SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended July 4, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number 1-10791
THERMOTREX CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 52-1711436
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10455 Pacific Center Court
San Diego, California 92121-4339
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [
]
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date.
Class Outstanding at July 31, 1998
---------------------------- ----------------------------
Common Stock, $.01 par value 18,671,846
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMOTREX CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
July 4, September 27,
(In thousands) 1998 1997
- --------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents (includes $185,383
and $91,164 under repurchase agreement
with parent company) $194,653 $135,720
Available-for-sale investments, at quoted
market value (amortized cost of $13,130
and $17,520) 13,127 17,499
Accounts receivable, less allowances of
$3,647 and $1,969 89,549 58,632
Unbilled contract costs and fees 4,183 4,651
Inventories:
Raw materials and supplies 39,050 27,860
Work in process 17,635 13,474
Finished goods 12,834 6,870
Prepaid expenses 4,143 3,422
Prepaid income taxes 11,521 11,877
-------- --------
386,695 280,005
-------- --------
Property, Plant, and Equipment, at Cost 83,518 67,957
Less: Accumulated depreciation and
amortization 19,998 15,568
-------- --------
63,520 52,389
-------- --------
Notes Receivable from Related Parties (Note 2) 4,967 3,300
-------- --------
Prepaid Income Taxes and Other Assets 18,104 13,831
-------- --------
Cost in Excess of Net Assets of Acquired
Companies (Note 6) 153,239 100,592
-------- --------
$626,525 $450,117
======== ========
2
<PAGE>
THERMOTREX CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
July 4, September 27,
(In thousands except share amounts) 1998 1997
- --------------------------------------------------------------------------
Current Liabilities:
Note payable to parent company $ - $ 11,000
Accounts payable 27,777 21,373
Accrued payroll and employee benefits 10,613 8,863
Accrued warranty costs 9,156 6,299
Accrued commissions 8,101 3,922
Other accrued expenses 35,181 24,245
Due to parent company and affiliated
companies 1,460 2,027
-------- --------
92,288 77,729
-------- --------
Long-term Obligations:
3 1/4% Subordinated convertible debentures
(includes $10,000 of related-party debt;
Note 3) 124,500 -
4 3/8% Subordinated convertible debentures 115,000 115,000
-------- --------
239,500 115,000
-------- --------
Deferred Lease Liability 1,396 1,379
-------- --------
Common Stock of Subsidiary Subject to
Redemption 40,500 40,500
-------- --------
Minority Interest 87,969 39,374
-------- --------
Shareholders' Investment:
Common stock, $.01 par value, 50,000,000
shares authorized; 19,590,446 and
19,251,769 shares issued 196 193
Capital in excess of par value 73,301 78,601
Retained earnings 112,970 97,597
Treasury stock at cost, 919,627 and 8,747
shares (20,807) (243)
Net unrealized loss on available-for-sale
investments (2) (13)
Cumulative translation adjustment (786) -
-------- --------
164,872 176,135
-------- --------
$626,525 $450,117
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
THERMOTREX CORPORATION
Consolidated Statement of Operations
(Unaudited)
Three Months Ended
-------------------
July 4, June 28,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues $ 88,889 $ 72,931
-------- --------
Costs and Operating Expenses:
Cost of revenues 54,099 46,237
Selling, general, and administrative expenses 22,882 18,651
Research and development expenses 9,864 8,350
Restructuring costs (Note 7) 1,917 -
-------- --------
88,762 73,238
-------- --------
Operating Income (Loss) 127 (307)
Interest Income 3,297 860
Interest Expense (includes $228 and $11 to
related party) (2,423) (11)
Equity in Losses of Joint Ventures (85) (350)
-------- --------
Income Before Provision for Income Taxes and
Minority Interest 916 192
Provision for Income Taxes 4,035 376
Minority Interest Expense (Income) 1,724 (469)
-------- --------
Net Income (Loss) $ (4,843) $ 285
======== ========
Earnings (Loss) per Share (Note 5):
Basic $ (.26) $ .01
======== ========
Diluted $ (.26) $ .01
======== ========
Weighted Average Shares (Note 5):
Basic 18,608 19,222
======== ========
Diluted 18,608 19,549
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
THERMOTREX CORPORATION
Consolidated Statement of Operations
(Unaudited)
Nine Months Ended
---------------------
July 4, June 28,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues $257,007 $205,835
