Exhibit 13
THERMEDICS INC.
Consolidated Financial Statements
1996
PAGE
Thermedics Inc. 1996 Financial Statements
Consolidated Statement of Income
(In thousands except per share amounts) 1996 1995 1994
------------------------------------------------------------------------
Revenues (Note 14) $258,085 $175,754 $155,111
-------- -------- --------
Costs and Operating Expenses:
Cost of revenues 132,896 97,290 87,597
Selling, general, and administrative
expenses (Note 8) 77,539 47,933 42,734
Research and development expenses 17,704 11,087 10,445
Nonrecurring costs (Notes 3 and 13) 17,637 - -
-------- -------- --------
245,776 156,310 140,776
-------- -------- --------
Operating Income 12,309 19,444 14,335
Interest Income 10,765 9,073 7,273
Interest Expense (3,770) (3,677) (3,206)
Gain on Issuance of Stock by
Subsidiaries (Note 11) 23,651 3,455 -
Gain on Sale of Investments, Net
(Note 2) 956 421 203
Other Income - 14 719
-------- -------- --------
Income Before Provision for Income
Taxes and Minority Interest 43,911 28,730 19,324
Provision for Income Taxes (Note 5) 11,055 9,154 7,334
Minority Interest Expense 6,025 4,455 1,153
-------- -------- --------
Net Income $ 26,831 $ 15,121 $ 10,837
======== ======== ========
Earnings per Share $ .70 $ .45 $ .33
======== ======== ========
Weighted Average Shares 38,080 33,660 32,878
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
2PAGE
Thermedics Inc. 1996 Financial Statements
Consolidated Balance Sheet
(In thousands) 1996 1995
------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 82,673 $ 37,370
Short-term available-for-sale investments,
at quoted market value (amortized cost
of $64,950 and $76,682; includes $1,937
and $2,100 of related party investments;
Notes 2 and 8) 65,054 77,916
Accounts receivable, less allowances
of $4,641 and $3,982 58,736 41,327
Inventories 50,604 44,261
Prepaid income taxes and expenses (Note 5) 12,798 8,645
-------- --------
269,865 209,519
-------- --------
Property, Plant, and Equipment, at Cost, Net 14,730 12,933
-------- --------
Long-term Available-for-sale Investments,
at Quoted Market Value (amortized cost
of $33,929 and $39,795; Note 2) 33,920 39,953
-------- --------
Other Assets 6,563 4,171
-------- --------
Cost in Excess of Net Assets of Acquired
Companies (Notes 3, 5, and 13) 113,764 101,574
-------- --------
$438,842 $368,150
======== ========
3PAGE
Thermedics Inc. 1996 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) 1996 1995
------------------------------------------------------------------------
Liabilities and Shareholders' Investment
Current Liabilities:
Notes payable and current maturity of
long-term obligation (includes $38,000 due
to parent company in 1995; Notes 3 and 7) $ 9,017 $ 47,420
Accounts payable 17,960 16,336
Accrued payroll and employee benefits 9,988 8,893
Deferred revenue 1,397 1,705
Accrued income taxes 5,438 2,340
Accrued warranty costs 3,271 3,637
Other accrued expenses 16,064 17,469
Due to parent company 1,600 1,606
-------- --------
64,735 99,406
-------- --------
Deferred Income Taxes and Other Deferred
Items (Note 5) 1,382 2,173
-------- --------
Long-term Obligations (Note 7) 74,359 45,201
-------- --------
Minority Interest 92,308 54,360
-------- --------
Commitments and Contingency (Notes 6 and 9)
Shareholders' Investment (Notes 4, 8, and 10):
Common stock, $.10 par value, 100,000,000
shares authorized; 36,842,500 and
33,986,050 shares issued 3,684 3,399
Capital in excess of par value 138,433 120,665
Retained earnings 69,018 42,187
Treasury stock at cost, 166,144 and 2,146 shares (4,729) (42)
Cumulative translation adjustment (409) (88)
Net unrealized gain on available-for-sale
investments (Note 2) 61 889
-------- --------
206,058 167,010
-------- --------
$438,842 $368,150
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
4PAGE
Thermedics Inc. 1996 Financial Statements
Consolidated Statement of Cash Flows
(In thousands) 1996 1995 1994
-----------------------------------------------------------------------
Operating Activities:
Net income $ 26,831 $ 15,121 $ 10,837
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 9,124 5,678 4,208
Gain on issuance of stock by
subsidiaries (Note 11) (23,651) (3,455) -
Nonrecurring costs (Notes
3 and 13) 17,637 - -
Provision for losses on accounts
receivable 1,352 689 1,190
Gain on sale of investments, net
(Note 2) (956) (421) (203)
Minority interest expense 6,025 4,455 1,153
Increase (decrease) in deferred
income taxes (725) 643 (67)
Other noncash expenses 1,038 962 1,382
Changes in current accounts,
excluding the effects of
acquisitions:
Accounts receivable (14,471) 221 (1,750)
Inventories (899) (10,304) 7,090
Prepaid income taxes and
expenses 23 (1,957) 112
Accounts payable 611 3,468 (7,362)
Other current liabilities (1,534) 1,956 2,430
Other (270) (182) (62)
--------- --------- ---------
Net cash provided by operating
activities 20,135 16,874 18,958
--------- --------- ---------
Investing Activities:
Acquisitions, net of cash acquired
(Note 3) (37,044) (56,560) (44,657)
Acquisition of product lines (4,737) - -
Purchases of property, plant, and
equipment (6,972) (4,407) (3,220)
Purchases of available-for-sale
investments (99,800) (101,246) (78,303)
Proceeds from sale and maturities of
available-for-sale investments 118,356 104,786 77,677
Other (780) 399 266
--------- --------- ---------
Net cash used in investing activities $ (30,977) $ (57,028) $ (48,237)
--------- --------- ---------
5PAGE
Thermedics Inc. 1996 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 1996 1995 1994
-----------------------------------------------------------------------
Financing Activities:
Net proceeds from issuance of Company
and subsidiaries' common stock
(Note 10) $ 49,780 $ 4,515 $ 2,020
Purchases of Company and subsidiaries'
common stock (15,665) (179) (8,064)
Proceeds from issuance of note
payable to parent company (Note 3) 15,000 38,000 -
Repayments of notes payable to parent
company (Notes 3 and 7) (53,000) - -
Net proceeds from issuance of
subordinated convertible
obligations (Note 7) 63,249 - 31,968
Repayment and repurchase of long-
term obligations (2,432) (132) -
Net decrease in short-term
borrowings (1,944) (1,961) -
Other (146) 740 134
--------- --------- ---------
Net cash provided by financing
activities 54,842 40,983 26,058
--------- --------- ---------
Exchange Rate Effect on Cash 1,303 (502) 85
--------- --------- ---------
Increase (Decrease) in Cash and
Cash Equivalents 45,303 327 (3,136)
Cash and Cash Equivalents at Beginning
of Year 37,370 37,043 40,179
--------- --------- ---------
Cash and Cash Equivalents at End
of Year $ 82,673 $ 37,370 $ 37,043
========= ========= =========
Cash Paid For:
Interest $ 5,333 $ 3,328 $ 2,884
Income taxes $ 7,108 $ 6,489 $ 4,980
Noncash Activities:
Fair value of assets of acquired
companies $ 42,955 $ 67,394 $ 65,493
Cash paid for acquired companies (37,445) (56,879) (44,743)
--------- --------- ---------
Liabilities assumed of acquired
companies $ 5,510 $ 10,515 $ 20,750
========= ========= =========
Issuance of Company common stock to
parent company in exchange for
subsidiary common stock (Note 8) $ 4,236 $ - $ 936
Conversions of Company and
subsidiaries' convertible
obligations (Note 7) $ 31,562 $ 37,317 $ 9,745
The accompanying notes are an integral part of these consolidated
financial statements.
6PAGE
Thermedics Inc. 1996 Financial Statements
Consolidated Statement of Shareholders' Investment
(In thousands) 1996 1995 1994
-----------------------------------------------------------------------
Common Stock, $.10 Par Value
Balance at beginning of year $ 3,399 $ 3,330 $ 3,217
Issuance of stock under employees'
and directors' stock plans 12 7 14
Conversions of subordinated
convertible debentures 74 62 92
Issuance of Company common stock to
parent company in exchange for
common stock of subsidiaries (Note 8) 199 - 7
-------- -------- --------
Balance at end of year 3,684 3,399 3,330
-------- -------- --------
Capital in Excess of Par Value
Balance at beginning of year 120,665 102,975 98,279
Issuance of stock under employees'
and directors' stock plans 737 378 1,079
Tax benefit related to employees'
and directors' stock plans 1,218 434 668
Conversions of subordinated
convertible debentures (Note 7) 7,631 6,259 9,316
Issuance of Company common stock to
parent company in exchange for
common stock of subsidiaries (Note 8) 4,037 - 929
Effect of majority-owned subsidiaries'
equity transactions 4,145 9,858 (7,296)
Capital contribution from parent
company - 761 -
-------- -------- --------
Balance at end of year 138,433 120,665 102,975
-------- -------- --------
Retained Earnings
Balance at beginning of year 42,187 27,066 16,229
Net income 26,831 15,121 10,837
-------- -------- --------
Balance at end of year 69,018 42,187 27,066
-------- -------- --------
Treasury Stock
Balance at beginning of year (42) (310) (272)
Issuance of stock under employees'
and directors' stock plans 58 268 (38)
Purchase of Company common stock (4,745) - -
-------- -------- --------
Balance at end of year (4,729) (42) (310)
-------- -------- -------
Cumulative Translation Adjustment
Balance at beginning of year (88) 326 (2)
Translation adjustment (321) (414) 328
-------- -------- --------
Balance at end of year $ (409) $ (88) $ 326
-------- -------- --------
7PAGE
Thermedics Inc. 1996 Financial Statements
Consolidated Statement of Shareholders' Investment (continued)
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Net Unrealized Gain (Loss) on Available-
for-sale Investments
Balance at beginning of year $ 889 $ (1,622) $ -
Effect of change in accounting
principle (Note 2) - - 1,185
Change in net unrealized gain (loss)
on available-for-sale investments
(Note 2) (828) 2,511 (2,807)
-------- -------- --------
Balance at end of year 61 889 (1,622)
-------- -------- --------
Total Shareholders' Investment $206,058 $167,010 $131,765
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
8PAGE
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Thermedics Inc. (the Company) develops, manufactures, and markets
precision weighing and inspection equipment, electrochemistry and
microweighing products, product quality assurance systems, electronic
test instruments, and explosives-detection devices, as well as
implantable heart-assist systems and other biomedical products.
Relationship with Thermo Electron Corporation
The Company was incorporated in 1983 as a wholly owned subsidiary of
Thermo Electron Corporation (Thermo Electron). As of December 28, 1996,
Thermo Electron owned 20,293,310 shares of the Company's common stock,
representing 55% of such stock outstanding.
Principles of Consolidation
The accompanying financial statements include the accounts of the
Company; its wholly owned subsidiaries; its majority-owned public
subsidiaries, Thermo Cardiosystems Inc. (Thermo Cardiosystems), Thermo
Voltek Corp. (Thermo Voltek), and Thermo Sentron Inc. (Thermo Sentron);
and its majority-owned privately-held subsidiary, Thermedics Detection
Inc. (Thermedics Detection). All material intercompany accounts and
transactions have been eliminated. The Company's percentage ownership of
its majority-owned subsidiaries at year end was as follows:
1996 1995 1994
Thermo Cardiosystems 54% 52% 55%
Thermo Voltek 51% 50% 60%
Thermo Sentron 71% 100% 100%
Thermedics Detection 94% 100% 100%
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest
December 31. References to 1996, 1995, and 1994 are for the fiscal years
ended December 28, 1996, December 30, 1995, and December 31, 1994,
respectively.
Cash and Cash Equivalents
As of December 28, 1996, $74,625,000 of the Company's cash
equivalents were invested in a repurchase agreement with Thermo Electron.
Under this agreement, the Company in effect lends excess cash to Thermo
Electron, which Thermo Electron collateralizes with investments
principally consisting of U.S. government agency securities, corporate
notes, commercial paper, money market funds, and other marketable
securities, in the amount of at least 103% of such obligation. The
Company's funds subject to the repurchase agreement are readily
convertible into cash by the Company and have an original maturity of
three months or less. The repurchase agreement earns a rate based on the
90-day Commercial Paper Composite Rate plus 25 basis points, set at the
beginning of each quarter. As of December 28, 1996, the Company's cash
equivalents were also invested in U.S. government agency discount notes
9PAGE
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
and money market preferred stock. Cash equivalents are carried at cost,
which approximates market value.
