successor escrow agent. If the Buyer
and the Company Stockholder Representative are unable to agree upon a successor
escrow agent within 30 days after receipt of such notice, Escrow Agent may apply
to a court of competent jurisdiction for such appointment. Escrow Agent shall
continue to serve until its successor delivers to the Buyer and the Company
Stockholder Representative a duly executed instrument of acceptance of the terms
and conditions of this Agreement and receives the Escrow Property.
Section 14. Investments. Escrow Agent shall invest the cash
portion of the Escrow Property, if any, in money market accounts at
_________________________. Income from any such investment shall be held by
Escrow Agent, shall be reinvested in accordance with this Section 14 and shall
be considered part of the Escrow Property.
Section 15. Security Interest. To secure the obligations that
may be owed it hereunder, the Buyer shall have a security interest in the Escrow
Property, and for purposes of protection of an enforceable security interest,
possession of the Escrow Property by the Escrow Agent shall be deemed possession
by the Buyer.
Section 16. Notices and Communications. Any notice or other
communications hereunder shall be deemed to have been duly delivered if
delivered by hand or overnight courier service to the party to whom such notice
or other communication is to be delivered at such party's address set forth
below, or sent by certified or registered mail, return receipt requested,
postage prepaid, as follows:
If to the Buyer:
Thermo Electron Corporation
81 Wyman Street
Waltham, Massachusetts 02254
Attention: President
A-10
<PAGE> 58
With a copy to:
Thermo Electron Corporation
81 Wyman Street
Waltham, Massachusetts 02254
Attention: General Counsel
If to the Company, to:
SensorMedics Corporation
22705 Savi Ranch Parkway
Yorba Linda, CA 92687
With a copy to:
Riordan & McKinzie
California Plaza
380 South Grand Avenue
Los Angeles, CA 90071
Attention: Janice Salin, Esquire
and
Thermo Electron Corporation
81 Wyman Street
Waltham, Massachusetts 02254
Attention: General Counsel
If to the Company Stockholder Representative, to:
If to a Company Stockholder, to:
At the Company Stockholder's address set forth on the
Buyer's stock records.
If to Escrow Agent, to:
or to such other address, or to the attention of such other individual, as any
party hereto may designate in writing to the other parties to this Agreement.
Any such notice, request, demand, consent or other communication shall be deemed
to have been given on the earlier of (i) the date of delivery if by hand or by
overnight courier service or (ii) five days after having been mailed.
A-11
<PAGE> 59
Section 17. Governing Law. This Agreement shall be governed
by the law of the Commonwealth of Massachusetts applicable to agreements made
and to be performed wholly within such jurisdiction, without regard to the
conflicts of laws provisions thereof.
Section 18. Amendments. This instrument supersedes any and all
prior agreements among the parties with regard to the matters set forth herein
and may not be altered or amended except by a writing signed by the parties
against whom such alteration or amendment is sought.
Section 19. Waiver. No waiver of any term or provision of this
Agreement shall be effective unless made in a writing signed by the party
against whom the enforcement of the waiver is sought. No waiver of any term or
provision of this Agreement shall be deemed to be a waiver of any other breach
of such term or provision of this Agreement.
Section 20. Section Headings. The headings in this Agreement
are for the purposes of reference only and shall not limit or otherwise affect
any of the terms or provisions hereof.
Section 21. Successor and Assigns. The rights and obligations
of the parties hereto shall inure to the benefit of and shall be binding upon
the successors and assigns of each of them; provided, however, that neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any of the parties hereto without the prior written consent of the
other parties hereto.
Section 22. Counterparts. This Agreement may be executed in
several identical counterparts each of which when executed by the parties hereto
and delivered shall be an original, but all of which together shall constitute a
single instrument.
A-12
<PAGE> 60
IN WITNESS WHEREOF, the parties have caused this Agreement to
be duly executed as of the date first written above.