-------- --------
Costs and Operating Expenses:
Cost of revenues 158,871 133,068
Selling, general, and administrative expenses 64,043 50,459
Research and development expenses 28,770 23,544
Restructuring costs (Note 7) 1,917 -
-------- --------
253,601 207,071
-------- --------
Operating Income (Loss) 3,406 (1,236)
Interest Income 10,222 3,323
Interest Expense (includes $785 and $70 to
related party) (7,178) (70)
Gain on Issuance of Stock by Subsidiary (Note 4) 23,798 1,997
Equity in Losses of Joint Ventures (905) (350)
-------- --------
Income Before Provision for Income Taxes and
Minority Interest 29,343 3,664
Provision for Income Taxes 10,057 1,603
Minority Interest Expense (Income) 3,913 (1,175)
-------- --------
Net Income $ 15,373 $ 3,236
======== ========
Earnings per Share (Note 5):
Basic $ .82 $ .17
======== ========
Diluted $ .73 $ .16
======== ========
Weighted Average Shares (Note 5):
Basic 18,717 19,202
======== ========
Diluted 23,039 19,606
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
THERMOTREX CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
--------------------
July 4, June 28,
(In thousands) 1998 1997
- --------------------------------------------------------------------------
Operating Activities:
Net income $ 15,373 $ 3,236
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 10,901 6,448
Provision for losses on accounts receivable 818 266
Gain on issuance of stock by subsidiary
(Note 4) (23,798) (1,997)
Minority interest expense (income) 3,913 (1,175)
Increase in long-term prepaid income taxes (1,085) (4,725)
Restructuring costs (Note 7) 1,917 -
Other 375 1,111
Changes in current accounts, excluding the
effects of acquisitions:
Accounts receivable (17,729) (11,712)
Inventories and unbilled contract costs
and fees (7,881) (14,487)
Other current assets 171 (864)
Accounts payable (7,355) 683
Other current liabilities (5,389) 6,126
-------- --------
Net cash used in operating activities (29,769) (17,090)
-------- --------
Investing Activities:
Acquisitions, net of cash acquired (Note 6) (44,461) -
Purchases of available-for-sale investments (4,000) -
Proceeds from sale and maturities of available-
for-sale investments 8,400 44,000
Purchases of property, plant, and equipment (7,532) (23,851)
Advances pursuant to notes receivable from related
parties (Note 2) (1,667) -
Investment in other assets (1,072) (1,144)
Other - 774
-------- --------
Net cash provided by (used in) investing
activities $(50,332) $ 19,779
-------- --------
6
<PAGE>
THERMOTREX CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
--------------------
July 4, June 28,
(In thousands) 1998 1997
- --------------------------------------------------------------------------
Financing Activities:
Net proceeds from issuance of Company and
subsidiary common stock and sale of subsidiary
put options (Note 4) $ 70,579 $ 5,502
Net proceeds from subsidiary stock exchange offer - 522
Purchases of Company and subsidiary common stock (38,810) (11,268)
Net proceeds from issuance of subordinated
convertible debentures (Note 3) 121,814 -
Repayment of note payable to parent company (11,000) (2,000)
Payment of withholding taxes related to stock
option exercises (3,058) (1,118)
-------- ---------
Net cash provided by (used in) financing
activities 139,525 (8,362)
-------- --------
Exchange Rate Effect on Cash (491) -
-------- --------
Increase (Decrease) in Cash and Cash Equivalents $ 58,933 $ (5,673)
Cash and Cash Equivalents at Beginning of Period 135,720 43,940
-------- --------
Cash and Cash Equivalents at End of Period $194,653 $ 38,267
======== ========
Noncash Activities:
Fair value of assets of acquired companies $ 98,908 $ -
Cash paid for acquired companies (47,216) -
Issuance of subsidiaries' common stock for
acquired companies (11,175) -
-------- --------
Liabilities assumed of acquired companies $ 40,517 $ -
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
THERMOTREX CORPORATION
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by ThermoTrex Corporation (the Company) without audit and, in the opinion of
management, reflect all adjustments of a normal recurring nature necessary for a
fair statement of the financial position at July 4, 1998, the results of
operations for the three- and nine-month periods ended July 4, 1998, and June
28, 1997, and the cash flows for the nine-month periods ended July 4, 1998, and
June 28, 1997. The Company's results of operations for the nine-month periods
ended July 4, 1998, and June 28, 1997, include 40 weeks and 39 weeks,
respectively. Interim results are not necessarily indicative of results for a
full year.