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out
basis) or market value and include materials, labor, and manufacturing
overhead. The components of inventories are as follows:
(In thousands) 1996 1995
------------------------------------------------------------------------
Raw materials and supplies $26,448 $21,517
Work in process and finished goods 24,156 22,744
------- -------
$50,604 $44,261
======= =======
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 30 years; machinery and equipment, 2 to 10 years; and
leasehold improvements, the shorter of the term of the lease or the life
of the asset. Property, plant, and equipment consists of the following:
(In thousands) 1996 1995
------------------------------------------------------------------------
Land and building $ 2,992 $ 2,944
Machinery, equipment, and leasehold improvements 33,828 27,358
------- -------
36,820 30,302
Less: Accumulated depreciation and amortization 22,090 17,369
------- -------
$14,730 $12,933
======= =======
Other Assets
Other assets in the accompanying balance sheet includes the cost of
acquired patents, trademarks, acquired technology, and other specifically
identifiable intangible assets. These assets are amortized using the
straight-line method over their estimated useful lives, which range from
4 to 15 years. These assets were $3,815,000 and $2,916,000, net of
accumulated amortization of $2,668,000 and $2,245,000, at year-end 1996
and 1995, respectively.
Cost in Excess of Net Assets of Acquired Companies
The excess of cost over the fair value of net assets of acquired
companies is amortized using the straight-line method over periods not
exceeding 40 years. Accumulated amortization was $9,343,000 and
10PAGE
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
$6,343,000 at year-end 1996 and 1995, respectively. The Company assesses
the future useful life of this asset whenever events or changes in
circumstances indicate that the current useful life has diminished. The
Company considers the future undiscounted cash flows of the acquired
companies in assessing the recoverability of this asset. If impairment
has occurred, any excess of carrying value over fair value is recorded as
a loss.
Foreign Currency
All assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates, and revenues and expenses are
translated at average exchange rates for the year in accordance with
Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign
Currency Translation." Resulting translation adjustments are reflected as
a separate component of shareholders' investment, titled "Cumulative
translation adjustment." In 1994, the Company recorded foreign currency
transaction gains of $635,000 on the repayment of intercompany
borrowings, denominated in U.S. dollars, by several of the Company's
foreign subsidiaries. The borrowings resulted from the acquisition of
Ramsey Technology, Inc. by the Company. Foreign currency transaction
gains are included in other income in the accompanying 1994 statement of
income. There were no material foreign currency transaction gains or
losses in 1996 and 1995.
Revenue Recognition
In general, the Company recognizes revenues upon shipment of its
products. The Company provides a reserve for its estimate of warranty
costs at the time of shipment. Revenues and profits on substantially all
contracts are recognized using the percentage-of-completion method.
Revenues recorded under the percentage-of-completion method were
$6,564,000 in 1996, $8,521,000 in 1995, and $2,253,000 in 1994. The
percentage of completion is determined by relating either the actual
costs or actual labor incurred to date to management's estimate of total
costs or total labor, respectively, to be incurred on each contract. If a
loss is indicated on any contract in process, a provision is made
currently for the entire loss. The Company's contracts generally provide
for customer billing on a cost-plus-fixed-fee basis when certain
milestones are attained, or monthly, as costs are incurred. Revenues
earned on contracts in process in excess of billings are included in
inventories in the accompanying balance sheet and were not material at
year-end 1996 and 1995. There are no significant amounts included in the
accompanying balance sheet that are not expected to be recovered from
existing contracts at current contract values, or that are not expected
to be collected within one year, including amounts that are billed but
not paid under retainage provisions.
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
11PAGE
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
entity and not engaged principally in research and development, the
Company records the increase as a gain.
If gains have been recognized on issuances of a subsidiary's stock
and shares of the subsidiary are subsequently repurchased by the
subsidiary, the Company, or Thermo Electron, gain recognition does not
occur on issuances subsequent to the date of a repurchase until such time
as shares have been issued in an amount equivalent to the number of
repurchased shares. Such transactions are reflected as equity
transactions and the net effect of these transactions is reflected in the
accompanying statement of shareholders' investment as "Effect of
majority-owned subsidiaries' equity transactions."
Stock-based Compensation Plans
The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plans (Note 4). Accordingly,
no accounting recognition is given to stock options granted at fair
market value until they are exercised. Upon exercise, net proceeds,
including tax benefits realized, are credited to equity.
Income Taxes
In accordance with SFAS No. 109, "Accounting for Income Taxes," the
Company recognizes deferred income taxes based on the expected future tax
consequences of differences between the financial statement basis and the
tax basis of assets and liabilities, calculated using enacted tax rates
in effect for the year in which the differences are expected to be
reflected in the tax return.
Earnings per Share
Earnings per share has been computed based on the weighted average
number of shares outstanding during the year. Weighted average shares in
1996 includes the effect of common stock equivalents, which represent the
assumed conversion of the Company's noninterest-bearing subordinated
convertible debentures and the assumed exercise of stock options that
were computed using the treasury stock method. Because the effect of the
assumed exercise of stock options would be immaterial in 1995 and 1994,
they have been excluded from the earnings per share calculation. Fully
diluted earnings per share has not been presented because the effect of
the assumed exercise of stock options and the assumed conversion of the
Company's interest-bearing subordinated convertible debentures would be
immaterial.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
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.
12PAGE
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
2. Available-for-sale Investments
Effective January 2, 1994, the Company adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." In
accordance with SFAS No. 115, the Company's debt securities are considered
available-for-sale investments in the accompanying balance sheet and are
carried at market value, with the difference between cost and market value,
net of related tax effects, recorded currently as a component of
shareholders' investment titled "Net unrealized gain (loss) on
available-for-sale investments." Effect of change in accounting principle
in the accompanying 1994 statement of shareholders' investment represents
the unrealized gain, net of related tax effects, pertaining to
available-for-sale investments held by the Company on January 2, 1994.
The aggregate market value, cost basis, and gross unrealized gains and
losses of short- and long-term available-for-sale investments by major
security type, as of December 28, 1996, and December 30, 1995, are as
follows:
Gross Gross
Market Cost Unrealized Unrealized
(In thousands) Value Basis Gains Losses
--------------------------------------------------------------------------
1996
Government agency securities $ 86,403 $ 86,412 $ 7 $ (16)
Corporate bonds 6,806 6,634 172 -
Money market preferred stock 1,060 1,071 - (11)
Other 4,705 4,762 - (57)
-------- -------- -------- --------
$ 98,974 $ 98,879 $ 179 $ (84)
======== ======== ======== ========
1995
Government agency securities $ 99,373 $ 98,434 $ 1,020 $ (81)
Corporate bonds 10,612 10,169 454 (11)
Money market preferred stock 6,297 6,287 28 (18)
Other 1,587 1,587 - -
-------- -------- -------- --------
$117,869 $116,477 $ 1,502 $ (110)
======== ======== ======== ========
Short- and long-term available-for-sale investments in the accompanying
1996 balance sheet include $59,457,000 with contractual maturities of one
year or less, $38,667,000 with contractual maturities of more than one year
through five years, and $850,000 with contractual maturities of more than
five years. Actual maturities may differ from contractual maturities as a
result of the Company's intent to sell these securities prior to maturity
and as a result of put and call options that enable either the Company, the
issuer, or both to redeem these securities at an earlier date.
13PAGE
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
2. Available-for-sale Investments (continued)
The cost of available-for-sale investments that were sold was based
on specific identification in determining realized gains recorded in the
accompanying statement of income. Gain on sale of investments, net,
resulted from gross realized gains of $1,086,000, $439,000, and $241,000
and gross realized losses of $130,000, $18,000, and $38,000 in 1996,
1995, and 1994, respectively, relating to the sale of available-for-sale
investments.
3. Acquisitions
In December 1996, Thermo Cardiosystems acquired substantially all of
the assets, subject to certain liabilities, of Nimbus Medical, Inc.
(Nimbus), a research and development organization specializing in
ventricular-assist devices and total artificial hearts, for $5,013,000 in
cash. Nimbus is engaged strictly in research and development activities
and, through its acquisition date, had not completed development of any
commercial products for which it retains ownership rights. Nimbus' assets
acquired by Thermo Cardiosystems included certain technology in
development. The feasibility of the technology in development had not
been conclusively established at the acquisition date and such technology
had no future use other than in potential future generations of
heart-assist devices or in total artificial hearts. In connection with
the acquisition of Nimbus, Thermo Cardiosystems wrote off $4,909,000,
which represents the portion of the purchase price allocated to
technology in development based on estimated replacement cost.
In January 1996, Thermedics Detection acquired the assets and certain
liabilities of Moisture Systems Corporation and certain affiliated
companies (collectively, Moisture Systems), and the stock of Rutter & Co.
B.V. (Rutter) for a total purchase price of $21,668,000 in cash, which
included the repayment of $700,000 of debt. In connection with these
acquisitions, the Company borrowed $15,000,000 from Thermo Electron
pursuant to a promissory note due March 1997, and bearing interest at the
90-day Commercial Paper Composite Rate plus 25 basis points, set at the
beginning of each quarter. The Company repaid the $15,000,000 promissory
note to Thermo Electron in September 1996 (Note 7). Moisture Systems and
Rutter design, manufacture, and sell instruments that use near-infrared
spectroscopy to measure moisture and other product components. During
1996, the Company's majority-owned subsidiaries made other acquisitions
for $15,501,000 in cash, subject to post-closing adjustments, as
applicable.
In December 1995, the Company acquired the Orion laboratory products
division (Orion) of Analytical Technology, Inc. for $52,724,000 in cash,
which included the repayment of $8,585,000 of debt. To partially finance
this acquisition, the Company borrowed $38,000,000 from Thermo Electron
pursuant to a promissory note due December 1996, and bearing interest at
the 90-day Commercial Paper Composite Rate plus 25 basis points. The
balance of the purchase price was funded from the Company's working
capital. The Company repaid the $38,000,000 promissory note to Thermo
Electron in September 1996 (Note 7). Orion manufactures
14PAGE
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
3. Acquisitions (continued)
electrochemistry, microweighing, process, and other instruments used to
analyze the chemical composition of food, beverage, and pharmaceutical
products and detect contaminants in high-purity water. In 1995, one of
the Company's majority-owned subsidiaries made an acquisition for
$3,755,000 in cash.
In March 1994, the Company acquired substantially all of the assets,
subject to certain liabilities, of Ramsey Technology, Inc. (Ramsey), a
business of Baker Hughes Incorporated, for a cash purchase price of
$41,872,000. In January 1996, Ramsey was contributed by the Company to
its newly formed Thermo Sentron subsidiary in exchange for shares of
Thermo Sentron common stock. Thermo Sentron designs, develops,
manufactures, and sells high-speed precision weighing and inspection
equipment for industrial production and packaging lines. In 1994, the
Company and one of its majority-owned subsidiaries made other
acquisitions for an aggregate of $2,871,000 in cash.
These acquisitions have been accounted for using the purchase method
of accounting, and their results of operations have been included in the
accompanying financial statements from their respective dates of
acquisition. The aggregate cost of these acquisitions exceeded the
estimated fair value of the acquired net assets by $111,826,000, which is
being amortized over periods not exceeding 40 years. Allocation of the
purchase price for these acquisitions was based on estimates of the fair
value of the net assets acquired and, for acquisitions completed in 1996,
is subject to adjustment upon finalization of the purchase price
allocation.
Based on unaudited data, the following table presents selected
financial information on a pro forma basis, assuming the Company, Thermo
Sentron, and Orion had been combined since the beginning of 1994. The
effect of the acquisitions not included in the pro forma data was not
material to the Company's results of operations.
(In thousands except per share amounts) 1995 1994
-------------------------------------------------------------------------
Revenues $218,920 $212,392
Net income 17,186 12,821
Earnings per share .51 .39
The pro forma results are not necessarily indicative of future
operations or the actual results that would have occurred had the
acquisitions been made at the beginning of 1994.