THERMO ELECTRON CORPORATION
By:
----------------------------------
Title:
SENSORMEDICS CORPORATION
By:
----------------------------------
Title:
COMPANY STOCKHOLDER
REPRESENTATIVE
-------------------------------------
George D. Holmes
[ ]
------------------------------------
as Escrow Agent
By:
----------------------------------
Title:
A-13
<PAGE> 61
EXHIBIT C TO APPENDIX A
SENSORMEDICS CORPORATION
AFFILIATE AGREEMENT
June , 1996
SensorMedics Corporation
22705 Savi Ranch Parkway
Yorba Linda, California 92687
Thermo Electron Corporation
81 Wyman Street
Waltham, Massachusetts 02254
Ladies and Gentlemen:
The undersigned Shareholder (the "Shareholder") of SensorMedics
Corporation, a California corporation ("SMC"), understands that SMC has entered
into an Agreement and Plan of Merger (the "Merger Agreement") dated as of June
, 1996 among Thermo Electron Corporation, a Delaware corporation ("Thermo"),
SMC Acquisition Corporation, a Delaware corporation and a wholly-owned
subsidiary of Thermo ("Acquisition"), and SMC. Pursuant to the Merger Agreement,
Acquisition will merge (the "Merger") with and into SMC, following which SMC
will become a wholly-owned subsidiary of Thermo. The Merger Agreement provides
that, on the Effective Date of the Merger (as defined in the Merger Agreement),
all of the outstanding shares of common stock and all shares of Series A
Preferred Stock of SMC as to which an election is made will be converted into
shares of common stock of Thermo (the "Thermo Common Stock") in accordance with
the applicable exchange ratio specified in the Merger Agreement.
The Shareholder has been advised that as of the date hereof, the
Shareholder may be deemed to be an "affiliate" of SMC, as the term "affiliate"
is (i) defined for purposes of paragraphs (c) and (d) of Rule 145 promulgated by
the Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933, as amended (the "Act"), and (ii) used in and for purposes of
Accounting Series Releases 130 and 135, as amended, of the Commission.
The Shareholder understands that the representations, warranties and
covenants set forth herein will be relied upon by Thermo, Acquisition, SMC and
other shareholders of SMC, and their respective counsel and accounting firms.
The Shareholder represents, warrants and agrees with Thermo and SMC as
follows:
1. The Shareholder is the beneficial owner of the shares of SMC
capital stock and options to purchase SMC capital stock indicated on the
last page hereof (the "SMC Securities"), which at the date hereof and at
all times up until the Effective Date will be free and clear of any liens,
claims, options, charges or other encumbrances not described on such page.
Except for the SMC Securities, the Shareholder does not beneficially own
any shares of capital stock of SMC or any other equity securities of SMC or
any other options, warrants or other rights to acquire any equity
securities of SMC. The Shareholder has full power and authority to make,
enter into and carry out the terms of this Agreement.
2. The Shareholder has been advised that the issuance of shares of
Thermo Common Stock to the Shareholder (the "Thermo Shares") in connection
with the Merger has been or will be registered with the Commission under
the Act on a Registration Statement on Form S-4. However, the Shareholder
has also been advised that, since at the time the Merger is to be submitted
for a vote of the shareholders of SMC, the Shareholder may be deemed to be
an affiliate of SMC and the distribution by the Shareholder of any Thermo
Shares will not have been registered under the Act, the Shareholder may not
sell, transfer or otherwise dispose of the Thermo Shares unless (i) such
sale, transfer or other disposition has been registered under the Act, (ii)
such sale, transfer or other disposition is made in compliance with Rule
145
C-1
<PAGE> 62
promulgated by the Commission under the Act, or (iii) such sale, transfer
or other disposition is otherwise exempt from registration under the Act.
3. The Shareholder shall not make any sale, transfer or other
disposition of the Thermo Shares in violation of the Act or the rules and
regulations promulgated thereunder.
4. The Shareholder understands that Thermo is under no obligation to
register the sale, transfer or other disposition of the Thermo Shares, or
any other Thermo Common Stock held on the Shareholder's behalf, under the
Act or to take any other action necessary in order to make compliance with
an exemption from such registration available.
5. Notwithstanding any other provision hereof to the contrary, during
the period commencing on the date hereof and ending at such time as
financial results covering at least thirty days of combined operations of
SMC and Thermo have been published by Thermo in the form of a quarterly
earnings report, an effective registration statement filed with the
Commission, a report to the Commission on Form 10-K, 10-Q or 8-K, or any
other public filing or announcement which includes the combined results of
operations of Thermo and SMC, the Shareholder will not sell, transfer or
otherwise dispose of, or offer or agree to sell, transfer or otherwise
dispose of, or in any other way reduce the risk of the Shareholder's
ownership of or investment in, any SMC Securities, any shares of SMC common
stock or other equity securities of SMC which the Shareholder purchases or
acquires after the execution of this Agreement, the Thermo Shares or any
securities which may be paid as a dividend or otherwise distributed thereon
or with respect thereto or issued or delivered in exchange or substitution
therefor (all such shares and other securities being referred to herein,
collectively, as "Restricted Securities"), or any option, right or other
interest with respect to any Restricted Securities. Without limiting the
foregoing, the Shareholder acknowledges that such restriction prohibits the
acquisition of a "put" option or other hedging instrument with respect to
Thermo Common Stock.