4. Employee Benefit Plans
Stock-based Compensation Plans
Stock Option Plans
------------------
The Company has stock-based compensation plans for its key employees,
directors, and others. Two of these plans, adopted in 1983, permitted the
grant of nonqualified and incentive stock options. These plans expired
during 1993. A third plan, adopted in 1993, permits the grant of a
15PAGE
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
4. Employee Benefit Plans (continued)
variety of stock and stock-based awards as determined by the human
resources committee of the Company's Board of Directors (the Board
Committee), including restricted stock, stock options, stock bonus
shares, or performance-based shares. To date, only nonqualified stock
options have been awarded under this plan. The option recipients and the
terms of options granted under this plan are determined by the Board
Committee. Generally, options granted to date are exercisable
immediately, but are subject to certain transfer restrictions and the
right of the Company to repurchase shares issued upon exercise of the
options at the exercise price, upon certain events. The restrictions and
repurchase rights generally lapse ratably over a five to ten year period,
depending on the term of the option, which may range from seven to twelve
years. Nonqualified stock options may be granted at any price determined
by the Board Committee, although incentive stock options must be granted
at not less than the fair market value of the Company's stock on the date
of grant. To date, all options have been granted at fair market value.
The Company also has a directors' stock option plan, adopted in 1991,
that provides for the grant of stock options to outside directors
pursuant to a formula approved by the Company's shareholders. Options
awarded under this plan are exercisable six months after the date of
grant and expire three or seven years after the date of grant. In
addition to the Company's stock-based compensation plans, certain
officers and key employees may also participate in stock-based
compensation plans of Thermo Electron.
Employee Stock Purchase Program
-------------------------------
Substantially all of the Company's full-time U.S. employees are
eligible to participate in an employee stock purchase program sponsored
by the Company or its majority-owned public subsidiaries and Thermo
Electron. Under this program, shares of the Company's or its
majority-owned public subsidiaries', and shares of Thermo Electron's,
common stock can be purchased at 95% of the fair market value at the
beginning of the period, and the shares purchased are subject to a
six-month resale restriction. Prior to November 1, 1995, the applicable
shares of common stock could be purchased at the end of a 12-month period
at 85% of the fair market value at the beginning of the period, and the
shares purchased were subject to a one-year resale restriction. Shares
are purchased through payroll deductions of up to 10% of each
participating employee's gross wages. During 1996, 1995, and 1994, the
Company issued 9,503 shares, 14,552 shares, and 13,711 shares,
respectively, of its common stock under this program.
Pro Forma Stock-based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-based Compensation," which sets forth a
fair-value based method of recognizing stock-based compensation expense.
As permitted by SFAS No. 123, the Company has elected to continue to
apply APB No. 25 to account for its stock-based compensation plans. Had
compensation cost for awards granted in 1996 and 1995 under the Company's
stock-based compensation plans been determined based on the fair value at
16PAGE
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
4. Employee Benefit Plans (continued)
the grant dates consistent with the method set forth under SFAS No. 123,
the effect on the Company's net income and earnings per share would have
been as follows:
(In thousands except per share amounts) 1996 1995
-----------------------------------------------------------------------
Net income:
As reported $26,831 $15,121
Pro forma 25,653 14,951
Earnings per share:
As reported .70 .45
Pro forma .67 .44
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation expense may not be representative of the amount to be
expected in future years. Pro forma compensation expense for options
granted is reflected over the vesting period; therefore, future pro forma
compensation expense may be greater as additional options are granted.
The fair value of each option grant was estimated on the grant date
using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
1996 1995
-----------------------------------------------------------------------
Volatility 39% 39%
Risk-free interest rate 5.70% 6.05%
Expected life of options 5.03 years 3.72 years
The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option-pricing
models require the input of highly subjective assumptions, including
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
17PAGE
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
4. Employee Benefit Plans (continued)
Stock Option Activity
A summary of the Company's stock option activity is as follows:
1996 1995 1994
---------------- ---------------- -----------------
Weighted Weighted Range of
Number Average Number Average Number Option
(Shares in of Exercise of Exercise of Prices
thousands) Shares Price Shares Price Shares per Share
--------------------------------------------------------------------------
Options outstanding, $ 4.70-
beginning of year 1,557 $12.38 1,773 $12.14 1,669 16.45
12.43-
Granted 303 27.17 27 17.65 366 14.53
4.70-
Exercised (137) 9.12 (74) 8.16 (195) 10.65
5.00-
Forfeited (59) 22.42 (169) 12.57 (67) 16.28
----- ----- -----
Options outstanding, $ 4.70-
end of year 1,664 $14.99 1,557 $12.38 1,773 16.45
===== ====== ===== ====== ===== ======
$ 4.70-
Options exercisable 1,664 $14.99 1,557 $12.38 1,771 16.45
===== ====== ===== ====== ===== ======
Options available
for grant 284 545 457
===== ===== =====
Weighted average fair
value per share of
options granted
during year $11.49 $ 6.50
====== ======
A summary of the status of the Company's stock options at December 28,
1996, is as follows:
Options Outstanding and Exercisable
-----------------------------------
Weighted
Weighted Average Average
Number Remaining Exercise
Range of Exercise Prices of Shares Contractual Life Price
--------------------------------------------------------------------------
(Shares in thousands)
$ 4.70 - $ 9.03 458 2.4 years $ 7.16
9.04 - 15.93 319 8.3 years 13.20
15.94 - 22.83 642 8.9 years 16.46
22.84 - 29.73 245 6.5 years 28.11
-----
$ 4.70 - $29.73 1,664 6.6 years $14.99
=====
18PAGE
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
4. Employee Benefit Plans (continued)
401(k) Savings Plan and Employee Stock Ownership Plan
The majority of the Company's full-time U.S. employees are eligible to
participate in Thermo Electron's 401(k) savings plan and, prior to 1995,
in Thermo Electron's employee stock ownership plan (ESOP). Contributions
to the 401(k) savings plan are made by both the employee and the Company.
Company contributions to the 401(k) plan are based upon the level of
employee contributions. For these plans, the Company contributed and
charged to expense $1,193,000, $1,011,000, and $942,000 in 1996, 1995,
and 1994, respectively. Effective December 31, 1994, the ESOP was split
into two plans: ESOP I, covering employees of Thermo Electron's corporate
office and its wholly owned subsidiaries, and ESOP II, covering employees
of certain of Thermo Electron's majority-owned subsidiaries, including
the Company. Also, effective December 31, 1994, the ESOP II plan was
terminated and as a result, the Company's employees are no longer
eligible to participate in an ESOP.
5. Income Taxes
The components of income before provision for income taxes and
minority interest are as follows:
(In thousands) 1996 1995 1994
-----------------------------------------------------------------------
Domestic $35,861 $25,020 $17,761
Foreign 8,050 3,710 1,563
------- ------- -------
$43,911 $28,730 $19,324
======= ======= =======
The components of the provision for income taxes are as follows:
(In thousands) 1996 1995 1994
-----------------------------------------------------------------------
Currently payable:
Federal $ 9,837 $ 7,541 $ 5,390
State 1,725 1,546 1,335
Foreign 3,618 1,783 998
------- ------- -------
15,180 10,870 7,723
------- ------- -------
Net deferred (prepaid):
Federal (3,913) (1,373) (331)
State 3 (343) (58)
Foreign (215) - -
------- ------- -------
(4,125) (1,716) (389)
------- ------- -------
$11,055 $ 9,154 $ 7,334
======= ======= =======
19PAGE
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
5. Income Taxes (continued)
The Company receives a tax deduction upon exercise of nonqualified
stock options by employees for the difference between the exercise price
and the market price of the Company's common stock on the date of
exercise. The provision for income taxes that is currently payable does
not reflect $3,520,000, $3,935,000, and $668,000 of such benefits of the
Company and its majority-owned subsidiaries that have been allocated to
capital in excess of par value, directly or through the effect of
majority-owned subsidiaries' equity transactions, in 1996, 1995, and
1994, respectively. The provision for income taxes that is currently
payable also does not reflect $1,800,000 of tax benefits used to reduce
cost in excess of net assets of acquired companies in 1996.
The provision for income taxes in the accompanying statement of
income differs from the provision calculated by applying the statutory
federal income tax rate of 35% to income before provision for income
taxes and minority interest due to the following:
(In thousands) 1996 1995 1994
-----------------------------------------------------------------------
Provision for income taxes at
statutory rate $15,369 $10,056 $ 6,763
Increases (decreases) resulting from:
Gain on issuance of stock by subsidiaries (8,278) (1,206) -
Amortization and write-off of cost in
excess of net assets of acquired
companies 3,256 232 296
State income taxes, net of federal tax 1,123 782 830
Reduction in valuation allowance (684) (854) -
Tax-exempt investment income (11) (115) (113)
Tax benefit of foreign sales corporation (326) (323) (833)
Foreign tax rate and regulation
differential (132) 485 363
Nondeductible expenses 228 137 88
Other, net 510 (40) (60)
------- ------- -------
$11,055 $ 9,154 $ 7,334
======= ======= =======
20PAGE
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
5. Income Taxes (continued)
Prepaid income taxes and deferred income taxes in the accompanying
balance sheet consist of the following:
(In thousands) 1996 1995
----------------------------------------------------------------
Prepaid income taxes:
Inventory reserves $ 1,403 $ 1,926
Reserves and accruals 3,433 1,042
Warranty reserves 934 1,142
Tax loss and credit carryforwards 652 2,105
Accrued compensation 1,380 1,013
Allowance for doubtful accounts 1,079 684
Available-for-sale investments 308 (116)
Write-off of acquired technology (Note 3) 1,865 -
Other, net 225 207
------- -------
11,279 8,003
Less: Valuation allowance - 1,516
------- -------
$11,279 $ 6,487
======= =======
Deferred income taxes:
Trademarks and other intangible assets $ 962 $ 1,627
Difference in book and tax basis
of fixed assets 288 348
------- -------
$ 1,250 $ 1,975
======= =======
The 1995 valuation allowance primarily related to uncertainty
surrounding the realization of tax loss and credit carryforwards and
other tax assets of certain subsidiaries. The elimination of the
valuation allowance in 1996 is primarily due to reduced uncertainty
surrounding the realizability of such future tax benefits and was
recorded in part as a reduction of $684,000 in the 1996 provision for
income taxes. The remaining decrease in the valuation allowance primarily
relates to the elimination of related tax loss and credit carryforwards
due to the inability to obtain a benefit prior to the expiration thereof.
The provision for income taxes in 1995 was reduced by $854,000 due to a
decrease in the valuation allowance as a result of reduced uncertainty
surrounding the realizability of tax assets of certain subsidiaries.
As of December 28, 1996, federal and state tax assets existed at
Thermo Voltek that are not consolidated for federal tax purposes. Thermo
Voltek had federal and state tax net operating loss carryforwards of
approximately $2,500,000 expiring in 1998 through 2006. The carryforwards
of Thermo Voltek are limited to a tax benefit of approximately $240,000
per year under Sections 382 and 383 of the U.S. Internal Revenue Code.
The Company has not recognized a deferred tax liability for the
difference between the book basis and tax basis of its investment in the
21PAGE
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
5. Income Taxes (continued)
common stock of its domestic subsidiaries (such difference relates
primarily to unremitted earnings and gains on issuance of stock by
subsidiaries) because the Company does not expect this basis difference
to become subject to tax at the parent level. The Company believes it can
implement certain tax strategies to recover its investment in its
domestic subsidiaries tax-free.
A provision has not been made for U.S. or additional foreign taxes on
$8,041,000 of undistributed earnings of foreign subsidiaries that could
be subject to taxation if remitted to the U.S. because the Company
currently plans to keep these amounts permanently reinvested overseas.
The Company believes that any additional U.S. tax liability due upon
remittance of such earnings would be immaterial due to available U.S.
foreign tax credits.
6. Commitments
The Company and its subsidiaries lease various office and
manufacturing facilities under noncancellable operating lease
arrangements expiring from 1997 through 2003. The accompanying statement
of income includes expenses from operating leases of $5,501,000,
$3,403,000, and $2,081,000 in 1996, 1995, and 1994, respectively. Future
minimum payments due under noncancellable operating leases as of December
28, 1996, are $4,221,000 in 1997; $3,806,000 in 1998; $2,918,000 in 1999;
$2,433,000 in 2000; $1,892,000 in 2001; and $7,542,000 in 2002 and
thereafter. Total future minimum lease payments are $22,812,000.
7. Short- and Long-term Obligations and Other Financing Arrangements
Long-term Obligations
Long-term obligations of the Company are as follows:
(In thousands except per share amounts) 1996 1995
------------------------------------------------------------------------
Noninterest-bearing subordinated convertible notes,
due 2003, convertible at $32.68 per share $65,000 $ -
6 1/2% Subordinated convertible debentures,
due 1998, convertible at $10.42 per share - 8,037
3 3/4% Subordinated convertible debentures,
due 2000, convertible into shares of
Thermo Voltek at $7.83 per share 9,345 25,240
Noninterest-bearing subordinated convertible
debentures, due 1997, convertible into shares
of Thermo Cardiosystems at $14.49 per share 3,755 11,642
Other 14 282
------- -------
78,114 45,201
Less: Current maturity of long-term obligation 3,755 -
------- -------
$74,359 $45,201
======= =======
22PAGE
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
7. Short- and Long-term Obligations and Other Financing Arrangements
(continued)
In February 1996, the Company called for redemption on March 11,
1996, all of the outstanding principal amount of its 6 1/2% subordinated
convertible debentures due 1998. Approximately $7,780,000 of the
outstanding principal amount of the debentures was converted into the
Company's common stock.
The Company's convertible obligations are guaranteed on a
subordinated basis by Thermo Electron. The Company has agreed to
reimburse Thermo Electron in the event Thermo Electron is required to
make a payment under its guarantee of Thermo Voltek's or Thermo
Cardiosystems' obligations.
In lieu of issuing shares of Thermo Voltek common stock upon the
conversion of the 3 3/4% subordinated convertible debentures due 2000,
Thermo Voltek has the option to pay holders of the debentures cash equal
to the weighted average market price of its common stock on the trading
date prior to conversion.
During 1996, 1995, and 1994, convertible obligations of $31,562,000,
$37,317,000, and $9,745,000, respectively, were converted into common
stock of the Company or its subsidiaries.
See Note 12 for fair value information pertaining to the Company's
long-term obligations.
Short-term Obligations and Other Financing Arrangements
In September 1996, the Company repaid its $15,000,000 and $38,000,000
million promissory notes to Thermo Electron with proceeds from its 1996
issuance of $65,000,000 principal amount of noninterest-bearing
subordinated convertible debentures.
Several of the Company's foreign subsidiaries have lines of credit
under which an aggregate of $17,344,000 may be borrowed at a current rate
as determined by each country's local market. The lines of credit are
denominated in local currency. Unused lines of credit were $12,178,000 as
of December 28, 1996. Amounts borrowed under these agreements are
included in notes payable and current maturity of long-term obligation in
the accompanying balance sheet and are guaranteed by either the Company
or Thermo Electron. The weighted average interest rate on these
borrowings was 6.3% and 8.5% at year-end 1996 and 1995, respectively.
8. Related Party Transactions
Corporate Services Agreement
The Company and Thermo Electron have a corporate services agreement
under which Thermo Electron's corporate staff provides certain
administrative services, including certain legal advice and services,
risk management, certain employee benefit administration, tax advice and
preparation of tax returns, centralized cash management, and certain
financial and other services, for which the Company pays Thermo Electron
annually an amount equal to 1.0% of the Company's revenues. The Company
paid Thermo Electron an amount equal to 1.20% and 1.25% of the Company's
revenues in 1995 and 1994, respectively. The annual fee is reviewed and
adjusted annually by mutual agreement of the parties. The corporate
23PAGE
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
8. Related Party Transactions (continued)
services agreement is renewed annually but can be terminated upon 30
days' prior notice by the Company or upon the Company's withdrawal from
the Thermo Electron Corporate Charter (the Thermo Electron Corporate
Charter defines the relationships among Thermo Electron and its
majority-owned subsidiaries). In addition, the Company uses data
processing and contract administration services of two majority-owned
subsidiaries of Thermo Electron, and is charged based on actual usage.
For these services, as well as the administrative services provided by
Thermo Electron, the Company was charged $2,613,000, $2,142,000, and
$1,964,000 in 1996, 1995, and 1994, respectively. Management believes
that the service fees charged by Thermo Electron and its subsidiaries are
reasonable and that such fees are representative of the expenses the
Company would have incurred on a stand-alone basis. For additional items
such as employee benefit plans, insurance coverage, and other
identifiable costs, Thermo Electron charges the Company based upon costs
attributable to the Company.
Distribution Agreements
Pursuant to an international distributorship agreement, Thermedics
Detection appointed Arabian Business Machines Co. (ABM) as its exclusive
distributor of the Company's security instruments in certain Middle
Eastern countries. ABM is a member of The Olayan Group. Ms. Hutham S.
Olayan, a director of Thermo Electron, is the president and a director of
Olayan America Corporation and Competrol Real Estate Limited, two other
members of The Olayan Group, which are indirectly controlled by Suliman
S. Olayan, Ms. Olayan's father. Revenues recorded under this agreement
totaled $652,000, $3,000, and $42,000 in 1996, 1995, and 1994,
respectively. In addition, during 1994, the Company sold $1,240,000 of
security instruments directly to a customer in the Middle East and paid a
commission of $409,000 pursuant to the ABM distributor agreement.
Management Contract
Two executive employees of the Company allocate a portion of their
salary, bonus, and travel expenses for the time they devote to Thermo
Electron in connection with certain management responsibilities relating
to International Technidyne Corporation (ITC), a wholly owned subsidiary
of Thermo Electron, as well as Thermo Electron's other biomedical
businesses. In 1996, 1995, and 1994, the Company was reimbursed $707,000,
$402,000, and $84,000, respectively, under this arrangement.
Repurchase Agreement
The Company invests excess cash in a repurchase agreement with Thermo
Electron as discussed in Note 1.
Short-term Available-for-sale Investments
As of December 28, 1996, and December 30, 1995, the Company's
short-term available-for-sale investments included $1,937,000 and
$2,100,000 (amortized cost of $1,846,000 and $1,844,000), respectively,
of 6 1/2% subordinated convertible debentures due 1997, which were
purchased on the open market. The debentures have a par value of
$1,800,000 and were issued by Thermo TerraTech Inc., a majority-owned
subsidiary of Thermo Electron.
24PAGE
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
8. Related Party Transactions (continued)
Common Stock
In January and April 1996, the Company issued an aggregate of
1,987,273 shares of its common stock to Thermo Electron in exchange for
634,049 shares of common stock of Thermo Voltek and 929,947 shares of
common stock of Thermo Cardiosystems. The shares of common stock were
exchanged at their respective fair market values on the dates of the
transactions.
During 1994, the Company issued 66,265 shares of its common stock
to Thermo Electron in exchange for 187,200 shares of Thermo Voltek common
stock.
Share information for Thermo Cardiosystems and Thermo Voltek has
been restated to reflect three-for-two stock splits, effected in the form
of 50% stock dividends, distributed in May 1996 and August 1996,
respectively.
9. Contingency
Thermo Cardiosystems has received correspondence alleging that the
textured surface of the left ventricular-assist system's (LVAS) housing
infringed the intellectual property rights of another party. In general,
an owner of intellectual property can prevent others from using such
property without a license and is entitled to damages for unauthorized
past usage. The Company has investigated the bases of the allegation and,
based on the opinion of its counsel, believes that if Thermo
Cardiosystems were sued on these bases, it would have meritorious
defenses.
10. Common Stock
At December 28, 1996, the Company had reserved 4,030,200 unissued
shares of its common stock for possible issuance under stock-based
compensation plans and possible issuance upon conversion of the
noninterest-bearing subordinated convertible debentures.
11. Transactions in Stock of Subsidiaries
In March 1996, Thermedics Detection issued 300,000 shares of its
common stock, at $10.00 per share, in a private placement for net
proceeds of $3,000,000, resulting in a gain of $2,516,000. In November
1996, Thermedics Detection issued 383,500 shares of its common stock, at
$10.75 per share, in a private placement for net proceeds of $3,964,000,
resulting in a gain of $3,165,000.
In April 1996, the Company's Thermo Sentron subsidiary issued
2,875,000 shares of its common stock, at $16.00 per share, in an initial
public offering for net proceeds of $42,335,000, resulting in a gain of
$17,970,000.
During 1995, $9,111,000 principal amount of Thermo Voltek's
subordinated convertible debentures was converted into 1,163,098 shares
of Thermo Voltek common stock, resulting in a gain of $3,455,000.
25PAGE
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
11. Transactions in Stock of Subsidiaries (continued)
During 1996 and 1995, a large portion of Thermo Cardiosystems'
subordinated convertible obligations was converted into shares of Thermo
Cardiosystems common stock. No gains were recorded on the conversions of
these convertible obligations as Thermo Cardiosystems was principally
engaged in research and development at the time the convertible
obligations were issued.
12. Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, available-for-sale investments, accounts receivable, notes
payable and current maturity of long-term obligation, accounts payable,
due to parent company, and long-term obligations. The carrying amounts of
these financial instruments, with the exception of available-for-sale
investments, current maturity of long-term obligation, and long-term
obligations, approximates fair value due to their short-term nature.
Available-for-sale investments are carried at fair value in the
accompanying balance sheet. The fair values were determined based on
quoted market prices. See Note 2 for fair value information pertaining to
these financial instruments.
The fair value of short- and long-term obligations was determined
based on quoted market prices. The fair value of convertible obligations
at year-end 1995 exceeds the carrying amount primarily due to the market
price of the Company's or subsidiaries' common stock exceeding the
conversion price of the convertible obligations. The carrying amount and
fair value of the Company's short- and long-term obligations are as
follows:
1996 1995
-------------------- --------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
-----------------------------------------------------------------------
Current maturity of
long-term
obligation $ 3,755 $ 7,435 $ - $ -
======= ======= ======= =======
Convertible
obligations $74,345 $62,666 $44,919 $95,589
Other long-term
obligations 14 14 282 282
------- ------- ------- -------
$74,359 $62,680 $45,201 $95,871
======= ======= ======= =======
13. Nonrecurring Costs
The Company recorded nonrecurring costs of $12,728,000 in 1996 for
the write-off of cost in excess of net assets of acquired company and
certain other intangible assets associated with its Corpak subsidiary.
The primary growth focus of the Company's biomedical products segment has
become technology for improved product quality and implantable left
ventricular-assist systems. The Company no longer expects to reinvest in
its enteral nutrition-delivery business. The Company's analysis indicates
26PAGE
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
13. Nonrecurring Costs (continued)
that the expected future undiscounted cash flow from this business would
be insufficient to recover the Company's investment.
In 1996, the Company wrote off $4,909,000 of acquired technology
associated with the acquisition of Nimbus by Thermo Cardiosystems (Note
3).
14. Business Segments, Geographical Information, and Concentrations
of Risk
The Company's principal businesses can be divided into two
segments. The Company's Instruments and Other Equipment segment develops,
manufactures, sells, and distributes precision equipment that weighs and
inspects bulk materials and packaged goods; electrochemistry,
microweighing, and other laboratory instruments; process detection
instruments; explosives-detection instruments; instruments that test
electronic and electrical systems and components for immunity to
electromagnetic interference; high-voltage power-conversion systems; and
programmable power amplifiers. The Company's Biomedical Products segment
develops, manufactures, and sells LVAS and other biomedical products.
The Company's Instruments and Other Equipment segment derived
revenues from precision weighing and inspection equipment of $70,027,000,
$67,474,000 and $50,116,000 in 1996, 1995, and 1994, respectively, and
from laboratory products of $50,854,000 in 1996. In addition, this
segment derived revenues from process detection instruments of
$16,032,000, $18,488,000, and $38,001,000, and from electronic test
instruments of $44,081,000, $31,580,000, and $19,009,000 in 1996, 1995,
and 1994, respectively.
The Company's Biomedical Products segment derived revenues from
LVAS devices of $29,970,000, $20,593,000, and $10,409,000 in 1996, 1995,
and 1994, respectively.
Certain raw materials used in the manufacture of Thermo
Cardiosystems' LVAS are available from only one or two suppliers. Thermo
Cardiosystems is making efforts to minimize the risks associated with
sole sources and ensure long-term availability, including qualifying
certain other alternative materials and components or developing
alternative sources for materials or components supplied by a single
source. Although the Company believes that it has adequate supplies of
materials and components to meet demand for the LVAS for the foreseeable
future, no assurance can be given that the Company will not experience
shortages of certain materials or components in the future that could
delay shipments of the LVAS.