6. Stock transfer instructions will be given to Thermo's transfer
agent with respect to the Thermo Shares and there will be placed on the
certificates for the Thermo Shares, or any substitutions therefor, a legend
stating in substance:
"The shares represented by this certificate were issued in a
transaction to which Rule 145 promulgated under the Securities Act of
1933 applies. The shares represented by this certificate may only be
transferred in accordance with the terms of an agreement dated as of
June , 1996 between the registered holder hereof and Thermo
Electron Corporation, a copy of which agreement is on file at the
principal offices of Thermo Electron Corporation.
7. Unless the transfer by the Shareholder of the Thermo Shares has
been registered under the Act, or is a sale made in compliance with Rule
145, Thermo reserves the right to put a legend on the certificates issued
to any transferee of the Shareholder stating in substance:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933 and were acquired from a person who
received such shares in a transaction to which Rule 145 promulgated
under the Securities Act of 1933 applies. The shares may not be sold,
pledged or otherwise transferred except in accordance with an
exemption from the registration requirements of the Securities Act of
1933."
8. The legends set forth in paragraphs 6 and 7 above shall be removed
by delivery of substitute certificates without the applicable legend if, in
the opinion of counsel to Thermo, (a) such legend is not required for
purposes of the Act or (b) the sale or other disposition of the shares
evidenced by the certificate is permitted by the provisions of Rule
145(d)). In any event, such legend may be removed upon request of the
Shareholder no later than two years after the Merger is consummated, unless
the Shareholder is then an "affiliate" of Thermo within the meaning of Rule
145(d).
9. The Shareholder hereby covenants and agrees to execute and deliver
any additional documents necessary or desirable, in the opinion of Thermo,
to carry out the intent of this Agreement.
C-2
<PAGE> 63
10. Miscellaneous.
10.1 If any term, provisions, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, all other terms, provisions, covenants and restrictions
of this Agreement shall nevertheless remain in full force and effect and
shall in no way be affected, impaired or invalidated.
10.2 This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but, except as otherwise
specifically provided herein, neither this Agreement nor any of the rights,
interests or obligations of the parties hereto may be assigned by either of
the parties without the prior written consent of the other.
10.3 This Agreement may not be modified, amended, altered or
supplemented except upon the execution and delivery of a written agreement
executed by the parties hereto.
10.4 The parties hereto acknowledge that Thermo will be
irreparably harmed and that there will be no adequate remedy at law for a
violation of any of the covenants or agreements of the Shareholder set
forth herein. Therefore, it is agreed that, in addition to any other
remedies that may be available to Thermo upon any such violation, Thermo
shall have the right to enforce such covenants and agreements by specific
performance, injunctive relief or by any other means available to Thermo at
law or in equity.
10.5 All notices, requests, claims,, demands and other
communications hereunder shall be in writing and sufficient if delivered in
person, by cable, telegram or telex, or sent by mail (registered or
certified mail, postage prepaid, return receipt requested) or overnight
courier (prepaid) to the respective parties as follows:
If to SMC: SensorMedics Corporation
22705 Savi Ranch Parkway
Yorba Linda, California 92687
Attention: President
with a copy to: Riordan & McKinzie
300 South Grand Avenue
Suite 2900
Los Angeles, CA 90071
Attention: Janis B. Salin, Esquire
and to:
Thermo Electron Corporation
81 Wyman Street
Waltham, MA 02254
Attention: General Counsel
If to Shareholder: to the address set forth on the last page hereof
or to such other address as any party may have furnished to the other in
writing in accordance herewith, except that notices of change of address
shall only be effective upon receipt.
10.6 This Agreement contains the entire understanding of the
parties in respect of the subject matter hereof, and supersedes all prior
negotiations and understandings between the parties with respect to such
subject matter.
10.7 This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall
constitute one and the same agreement.
C-3
<PAGE> 64
11. Thermo agrees to publish, as promptly as practicable following the
Merger, results covering at least thirty days of combined operations of
Thermo and SMC in the form of a quarterly earnings report, an effective
registration statement filed with the Commission, a report to the
Commission on Form 10-K, 10-Q or 8-K, or any other public filing or
announcement which includes the combined results of operations of Thermo
and SMC; provided, however, that Thermo shall be under no obligation to
publish any such financial information other than with respect to a fiscal
quarter of Thermo.