27PAGE
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
14. Business Segments, Geographical Information, and Concentrations
of Risk (continued)
No customer accounted for 10% or more of the Company's total
revenues in 1996 and 1995. During 1994, revenues derived from one
customer accounted for 21% of the Company's total revenues.
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Business Segment Information
Revenues:
Instruments and Other Equipment $213,138 $136,742 $124,100
Biomedical Products 44,947 39,012 31,011
-------- -------- --------
$258,085 $175,754 $155,111
======== ======== ========
Income before provision for income
taxes and minority interest:
Instruments and Other Equipment $ 22,725 $ 14,778 $ 16,054
Biomedical Products (8,304) 7,128 1,337
Corporate (a) (2,112) (2,462) (3,056)
-------- -------- --------
Total operating income 12,309 19,444 14,335
Interest and other income, net 31,602 9,286 4,989
-------- -------- --------
$ 43,911 $ 28,730 $ 19,324
======== ======== ========
Identifiable assets:
Instruments and Other Equipment $297,141 $213,755 $141,763
Biomedical Products 115,191 128,170 117,475
Corporate (b) 26,510 26,225 32,329
-------- -------- --------
$438,842 $368,150 $291,567
======== ======== ========
Depreciation and amortization:
Instruments and Other Equipment $ 7,304 $ 4,040 $ 2,923
Biomedical Products 1,808 1,609 1,256
Corporate 12 29 29
-------- -------- --------
$ 9,124 $ 5,678 $ 4,208
======== ======== ========
Capital expenditures:
Instruments and Other Equipment $ 5,185 $ 2,669 $ 1,919
Biomedical Products 1,787 1,715 1,278
Corporate - 23 23
-------- -------- --------
$ 6,972 $ 4,407 $ 3,220
======== ======== ========
28PAGE
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
14. Business Segments, Geographical Information, and Concentrations
of Risk (continued)
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Geographical Information
Revenues:
United States $193,458 $127,729 $121,351
Europe 62,955 43,018 31,640
Other 14,420 13,084 12,594
Transfers among geographical areas (c) (12,748) (8,077) (10,474)
-------- -------- --------
$258,085 $175,754 $155,111
======== ======== ========
Income before provision for income
taxes and minority interest:
United States $ 5,552 $ 17,124 $ 15,292
Europe 7,091 3,170 1,040
Other 1,778 1,612 1,059
Corporate (a) (2,112) (2,462) (3,056)
-------- -------- --------
Total operating income 12,309 19,444 14,335
Interest and other income, net 31,602 9,286 4,989
-------- -------- --------
$ 43,911 $ 28,730 $ 19,324
======== ======== ========
Identifiable assets:
United States $354,083 $301,613 $225,569
Europe 50,762 33,259 27,361
Other 7,487 7,053 6,308
Corporate (b) 26,510 26,225 32,329
-------- -------- --------
$438,842 $368,150 $291,567
======== ======== ========
Export revenues included in United States
revenues above (d):
Europe $ 21,700 $ 17,748 $ 21,455
Other 38,497 22,378 34,149
-------- -------- --------
$ 60,197 $ 40,126 $ 55,604
======== ======== ========
(a) Primarily general and administrative expenses.
(b) Primarily cash, cash equivalents, and short- and long-term
available-for-sale investments.
(c) Transfers among geographical areas are accounted for at prices that
are representative of transactions with unaffiliated parties.
(d) In general, export sales are denominated in U.S. dollars.
29PAGE
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
15. Unaudited Quarterly Information
(In thousands except per share amounts)
1996(a) First(b) Second Third Fourth
----------------------------------------------------------------------
Revenues $60,282 $62,630 $65,712 $69,461
Gross profit 28,563 29,653 32,885 34,088
Net income 4,753 9,174 5,767 7,137
Earnings per share .13 .24 .15 .18
1995 First Second Third Fourth(c)
Revenues $43,858 $43,268 $41,224 $47,404
Gross profit 19,572 19,553 17,595 21,744
Net income 3,262 3,666 4,017 4,176
Earnings per share .10 .11 .12 .12
(a) Results include nontaxable gains of $2,516,000, $17,970,000, and
$3,165,000 in the first, second, and fourth quarters, respectively,
from the issuance of stock by subsidiaries.
(b) Reflects the January 1996 acquisition of Moisture Systems and Rutter.
(c) Reflects the December 1995 acquisition of Orion.
30PAGE
Thermedics Inc. 1996 Financial Statements
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermedics Inc.:
We have audited the accompanying consolidated balance sheet of
Thermedics Inc. (a Massachusetts corporation and 55%-owned subsidiary of
Thermo Electron Corporation) and subsidiaries as of December 28, 1996,
and December 30, 1995, and the related consolidated statements of income,
shareholders' investment, and cash flows for each of the three years in
the period ended December 28, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Thermedics Inc. and subsidiaries as of December 28, 1996, and December
30, 1995, and the results of their operations and their cash flows for
each of the three years in the period ended December 28, 1996, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 6, 1997
31PAGE
Thermedics Inc. 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations.
For this purpose, any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes," "anticipates,"
"plans," "expects," "seeks," "estimates," and similar expressions are
intended to identify forward-looking statements. There are a number of
important factors that could cause the results of the Company to differ
materially from those indicated by such forward-looking statements,
including those detailed immediately after this Management's Discussion
and Analysis of Financial Condition and Results of Operations under the
caption "Forward-looking Statements."
Overview
The Company's business can be divided into two segments: Instruments
and Other Equipment, and Biomedical Products. The Instruments and Other
Equipment segment includes the Company's Thermo Sentron Inc. (Thermo
Sentron) subsidiary, which designs, develops, manufactures, and sells
high-speed precision weighing and inspection equipment for industrial
production and packaging lines; its Orion laboratory products division
(Orion), which manufactures electrochemistry, microweighing, process, and
other instruments used to analyze the chemical compositions of foods,
beverages, and pharmaceuticals and to detect contaminants in high-purity
water; its Thermedics Detection Inc. (Thermedics Detection) subsidiary,
which develops, manufactures, and markets high-speed, on-line detection
instruments used in a variety of industrial process applications,
explosives detection, and laboratory analysis; and its Thermo Voltek
Corp. (Thermo Voltek) subsidiary, which manufactures electromagnetic
compatibility testing instruments, high-voltage power-conversion systems,
and programmable power amplifiers.
As part of its Biomedical Products segment, the Company's Thermo
Cardiosystems Inc. (Thermo Cardiosystems) subsidiary manufactures
implantable left ventricular-assist systems (LVAS). Thermo Cardiosystems'
electric LVAS is being used in Europe as a bridge to transplant and as an
alternative to medical therapy. According to terms set by the U.S. Food
and Drug Administration (FDA), no profit can be earned from the sale of
an LVAS in the U.S. until the FDA has approved the device for commercial
sale. With the FDA's approval, the Company began earning a profit on the
sale of its air-driven LVAS in the fourth quarter of 1994. Until FDA
approval has been obtained, the Company may not earn a profit on the sale
in the U.S. of other products, such as the electric LVAS, currently used
in clinical studies. The Company also develops and manufactures enteral
nutrition delivery systems and a line of medical-grade polymers used in
medical disposables and nonmedical, industrial applications, including
safety glass and automotive coatings.
Approximately 48% of the Company's revenues in 1996 were derived from
sales of products outside of the U.S., through export sales and sales by
the Company's foreign subsidiaries. The Company expects an increase in
the percentage of revenues derived from international operations.
Although the Company seeks to charge its customers in the same currency
as its operating costs, the Company's financial performance and
32PAGE
Thermedics Inc. 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview (continued)
competitive position can be affected by currency exchange rate
fluctuations between the U.S. dollar and foreign currencies. Where
appropriate, the Company uses forward contracts to reduce its exposure to
currency fluctuations.
Results of Operations
1996 Compared With 1995
Total revenues increased 47% to $258.1 million in 1996 from $175.8
million in 1995. Instruments and Other Equipment segment revenues
increased to $213.1 million in 1996 from $136.7 million in 1995,
primarily due to the inclusion of $73.5 million in revenues from acquired
businesses (Note 3), principally Orion, acquired in December 1995,
Moisture Systems Corporation (Moisture Systems) and Rutter & Co. B.V.
(Rutter), acquired by Thermedics Detection in January 1996 and, to a
lesser extent, acquisitions by Thermo Sentron and Thermo Voltek.
Thermedics Detection's process detection instrument sales to the beverage
industry declined to $16.0 million in 1996 from $18.5 million in 1995,
primarily due to a decrease in product demand from Thermedics Detection's
principal customer, which has substantially completed its initial
deployment of Alexus systems. Revenues from Thermedics Detection's
explosives-detection systems increased to $7.1 million in 1996 from $4.6
million in 1995, primarily due to the sale of eight EGIS units to the
U.S. government to provide counter-terrorism support in Israel. Revenues
from Thermo Voltek increased $12.2 million to $48.5 million in 1996 due
in part to an increase in revenues at its Comtest subsidiary from sales
of electrostatic-discharge test equipment and its introduction of a new
product line in 1995. In addition, Thermo Voltek's revenues increased due
to the inclusion of $3.0 million in revenues from Pacific Power Source
Corporation, acquired in July 1996, and increased demand for
electromagnetic compatibility test equipment at its Keytek division.
Biomedical Products segment revenues increased to $44.9 million in
1996 from $39.0 million in 1995. Revenues from Thermo Cardiosystems
increased $9.4 million to $30.0 million in 1996, primarily due to a 61%
increase in the number of air-driven and electric LVAS units shipped for
subsequent implant and a 30% increase in the number of LVAS
implementation programs sold during 1996. This increase was offset in
part by a decline of $4.3 million in revenues from Scent Seal fragrance
samplers. In June 1995, the Company entered into an agreement with a
third party granting an exclusive license to all of its patents and
know-how relating to the Scent Seal fragrance samplers to a third party
in consideration for royalty payments on future sales by the licensee.
The Company recorded royalty income of $426,000 in 1996 and $197,000 in
1995 related to this agreement. The Company expects that shipments of
LVAS will stabilize at current levels until the electric LVAS is approved
for commercial sale in the U.S. and for use outside the hospital. The
Company believes that this approval could occur during 1997, however,
there can be no assurance that the Company will receive this approval
within the expected time period or at all.
33PAGE
Thermedics Inc. 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1996 Compared With 1995 (continued)
The gross profit margin was 49% in 1996, compared with 45% in 1995.
The gross profit margin for the Instruments and Other Equipment segment
increased to 48% in 1996 from 43% in 1995, primarily due to the inclusion
of higher-margin revenues at Orion, Moisture Systems, and Rutter.
The gross profit margin for the Biomedical Products segment increased
to 52% in 1996 from 49% in 1995, primarily due to an increase in revenues
at Thermo Cardiosystems from higher-margin implementation programs, an
increase in sales volume and, to a lesser extent, improvements in
manufacturing efficiencies. These increases were offset in part by
inventory write-offs at the Company's Corpak subsidiary associated with
discontinued product lines. In addition, 1995 included lower-margin
revenues from the sale of Scent Seal fragrance samplers.
Selling, general, and administrative expenses as a percentage of
revenues increased to 30% in 1996 from 27% in 1995, primarily due to
higher expenses as a percentage of revenues at Orion, Moisture Systems,
and Rutter and, to a lesser extent, costs incurred by Thermedics
Detection related to a reduction in personnel and leased space in
response to the lower sales volume of process detection instruments to
the beverage industry.
Research and development expenses as a percentage of revenues
increased to 6.9% in 1996 from 6.3% in 1995, primarily due to increased
research and development expenses at Thermedics Detection. The Company
does not expect research and development expenses to increase as a result
of Thermo Cardiosystems' acquisition of Nimbus Medical, Inc. (Nimbus)
(Note 3), as most of Nimbus' research and development costs have
historically been externally funded through government contracts.
The primary growth focus of the Company's Biomedical Products segment
has become technology for improved product quality and implantable LVAS.
The Company no longer expects to reinvest in its enteral
nutrition-delivery business. The Company's analysis indicates that the
expected future undiscounted cash flow from this business will be
insufficient to recover the Company's investment. Accordingly, in 1996,
the Company recorded nonrecurring costs of $12.7 million for the
write-off of cost in excess of net assets of acquired company and certain
other intangible assets associated with its Corpak subsidiary. In
addition, in connection with the December 1996 acquisition of Nimbus, the
Company wrote off $4.9 million, which represents the portion of the
purchase price allocated to technology in development based on estimated
replacement cost (Note 3).
Interest income increased to $10.8 million in 1996 from $9.1 million
in 1995, primarily due to interest income earned on invested proceeds
from the Company's May 1996 issuance of $65.0 million principal amount of
noninterest-bearing subordinated convertible debentures and Thermo
Sentron's April 1996 initial public offering of common stock. These
increases were offset in part by cash used for the repayment of an
aggregate of $53.0 million of promissory notes to Thermo Electron
Corporation (Thermo Electron) (Note 3). Interest expense increased to
$3.8 million in 1996 from $3.7 million in 1995, as a result of additional
borrowings by the Company to fund acquisitions, largely offset by a
decrease in interest expense due to conversions of the Company's and its
subsidiaries' subordinated convertible obligations.
34PAGE
Thermedics Inc. 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1996 Compared With 1995 (continued)
The Company has adopted a strategy of spinning out certain of its
businesses into separate subsidiaries and having these subsidiaries sell
a minority interest to outside investors. The Company believes that this
strategy provides additional motivation and incentives for the management
of the subsidiary through the establishment of subsidiary-level stock
option incentive programs, as well as capital to support the
subsidiaries' growth. As a result of Thermo Sentron's April 1996 initial
public offering of its common stock and Thermedics Detection's March 1996
and November 1996 private placements of its common stock, the Company
recorded gains of $23.7 million in 1996. These gains represent an
increase in the Company's proportionate share of the subsidiary's equity
and are classified as "Gain on issuance of stock by subsidiaries" in the
accompanying statement of income. The size and timing of these
transactions are dependent on market and other conditions that are beyond
the Company's control. In addition, in October 1995, the Financial
Accounting Standards Board (FASB) issued an exposure draft of a Proposed
Statement of Financial Accounting Standards, "Consolidated Financial
Statements: Policy and Procedures" (the Proposed Statement). The Proposed
Statement would establish new rules for how consolidated financial
statements should be prepared. If the Proposed Statement is adopted,
there could be significant changes in the way the Company records certain
transactions of its controlled subsidiaries. Among those changes, any
sale of the stock of a subsidiary that does not result in a loss of
control would be accounted for as a transaction in equity of the
consolidated entity with no gain or loss being recorded. The FASB expects
to issue a final statement or a revised exposure draft in 1997.
The effective tax rate was 25% in 1996, compared with 32% in 1995.
The effective tax rate in 1996 was below the statutory federal income tax
rate primarily due to the nontaxable gain on issuance of stock by
subsidiaries and the elimination of the valuation allowance no longer
required (Note 5), offset in part by the nondeductible write-off of
certain intangible assets at the Company's Corpak subsidiary (Note 13),
the impact of state income taxes, and nondeductible amortization of cost
in excess of net assets of acquired companies. The effective tax rate in
1995 was below the statutory federal income tax rate primarily due to
nontaxable gain on issuance of stock by subsidiaries and the reduction of
the valuation allowance no longer required (Note 5), offset in part by
the impact of state income taxes.
Minority interest expense increased to $6.0 million in 1996 from $4.5
million in 1995 due to higher profits at the Company's Thermo Voltek
subsidiary, and to a lesser extent, the minority interest associated with
the Company's newly public Thermo Sentron subsidiary.
1995 Compared With 1994
Total revenues increased 13% to $175.8 million in 1995 from $155.1
million in 1994. Instruments and Other Equipment segment revenues
increased 10% to $136.7 million in 1995 from $124.1 million in 1994.
Revenues increased $17.4 million due to the inclusion of sales for a full
year from Thermo Sentron, acquired in March 1994. Revenues from Thermo
Voltek increased $12.7 million, due to the inclusion of an additional
$7.2 million in revenues from businesses acquired in 1994 and 1995, an
increase of $3.1 million in revenues from Comtest primarily due to the
35PAGE
Thermedics Inc. 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1995 Compared With 1994 (continued)
introduction of a new product line in 1995, and an increase of $2.3
million in revenues from Keytek due to greater demand. Revenues at
Thermedics Detection were $28.0 million in 1995, compared with $50.3
million in 1994. Revenues from Thermedics Detection's process detection
instruments declined to $18.5 million in 1995 from $38.0 million in 1994.
This decline was due to a decrease in product demand from Thermedics
Detection's principal customer, which has substantially completed its
initial deployment of Alexus systems. Revenues from Thermedics
Detection's EGIS explosives-detection system declined to $4.6 million in
1995 from $10.1 million in 1994. The Company's sales of the EGIS system
have been made primarily to government entities outside of the U.S.
During 1993 and 1994, large orders from the U.K. and German governments
accounted for a significant portion of EGIS sales. These orders were
substantially filled by the end of 1994.
Biomedical Products segment revenues increased 26% to $39.0 million
in 1995 from $31.0 million in 1994. Revenues from Thermo Cardiosystems
increased by $10.2 million to $20.6 million due in part to an increase in
the price of the LVAS. Revenues also increased due to a 43% increase in
the number of air-driven and electric LVAS units shipped during 1995
compared with 1994. The increase in revenues from Thermo Cardiosystems
was partially offset by a decline of $2.8 million in revenues from Scent
Seal fragrance samplers. In June 1995, the Company entered into an
agreement granting an exclusive license to all of its patents and
know-how relating to the Scent Seal fragrance samplers to a third party
in consideration for royalty payments on future sales by the licensee.
The Company recorded royalty income of $197,000 in 1995.
The gross profit margin was 45% in 1995, compared with 44% in 1994.
The gross profit margin for the Instruments and Other Equipment segment
was 43% in 1995, compared with 44% in 1994. This decline was primarily
due to lower gross margins at Thermedics Detection as a result of a lower
sales volume and, to a lesser extent, the inclusion of lower-margin
research and development contract revenues. In addition, Thermo Voltek's
gross profit margin decreased to 48% in 1995 from 49% in 1994 primarily
due to higher European sales in one product line, which has lower margins
due to competitive pricing pressures. These decreases were offset in part
by improved gross profit margins at Thermo Sentron due to a reduction in
operating expenses.
The gross profit margin for the Biomedical Products segment was 49%
in 1995, compared with 42% in 1994, reflecting higher margins at Thermo
Cardiosystems resulting from the LVAS price increase and, to a lesser
extent, the increase in sales volume and improvements in manufacturing
efficiencies.
Selling, general, and administrative expenses as a percentage of
revenues decreased to 27% in 1995 from 28% in 1994. This decline results
primarily from lower expenses as a percentage of revenues at Thermo
Cardiosystems as a result of a higher sales volume in 1995 and, to a
lesser extent, a reduction in operating expenses at Thermo Sentron. These
improvements were partially offset by higher expenses as a percentage of
revenues at Thermedics Detection due to a lower sales volume in 1995.
36PAGE
Thermedics Inc. 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1995 Compared With 1994 (continued)
Research and development expenses as a percentage of revenues
decreased to 6.3% in 1995 from 6.7% in 1994, primarily due to lower
expenses as a percentage of revenues at Thermo Cardiosystems as a result
of an increase in total revenues.
Interest income increased to $9.1 million in 1995 from $7.3 million
in 1994 due to higher prevailing interest rates in 1995. Interest expense
increased to $3.7 million in 1995 from $3.2 million in 1994 as a result
of borrowings by Thermo Sentron's and Thermo Voltek's foreign
subsidiaries, offset in part by a decrease in interest expense due to
conversions of the Company's and its subsidiaries' subordinated
convertible obligations.
Gain on issuance of stock by subsidiaries of $3.5 million in 1995
resulted from the conversion of $9.1 million principal amount of Thermo
Voltek's 3 3/4% subordinated convertible debentures.
The effective tax rate was 32% in 1995, compared with 38% in 1994.
The effective tax rate in 1995 was below the statutory federal income tax
rate primarily due to the nontaxable gain on issuance of stock by
subsidiaries and the reduction of the valuation allowance no longer
required, offset in part by the impact of state income taxes (Note 5).
The effective tax rate in 1994 was higher than the statutory federal
income tax rate primarily due to the impact of state income taxes.
Minority interest expense increased to $4.5 million in 1995 from $1.2
million in 1994 due to higher net income at the Company's Thermo
Cardiosystems subsidiary and, to a lesser extent, the Company's Thermo
Voltek subsidiary.
Liquidity and Capital Resources
Consolidated working capital was $205.1 million at December 28, 1996,
compared with $110.1 million at December 30, 1995. Cash, cash
equivalents, and short- and long-term available-for-sale investments were
$181.6 million at December 28, 1996, compared with $155.2 million at
December 30, 1995. Of the $181.6 million balance at December 28, 1996,
$81.4 million was held by Thermo Cardiosystems, $34.8 million by Thermo
Sentron, $27.9 million by Thermo Voltek, $13.5 million by Thermedics
Detection, and the remainder by the Company and its wholly owned
subsidiaries.
During 1996, $20.1 million of cash was provided by operating
activities. Cash provided by operations was offset in part by cash of
$14.5 million used to fund an increase in accounts receivable primarily
due to increased sales at Thermo Voltek and Thermo Cardiosystems and, to
a lesser extent, due to a high level of sales in December 1996 at Thermo
Sentron.
During 1996, the Company's primary investing activities, excluding
purchases, sales, and maturities of available-for-sale investments,
included acquisitions and capital expenditures. In January 1996, the
Company acquired the assets and certain liabilities of Moisture Systems
and the stock of Rutter, for a total purchase price of $21.7 million in
cash, which included the repayment of $0.7 million of debt. In connection
with these acquisitions, the Company borrowed $15.0 million from Thermo
Electron pursuant to a promissory note due February 1997 (Note 3). In
September 1996, the Company repaid the promissory note with proceeds from
37PAGE
Thermedics Inc. 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources (continued)
the sale of subordinated convertible debentures (Note 7). During 1996,
the Company, through its majority-owned subsidiaries, made other
acquisitions of businesses and product lines for approximately $20.5
million in cash. During 1996, the Company expended $7.0 million on
purchases of property, plant, and equipment and expects to make capital
expenditures of approximately $8.0 million in 1997.
During 1996, the Company expended approximately $54.8 million for
financing activities. In March and November 1996, Thermedics Detection
issued shares of its common stock in private placements for aggregate net
proceeds of $7.0 million. In April 1996, Thermo Sentron issued shares of
its common stock in an initial public offering for net proceeds of $42.3
million (Note 11). In May 1996, the Company issued and sold $65.0 million
principal amount of noninterest-bearing subordinated convertible
debentures due 2003, for net proceeds of $63.2 million (Note 7). In
September 1996, the Company repaid its $15.0 million and $38.0 million
promissory notes to Thermo Electron with proceeds from the debenture
offering.
The Company intends, for the foreseeable future, to maintain at least
50% ownership of Thermo Cardiosystems, Thermo Voltek, Thermo Sentron, and
Thermedics Detection. This may require the Company's purchase of
additional shares of common stock or, if applicable, convertible
debentures (which are then converted) of these companies from time to
time, as the number of the companies' outstanding shares increases,
whether as a result of conversion of convertible notes or exercise of
stock options issued by them, or otherwise. These or any other purchases
may be made in the open market; directly from the applicable subsidiary,
or Thermo Electron; or pursuant to the conversion of all or part of
Thermo Voltek's subordinated convertible notes held by the Company. The
Company's and Thermo Cardiosystems' Boards of Directors each authorized
the repurchase, through June 1, 1997, and August 12, 1997, respectively,
of up to $10.0 million of their own securities. The Company's
authorization also includes the repurchase of securities of Thermo
Cardiosystems, Thermo Voltek, and Thermo Sentron. Any such purchases
would be funded from working capital. Through December 28, 1996, the
Company and Thermo Cardiosystems had expended $10.0 million and $5.7
million, respectively, under their authorizations. In February 1997, the
Securities and Exchange Commission declared effective a registration
statement filed by Thermedics Detection covering shares of common stock
to be offered in its initial public offering. The Company anticipates
that the offering will be completed in March 1997.
In January and April 1996, the Company issued an aggregate of
1,987,273 shares of its common stock to Thermo Electron in exchange for
634,049 shares of Thermo Voltek common stock and 929,947 shares of Thermo
Cardiosystems common stock. The shares of common stock were exchanged at
their respective fair market values on the dates of the transactions.