Very truly yours,
--------------------------------------
(Print Shareholder's Name)
By:
----------------------------------
Title:
--------------------------------
(if applicable)
Shareholders' Address:
--------------------------------------
--------------------------------------
--------------------------------------
C-4
<PAGE> 1
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
THERMO ELECTRON CORPORATION
Thermo Electron Corporation (the "Corporation"), a corporation organized
and existing under the laws of the State of Delaware, hereby certifies as
follows, pursuant to Section 242 of the General Corporation Law of the State of
Delaware:
1. That Article FOURTH of the Amended and Restated Certificate of
Incorporation of the Corporation, as amended and restated on June 21, 1994,
is hereby further amended to increase the number of authorized shares of
the Corporation's Common Stock, $1.00 par value per share, from 175 million
shares to 350 million shares and that such amendment is hereby effected by
deleting said Article in its entirety and inserting the following in
substitution therefor:
"FOURTH: The total number of shares of stock which the Corporation
shall have authority to issue is: (a) Three Hundred Fifty Million
(350,000,000) shares of Common Stock of the par value of $1.00 per
share, the holders of which shall have one vote for each share so held,
and (b) Fifty Thousand (50,000) shares of Preferred Stock of the par
value of $100 per share, to be issued in such classes, including one or
more series within such class, and to possess such specific terms
including dividend rates, conversion prices, voting rights, redemption
prices, maturity dates and other special rights, preferences,
qualifications, limitations, and restrictions thereof, as shall be
determined in the resolution or resolutions providing for the issue of
such Preferred Stock adopted by the Board of Directors from time to
time."
2. That the Board of Directors of the Corporation at a meeting held on
March 12, 1996, duly adopted the following resolutions:
RESOLVED, that it is in the best interests of the Corporation that the
authorized common stock of the Corporation, $1.00 par value, be
increased to 350 million shares, and that, upon the approval of
such increase by the Corporation's Stockholders, the proper
officers of the Corporation be, and each of them hereby are,
authorized, empowered and directed to execute on behalf of the
Corporation a Certificate of Amendment to the Corporation's
Restated Certificate of Incorporation to reflect such increase,
and to file, or cause to be filed, such Certificate of Amendment
with the Secretary of State of the State of Delaware.
RESOLVED, that the Board of Directors recommend to the Stockholders for
approval at the Annual Meeting the increase in authorized shares
of the Corporation's common stock to 350 million shares as
previously approved by the Directors.
3. That on May 21, 1996, at the Corporation's Annual Meeting of
Stockholders, the Amendment to the Corporation's Amended and Restated
Certificate of Incorporation was duly adopted by the affirmative vote of
Stockholders of the Corporation holding in excess of 66 2/3% of the shares
of Common Stock, $1.00 par value per share, of the Corporation in
accordance with the provisions of Section 242 of the General Corporation
Law of the State of Delaware and Article ELEVENTH of the Corporation's
Amended and Restated Certificate of Incorporation.
IN WITNESS WHEREOF, this Certificate of Amendment has been executed on
behalf of the undersigned corporation by its duly authorized officer and
attested to by its duly authorized Secretary this 22nd day of May, 1996.
<PAGE> 2
THERMO ELECTRON CORPORATION
By: /s/ GEORGE N. HATSOPOULOS
George N. Hatsopoulos,
Chairman of the Board and
President
ATTEST:
By: /s/ SANDRA L. LAMBERT
Sandra L. Lambert
Secretary
<PAGE> 1
EXHIBIT 11
THERMO ELECTRON CORPORATION
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE:
Income:
Net income..................................... $140,080,000 $104,711,000 $ 76,868,000
Add: Convertible debenture interest, net of
tax......................................... 15,561,000 15,934,000 10,273,000
------------ ------------ ------------
Income applicable to common stock assuming full
dilution(a)................................. $155,641,000 $120,645,000 $ 87,141,000
------------ ------------ ------------
Shares:
Weighted average shares outstanding............ 125,483,466 116,500,455 104,202,743
Add: Shares issuable from assumed conversion of
convertible debentures...................... 30,023,096 33,553,283 25,326,828
Shares issuable from assumed exercise of
options (as determined by the application of
the treasury stock method).................. 2,596,257 1,175,319 1,088,365
------------ ------------ ------------
Weighted average shares outstanding as
adjusted(b).................................... 158,102,819 151,229,057 130,617,936
------------ ------------ ------------
FULLY DILUTED EARNINGS
PER SHARE (a) divided by (b)................... $ .98 $ .80 $ .67
============ ============ ============
</TABLE>
<PAGE> 1
EXHIBIT 11.1
THERMO ELECTRON CORPORATION
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
MARCH 30, APRIL 1,
1996 1995
------------ ------------
<S> <C> <C>
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE:
Income:
Net Income.................................................... $ 40,442,000 $ 29,548,000
Add Convertible debenture interest, net of tax................ 6,836,000 4,304,000
------------ ------------
Income applicable to common stock assuming full dilution
(a)........................................................ $ 47,278,000 $ 33,852,000
------------ ------------
Shares:
Weighted average shares outstanding........................... 132,492,494 120,872,798
Add: Shares issuable from assumed conversion of convertible
debentures................................................. 39,251,282 34,221,771
Shares issuable from assumed exercise of options (as
determined by the application of the treasury stock
method).................................................... 2,577,058 1,559,007
------------ ------------
Weighted average shares outstanding, as adjusted (b).......... 174,320,834 156,653,576
------------ ------------
FULLY DILUTED EARNINGS
PER SHARE (a) divided by (b).................................... $ .27 $ .22
=========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Thermo Electron Corporation:
As independent public accountants, we hereby consent to the use of our
reports dated February 15, 1996 (except with respect to certain matters
discussed in Note 16 as to which the date is May 22, 1996) (and to all
references to our Firm) included and incorporated by reference in this
Registration Statement on Form S-4 of Thermo Electron Corporation for the
registration of shares of its common stock.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
June 3, 1996
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SensorMedics Corporation:
As independent public accountants, we hereby consent to the use of our
report dated January 12, 1996 on SensorMedics Corporation and Subsidiaries
included in or made a part of this Registration Statement on Form S-4.