38PAGE
Thermedics Inc. 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources (continued)
The Company expects to continue to pursue its strategy of expanding
its business both through the continued development, manufacture, and
sale of new products, and through the possible acquisition of companies
that will provide additional marketing or manufacturing capabilities and
new products. The Company expects that it will finance these acquisitions
through a combination of internal funds, additional debt or equity
financing from the capital markets, or short-term borrowings from Thermo
Electron. The Company believes its existing resources are sufficient to
meet the capital requirements of its existing operations for the
foreseeable future.
39PAGE
Thermedics Inc. 1996 Financial Statements
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company wishes to caution
readers that the following important factors, among others, in some cases
have affected, and in the future could affect, the Company's actual
results and could cause its actual results in 1997 and beyond to differ
materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company.
Risks Associated With Acquisition Strategy. The Company's strategy
includes the acquisition of businesses and technologies that complement
or augment its existing product lines. Promising acquisitions are
difficult to identify and complete for a number of reasons, including
competition among prospective buyers and the need for regulatory
approval, including antitrust approvals. There can be no assurance that
the Company will be able to complete future acquisitions or that it will
be able to successfully integrate any acquired business. In order to
finance such acquisitions, it may be necessary for the Company to raise
additional funds through public or private financings. Any equity or debt
financing, if available at all, may be on terms which are not favorable
to the Company and, in the case of equity financing, may result in
dilution to the Company's stockholders.
Risks Associated with Spin-Out of Subsidiaries. The Company has
adopted a strategy of spinning out certain of its businesses into
separate subsidiaries and having these subsidiaries sell a minority
interest to outside investors. As a result of the sale of stock by
subsidiaries, the issuance of stock by subsidiaries upon conversion of
convertible debentures and similar transactions, the Company records
gains that represent the increase in the Company's net investment in the
subsidiaries. These gains have represented a substantial portion of the
net income reported by the Company in certain periods. The size and
timing of these transactions are dependent on market and other conditions
that are beyond the Company's control. Accordingly, there can be no
assurance that the Company will be able to generate gains from such
transactions in the future.
In addition, in October 1995, the Financial Accounting Standards
Board (FASB) issued an exposure draft of a Proposed Statement of
Financial Accounting Standards, "Consolidated Financial Statements:
Policy and Procedures" (the Proposed Statement). The Proposed Statement
would establish new rules for how consolidated financial statements
should be prepared. If the Proposed Statement is adopted, there could be
significant changes in the way the Company records certain transactions
of its controlled subsidiaries. Among those changes, any sale of the
stock of a subsidiary that does not result in a loss of control would be
accounted for as a transaction in equity of the consolidated entity with
no gain or loss being recorded. The FASB expects to issue a final
statement or a revised exposure draft in 1997.
International Operations. Sales outside the U.S. have accounted for
a significant percentage of the Company's total revenues. The Company
intends to continue to expand its presence in international markets.
International sales are subject to a number of risks, including the
following: agreements may be difficult to enforce and receivables
difficult to collect through a foreign country's legal system; foreign
customers may have longer payment cycles; foreign countries may impose
40PAGE
Thermedics Inc. 1996 Financial Statements
Forward-looking Statements
additional withholding taxes or otherwise tax the Company's foreign
income, impose tariffs, or adopt other restrictions on foreign trade;
fluctuations in exchange rates may affect product demand and adversely
affect the profitability in U.S. dollars of products and services
provided by the Company in foreign markets where payment for the
Company's products and services is made in the local currency; U.S.
export licenses may be difficult to obtain; and the protection of
intellectual property in foreign countries may be more difficult to
enforce. There can be no assurance that any of these factors will not
have a material adverse effect on the Company's business and results of
operations.
Technological Change and Competition. The market for many of the
Company's products is characterized by changing technology, evolving
industry standards, and new product introductions. The Company's future
success will depend, in part, upon its ability to enhance its existing
products and to develop and introduce new products and technologies to
meet changing customer requirements. The Company is currently devoting
significant resources toward the enhancement of its existing products and
the development of new products and technologies. There can be no
assurance that the Company will successfully complete the enhancement and
development of these products in a timely fashion, or that these products
will compete successfully with those of the Company's competitors.
Certain of the Company's competitors have greater resources,
manufacturing and marketing capabilities, technical staff, and production
facilities than those of the Company. As a result, they may be able to
adapt more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the promotion
and sale of their products than can the Company. Competition could
increase if new companies enter the market, or if existing competitors
expand their product lines.
Intellectual Property Rights. The Company relies upon trade secret
protection and patents to protect its proprietary rights. There can be no
assurance that patents will issue from any pending or future patent
applications owned by or licensed to the Company, or that the claims
allowed under any issued patents will be sufficiently broad to protect
the Company's technology. In the absence of patent protection, the
Company may be vulnerable to competitors who attempt to copy the
Company's products or gain access to its trade secrets and know-how.
Proceedings initiated by the Company to protect its proprietary rights
could result in substantial costs to the Company. The Company has
received correspondence from a third party alleging that the textured
surface of the LVAS infringes certain patent rights of such third party.
The Company believes that it has meritorious defenses to the claims of
the third party. However, no assurance can be given that the Company
would be successful if litigation was commenced or that others will not
claim that the Company infringes their intellectual property rights.
There can be no assurance that competitors of the Company will not
initiate litigation to challenge the validity of the Company's patents,
or that they will not use their resources to design comparable products
that do not infringe the Company's patents. There may also be pending or
issued patents held by parties not affiliated with the Company that
relate to the Company's products or technologies. The Company may need to
acquire licenses to, or contest the validity of, any such patents. There
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Thermedics Inc. 1996 Financial Statements
Forward-looking Statements
can be no assurance that any license required under any such patent would
be made available on acceptable terms, or that the Company would prevail
in any such contest. The Company could incur substantial costs in
defending itself in suits brought against it, or in suits in which the
Company may assert its patent rights against others. If the outcome of
any such litigation is unfavorable to the Company, the Company's business
and results of operations could be materially adversely affected. In
addition, the Company relies on trade secrets and proprietary know-how
which it seeks to protect, in part, by confidentiality agreements with
its collaborators, employees, and consultants. There can be no assurance
that these agreements will not be breached, that the Company would have
adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known or be independently developed by
competitors.
Uncertainty of Regulatory Approval for Biomedical Devices. Thermo
Cardiosystems' LVAS are subject to approval by the FDA before they may be
sold for profit in the United States. Thermo Cardiosystems is also
subject to regulatory requirements in foreign countries in which it
markets its devices. The process of obtaining regulatory approvals is
lengthy, expensive, and inherently uncertain. Even after FDA approval has
been obtained, such approval can be suspended or revoked if the FDA does
not continue to be satisfied with the safety and efficacy of a product.
Failure to comply with applicable regulatory requirements can result in,
among other things, fines, suspensions of approvals, recalls of products,
operating restrictions, and criminal prosecutions.
In October 1994, Thermo Cardiosystems received FDA approval for the
commercial sale of its pneumatic LVAS. In April 1994, Thermo
Cardiosystems received the CE Mark for commercial sale of the pneumatic
LVAS in all European Union countries. Thermo Cardiosystems has developed
the HeartPak(TM), a lightweight, portable console that can be carried
over the shoulder and which can be used as an alternative to the larger
external console approved for use with the pneumatic LVAS. The HeartPak
received the CE Mark in February 1995 and is currently in Phase I
clinical trials in the U.S. Thermo Cardiosystems' electric LVAS is
currently in use in clinical trials in the U.S. These trials are testing
the safety and efficacy of the device as both a bridge to transplant and
as an alternative to transplant. The electric LVAS received the CE Mark
in August 1995.
No assurance can be given that Thermo Cardiosystems will file a
supplement to its pre-market approval (PMA) application with the FDA with
respect to the electric LVAS on a timely basis, or at all, or that the
PMA supplement, if filed, will ultimately be approved by the FDA. In
addition, any design changes to Thermo Cardiosystems' LVAS, including use
of the portable console for the pneumatic LVAS, must be approved pursuant
to a supplement to an approved PMA application. Failure of Thermo
Cardiosystems to obtain FDA approval for the commercial sale of the
electric LVAS, either as a bridge to transplant or as an alternative to
transplant, would have a material adverse effect on Thermo Cardiosystems'
long-term growth prospects. In addition, failure of Thermo Cardiosystems
to obtain approval for the HeartPak portable console would require
patients supported by the pneumatic LVAS to remain hospitalized. This
could materially decrease the market for the pneumatic LVAS.
Uncertainty of Patient Reimbursement. The cost of implanting a
cardiac support system is substantial. Without the financial support of
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Thermedics Inc. 1996 Financial Statements
Forward-looking Statements
the government or third-party insurers, the market for Thermo
Cardiosystems' devices will be limited. Medicare and Medicaid limit the
reimbursement that U.S. hospitals receive for treating certain medical
conditions by setting maximum fees that can be charged to their patients.
Under these systems, hospitals are paid a fixed amount for treating each
patient with a particular diagnosis. Private insurers also have initiated
reimbursement systems designed to slow the escalation of health care
costs. In addition, the federal government is considering, and certain
state governments are considering or have adopted, new health care
policies intended to curb rising health care costs. Such policies include
rationing of government-funded reimbursement for health care services and
imposing price controls upon providers of medical products and services.
These policies could have the effect of limiting the availability of
reimbursement for procedures, such as the implantation of an LVAS, that
involve prolonged treatment of critically ill patients.
In November 1995, the U.S. Health Care Finance Administration (HCFA)
issued a decision that extends Medicare coverage to Thermo Cardiosystems'
HeartMate pneumatic LVAS. Several major nongovernment insurers have
already agreed to offer coverage for the pneumatic LVAS. Even though
reimbursement has been established by HCFA and by certain nongovernment
insurers, the amount of available reimbursement may change, and
reimbursement may be denied by an insurer under certain circumstances,
including if it is determined that a procedure was not the most
cost-effective treatment method, was experimental, or was used for an
unapproved indication. No assurance can be given that additional
third-party reimbursement for the pneumatic LVAS will be granted within a
reasonable period of time, or at all. The unavailability of third-party
reimbursement for procedures involving Thermo Cardiosystems' systems
would have a material adverse effect on Thermo Cardiosystems' business.
Uncertainty of Opinion Leader Acceptance and Support for LVAS. A
limited number of cardiac surgeons and cardiologists influences medical
device selection and purchase decisions for a large portion of the target
patient population. Thermo Cardiosystems will achieve its business
objectives only if its LVAS are recommended for use by such opinion
leaders. Thermo Cardiosystems has developed working relationships with a
number of leading medical centers, and its existing and proposed LVAS
have been well received by opinion leaders in cardiac surgery and
cardiology. Moreover, since the inception of its work on cardiac support
systems in 1966, Thermo Cardiosystems has relied upon surgical teams at
medical institutions to perform clinical trials that are necessary to
obtain FDA approvals. A continuing working relationship with those and
other institutions will be important to the success of Thermo
Cardiosystems. No assurance can be given that existing relationships and
arrangements can be maintained or that new relationships will be
established. Furthermore, economic, psychological, ethical, and other
concerns may limit acceptance of heart assist devices in general, and
there can be no assurance that markets of sufficient size will develop
for Thermo Cardiosystems' LVAS.
Availability of Components and Raw Materials Used in LVAS. Thermo
Cardiosystems relies on a number of custom-designed components and
materials supplied by other companies to manufacture its LVAS. Thermo
Cardiosystems is making efforts to minimize the risks associated with
sole sources and ensure long-term availability, including qualifying
alternative materials and components or developing alternative sources
43PAGE
Thermedics Inc. 1996 Financial Statements
Forward-looking Statements
for the materials and components supplied by a single source. Although
Thermo Cardiosystems believes that it has adequate supplies of materials
and components to meet demand for its products for the foreseeable
future, no assurance can be given that Thermo Cardiosystems will not
experience in the future shortages of certain materials or components
that could delay shipments of its products. The cost to Thermo
Cardiosystems to evaluate and test alternative materials and components
and the time necessary to obtain FDA approval for these materials are
inherently difficult to determine because both time and cost are
dependent on at least two factors: the similarity of the alternative
material or component to the original material or component, and the
amount of third-party testing that may have already been completed on
alternative materials or components. There can be no assurance that the
substitution of alternative materials or components would not cause
delays in Thermo Cardiosystems' LVAS development programs or adversely
affect Thermo Cardiosystems' ability to manufacture and ship LVAS to meet
demand.
Limited Manufacturing and Marketing Experience of Thermo
Cardiosystems. Prior to FDA approval of commercial sale of the pneumatic
LVAS, Thermo Cardiosystems was engaged only in the research and
development of its LVAS. Since that time, Thermo Cardiosystems has been
building its manufacturing, marketing, and sales capabilities. While
Thermo Cardiosystems has not experienced difficulties in manufacturing
its LVAS at volumes, cost, and quality levels, sufficient to satisfy the
increased demand resulting from commercial approval, no assurance can be
given that Thermo Cardiosystems will not encounter difficulties as sales
volumes increase or new products or components are approved for
commercial sale. Thermo Cardiosystems does not have experience in the
large-scale commercialization of medical devices. While Thermo
Cardiosystems has added sales and marketing staff and is expanding its
distribution capabilities worldwide, no assurance can be given that
Thermo Cardiosystems will be able to market and sell its products
successfully in high volumes.
Product Liability. Thermo Cardiosystems faces an inherent business
risk of exposure to product liability claims relating to the use of its
products. Although Thermo Cardiosystems currently maintains product
liability insurance against this risk, there can be no assurance that it
will continue to be able to obtain such coverage at economically feasible
rates, if at all, or that such coverage will be adequate in terms and
scope to completely protect Thermo Cardiosystems in the event of a
successful product liability claim.
Effect of Government Regulations and Approvals on Market for Thermo
Sentron's Products. The market for certain of Thermo Sentron's products,
both in the United States and abroad, is subject to or influenced by
various domestic and foreign clean air and consumer protection laws.
Thermo Sentron designs, develops, and markets its products to meet
customer needs created by existing and anticipated regulations, and any
changes in these regulations may adversely affect consumer demand for
Thermo Sentron's products. In addition, the marketing of certain of
Thermo Sentron's products is dependent upon the receipt of regulatory and
other approvals, including industry association approvals of the design,
construction, and accuracy of Thermo Sentron's products. Delays in
obtaining, or the failure to obtain, any such approvals could have a
44PAGE
Thermedics Inc. 1996 Financial Statements
Forward-looking Statements
material adverse effect on Thermo Sentron's business and results of
operations.
Effect of Electrical Standards on Demand for Thermo Voltek's
Products. Demand for Thermo Voltek's EMC testing products and services is
driven to a large extent by mandatory government standards and voluntary
industry standards relating to electromagnetic compatibility. In
particular, demand for Thermo Voltek's products results from efforts by
manufacturers to comply with IEC 801, an EU directive that became
effective on January 1, 1996. Although many manufacturers have not yet
complied with IEC 801, as the number of non-complying manufacturers is
reduced over time, demand for Thermo Voltek's products could be adversely
affected. In addition, if new EMC standards requiring new testing
capabilities are enacted less frequently or if EMC standards become less
strict, demand for Thermo Voltek's products could be adversely affected.
Dependence of Explosives-Detection Market on Government Regulation
and Airline Industry. Sales of Thermedics Detection's explosives-
detection systems for use in airports has been and will continue to be
dependent on governmental initiatives to require, or support, the
screening of checked luggage, carry-on items, and personnel with advanced
explosives-detection equipment. Substantially all of such systems have
been installed at airports in countries other than the United States in
which the applicable government or regulatory authority overseeing the
operations of the airport has mandated such screening. Such mandates are
influenced by many factors outside of the control of Thermedics
Detection, including political and budgetary concerns of governments,
airlines, and airports. Of the more than 600 commercial airports
worldwide, more than 400 are located in the United States. Accordingly,
Thermedics Detection believes that the size of the market for
explosives-detection equipment is, and will increasingly be,
significantly influenced by United States government regulation. In the
United States, the Aviation Security Act of 1990 directed the Federal
Aviation Administration (FAA) to develop a standard for
explosives-detection systems and required airports in the United States
to deploy systems meeting this standard in 1993. The standard adopted by
the FAA is more comprehensive than standards adopted in most other
countries. To date, no system has demonstrated that it meets the FAA
standard under realistic airport operating conditions. As a result, the
FAA has not mandated the installation of automated explosives-detection
systems, and only a limited number of these systems have been deployed,
primarily on a test basis, in the United States. The FAA first certified
a computed X-ray tomography system for checked luggage in December 1994.
However, the FAA has recognized that this system must undergo further
testing to resolve whether it can operate under realistic airport
operating conditions. Thermedics Detection's systems are trace detectors
for which no FAA certification process for checked baggage, carry-on, or
personal screening exists to date. In 1992, the FAA approved Thermedics
Detection's EGIS system for use by airlines in screening carry-on
electronic items and luggage searches. Each airline must seek this
approval for each application. Although the FAA has provided significant
funding to Thermedics Detection in connection with the development of its
explosives-detection technology, there can be no assurance that any of
Thermedics Detection' systems will ever meet this or any other United
States certification standard. Any product utilizing a technology
ultimately recommended or required by the FAA will have a significant
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Thermedics Inc. 1996 Financial Statements
Forward-looking Statements
competitive advantage in the market for explosives-detection devices.
Unless the FAA takes action with respect to a particular
explosives-detection product or technology, airlines will not be required
to upgrade existing metal-detection equipment. Earnings of U.S. air
carriers tend to fluctuate significantly from time to time. Any
depression in the financial condition of such carriers would likely
result in lower capital spending for discretionary items. Moreover, there
can be no assurance that additional countries will mandate the
implementation of effective explosives screening for airline baggage,
carry-on items or personnel, or that, if mandated, Thermedics Detection's
systems will meet the certification or other requirements of the
applicable government authority. Even if Thermedics Detection's systems
were to meet the applicable requirements, there can be no assurance that
Thermedics Detection would be able to market its systems effectively.
In October 1996, the United States enacted legislation which includes
a $144.2 million allocation to purchase explosives-detection systems and
other advanced security equipment, including trace detection equipment
such as the systems manufactured by Thermedics Detection, for carry-on
and checked baggage screening. There can be no assurance that this
legislation will not be modified to reduce the funding for advanced
explosives equipment; that the necessary appropriations will be made to
fund the purchases of advanced explosives-detection equipment
contemplated by the legislation; that trace-detection equipment such as
the systems manufactured by Thermedics Detection will be mandated; or
that, even if such appropriation is made and such equipment is mandated,
any of the Thermedics Detection's explosives-detection systems will be
purchased for installation at any airports in the United States. Further,
there can be no assurance that the U.S. will mandate the widespread use
of these systems after completion of the initial purchases.
Significance of Certain Customers to Thermedics Detection. Sales of
process detection instruments and related services to bottlers licensed
by The Coca-Cola Company (Coca-Cola Bottlers) were $32,184,000,
$9,974,000 and $10,641,000 in 1994, 1995, and 1996, respectively. Sales
to Coca-Cola Bottlers have decreased as these customers have
substantially completed full deployment of Thermedics Detection's Alexus
system in existing plant locations. Although the Company anticipates that
Thermedics Detection will continue to derive revenues from the sale of
upgrades and new systems to new plants, as well as services to the
Coca-Cola Bottlers, the Company does not expect that revenues derived
from these customers will continue at a rate comparable to prior years.
While the Company believes that the introduction of new process detection
products for the food, beverage, and other markets will continue to
reduce the significance of the Coca-Cola Bottlers to Thermedics
Detection's results of operations, there can be no assurance that
Thermedics Detection will be successful in the introduction of new
process detection products or that any sales of these products will be
sufficient to maintain a rate of growth equivalent to prior years.
46PAGE
Thermedics Inc. 1996 Financial Statements
Selected Financial Information
(In thousands except
per share amounts) 1996(a) 1995(b) 1994(c) 1993(d) 1992
------------------------------------------------------------------------
Statement of Income Data:
Revenues $258,085 $175,754 $155,111 $ 80,220 $ 45,778
Net income 26,831 15,121 10,837 6,670 2,467
Earnings per share .70 .45 .33 .22 .09
Balance Sheet Data:
Working capital $205,130 $110,113 $128,330 $133,003 $ 63,205
Total assets 438,842 368,150 291,567 237,487 146,663
Long-term
obligations 74,359 45,201 82,551 59,130 33,820
Common stock
of subsidiary
subject to
redemption - - - - 5,468
Shareholders'
investment 206,058 167,010 131,765 117,451 69,323
(a)Reflects the January 1996 acquisition of Moisture Systems and Rutter,
the May 1996 issuance of $65.0 million principal amount of
noninterest-bearing subordinated convertible debentures, and
nontaxable gains of $23.7 million from the issuance of stock by
subsidiaries.
(b)Reflects the December 1995 acquisition of Orion.
(c)Reflects the January 1994 issuance of $33.0 million principal amount
of noninterest-bearing subordinated convertible debentures by Thermo
Cardiosystems and the March 1994 acquisition of Ramsey.
(d)Reflects the May 1993 public offering of the Company's common stock
for net proceeds of $30.0 million, the August 1993 acquisition of
Comtest Instrumentation B.V. and Comtest Limited, and the November
1993 issuance of $34.5 million principal amount of 3 3/4%
subordinated convertible debentures by Thermo Voltek.
47PAGE
Thermedics Inc. 1996 Financial Statements
Common Stock Market Information
The following table shows the market range for the Company's common
stock based on reported sales prices on the American Stock Exchange
(symbol TMD) for 1996 and 1995:
1996 1995
------------------ ----------------
Quarter High Low High Low
-------------------------------------------------------------------
First $30 1/2 $23 3/8 $17 1/2 $12 1/2
Second 31 7/8 24 5/8 20 1/2 15 1/2
Third 31 1/8 20 1/4 21 3/4 17 3/4
Fourth 33 3/8 17 5/8 28 17 1/2
As of January 24, 1997, the Company had 2,297 holders of record of
its common stock. This does not include holdings in street or nominee
names. The closing market price on the American Stock Exchange for the
Company's common stock on January 24, 1997, was $18 3/8 per share.
Common stock of the Company's majority-owned public subsidiaries is
traded on the American Stock Exchange: Thermo Cardiosystems Inc. (symbol
TCA), Thermo Voltek Corp. (symbol TVL), Thermo Sentron Inc. (symbol TSR),
and Thermedics Detection Inc. (TDX).
Shareholder Services
Shareholders of Thermedics Inc. who desire information about the
Company are invited to contact John N. Hatsopoulos, Chief Financial
Officer, Thermedics Inc., 81 Wyman Street, P.O. Box 9046, Waltham,
Massachusetts 02254-9046, (617) 622-1111. A mailing list is maintained to
enable shareholders whose stock is held in street name, and other
interested individuals, to receive quarterly reports, annual reports, and
press releases as quickly as possible. Beginning in 1997, quarterly
distribution will be limited to the second quarter report only. All
quarterly reports and press releases will be available through the
Internet from Thermo Electron's home page on the World Wide Web
(http://www.thermo.com/subsid/tmd.html).
Stock Transfer Agent
Bank of Boston is the stock transfer agent and maintains shareholder
activity records. The agent will respond to questions on issuance of
stock certificates, change of ownership, lost stock certificates, and
change of address. For these and similar matters, please direct inquiries
to:
Bank of Boston
c/o Boston EquiServe Limited Partnership
P.O. Box 8040
Boston, Massachusetts 02266-8040
(617) 575-3120
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Thermedics Inc. 1996 Financial Statements
Dividend Policy
The Company has never paid cash dividends and does not expect to pay
cash dividends in the foreseeable future because its policy has been to
use earnings to finance expansion and growth. Payment of dividends will
rest within the discretion of the Company's Board of Directors and will
depend upon, among other factors, the Company's earnings, capital
requirements, and financial condition.
Form 10-K Report
A copy of the Annual Report on Form 10-K for the fiscal year ended
December 28, 1996, as filed with the Securities and Exchange Commission,
may be obtained at no charge by writing to John N. Hatsopoulos, Chief
Financial Officer, Thermedics Inc., 81 Wyman Street, P.O. Box 9046,
Waltham, Massachusetts 02254-9046.
Annual Meeting
The annual meeting of shareholders will be held on Monday, June 2,
1997, at 1:30 p.m. at the Hyatt Regency Hotel, Hilton Head, South
Carolina.