ARTHUR ANDERSEN LLP
Orange County, California
June 3, 1996
<PAGE> 1
EXHIBIT 99.1
SENSORMEDICS CORPORATION
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS -- JUNE 28, 1996
The undersigned, revoking all prior proxies, hereby appoints GEORGE D.
HOLMES and PIERRE SICE, or each or either of them, proxies for the undersigned,
with full power of substitution, to vote all outstanding shares of Common Stock,
Series A Preferred Stock and Series B Preferred Stock as of the Record Date, May
28, 1996, which the undersigned is entitled to vote at the Special Meeting of
Stockholders of SensorMedics Corporation (the "Company") to be held at the
Company, 22705 Savi Ranch Parkway, Yorba Linda, California on Friday, June 28,
1996 at 10:00 a.m., Pacific Time, or at any adjournment thereof, upon such
business as may properly come before the meeting or any adjournment thereof
including, without limiting such general authorization, the following proposals
described in the accompanying proxy statement:
1. FOR / / AGAINST / / ABSTAIN / / Approval of the Agreement and Plan of
Merger among the Company, SMC
Acquisition Corp. ("Acquisition
Corp.") and Thermo Electron
Corporation ("Thermo") providing,
among other things, for the merger of
Acquisition Corp. with and into the
Company (the "Merger") pursuant to
which (i) each share of the Company's
common stock, no par value ("the
Company Common Stock"), outstanding at
the effective time of the Merger
(other than shares with respect to
which dissenters' rights are
perfected) will be converted into the
right to receive .2864 share of
Thermo's common stock, $1.00 par value
("Thermo Common Stock"), (ii) each
share of the Company's Series A
preferred stock, no par value will be
converted, at the option of the
holder, into either the right to
receive $1.74 in cash (representing
the liquidation preference with
respect to such shares as of the
consummation of the Merger) or .0411
share of Thermo Common Stock (which is
intended to represent a value
equivalent to the liquidation
preference), and (iii) each share of
the Company's Series B preferred
stock, no par value, which is not
converted into shares of the Company
Common Stock prior to the Merger, will
be converted into the right to receive
$12.51 in cash (representing the
liquidation preference with respect to
such shares as of the consummation of
the Merger) and the Company will
become a wholly owned subsidiary of
Thermo.
COMMON, SERIES A PREFERRED AND SERIES B PREFERRED
(continued, and to be signed on reverse side)
<PAGE> 2
(continued from other side)
2. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof. The Company is not aware of any other
business that will come before the Special Meeting.
UNLESS OTHERWISE SPECIFIED ON THE REVERSE SIDE, THIS PROXY WILL BE VOTED FOR
PROPOSAL 1 AND IN THE DISCRETION OF THE PROXIES IN MATTERS DESCRIBED IN PROPOSAL
2.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY.
The undersigned agree that said proxies may
vote in accordance with their discretion with
respect to any other matters which may
properly come before the meeting. The
undersigned instructs such proxies to vote as
directed on the reverse side.
COMMON This Proxy should be dated,
signed by the shareholder
SERIES A exactly as printed at the left
PREFERRED and returned promptly in the
enclosed envelope. Persons
SERIES B signing in a fiduciary
PREFERRED capacity should so indicate.
Dated: , ___
--------------------------
(Signature)
--------------------------
(Signature)
/ / I PLAN TO ATTEND THE MEETING.