The consolidated balance sheet presented as of September 27, 1997, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended September 27,
1997, filed with the Securities and Exchange Commission.
2. Related-party Note Receivable
In October 1997, the Company's ThermoLase Corporation subsidiary advanced
$1.7 million to ThermoLase U.K. Limited pursuant to a note receivable, due
December 31, 2003, and bearing interest at 8.0%, payable annually. ThermoLase
U.K. Limited, a subsidiary of a joint venture that is 50%-owned by ThermoLase,
is marketing ThermoLase's SoftLight(R) system in England.
3. Subordinated Convertible Debentures
In November 1997, the Company issued and sold at par value $124.5 million
principal amount of 3 1/4% subordinated convertible debentures due 2007,
including $10.0 million principal amount of such debentures sold to Thermo
Electron Corporation, for net proceeds of $121.8 million. The debentures are
convertible into shares of the Company's common stock at a conversion price of
$27.00 per share and are guaranteed on a subordinated basis by Thermo Electron.
4. Issuance of Stock by Subsidiary
In February 1998, the Company's Trex Medical Corporation subsidiary sold
5,175,000 shares of its common stock at $13.75 per share for net proceeds of
$66.9 million, resulting in a gain of $23.8 million. After the transaction, the
Company owned 67% of the outstanding common stock of Trex Medical.
8
<PAGE>
5. Earnings per Share
During the first quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share." As a result, all
previously reported earnings per share have been restated; however, basic and
diluted earnings per share equals the Company's previously reported earnings per
share for the fiscal 1997 periods presented. Basic earnings per share have been
computed by dividing net income by the weighted average number of shares
outstanding during the period. Except where the result would be antidilutive,
diluted earnings per share have been computed assuming conversion of the
Company's subordinated convertible debentures and the elimination of the related
interest expense, and the exercise of stock options, and their related income
tax effect. Basic and diluted earnings per share were calculated as follows:
Three Months Ended Nine Months Ended
-------------------- --------------------
(In thousands except July 4, June 28, July 4, June 28,
per share amounts) 1998 1997 1998 1997
- -------------------------------------------------------------------------
Basic
Net income (loss) $(4,843) $ 285 $15,373 $ 3,236
------- ------- ------- -------
Weighted average shares 18,608 19,222 18,717 19,202
------- ------- ------- -------
Basic earnings (loss) per
share $ (.26) $ .01 $ .82 $ .17
======= ======= ======= =======
Diluted
Net income (loss) $(4,843) $ 285 $15,373 $ 3,236
Effect of:
Convertible debentures - - 1,634 -
Majority-owned
subsidiaries' dilutive
securities (34) (11) (82) (53)
------- ------- ------- -------
Income (loss) available to
common shareholders, as
adjusted $(4,877) $ 274 $16,925 $ 3,183
------- ------- ------- -------
Weighted average shares 18,608 19,222 18,717 19,202
Effect of:
Convertible debentures - - 4,138 -
Stock options - 327 184 404
------- ------- ------- -------
Weighted average shares,
as adjusted 18,608 19,549 23,039 19,606
------- ------- ------- -------
Diluted earnings (loss)
per share $ (.26) $ .01 $ .73 $ .16
======= ======= ======= =======
9
<PAGE>
THERMOTREX CORPORATION
5. Earnings per Share (continued)
The computation of diluted earnings per share for the three-month period
ended July 4, 1998, excludes the effect of assuming the conversion of the
Company's subordinated convertible debentures and the exercise of stock options,
because the effect would be antidilutive.
6. Acquisitions
In June 1998, a wholly owned subsidiary of ThermoLase merged with The
Greenhouse Spa, Inc., exchanging 1,000,000 shares of ThermoLase common stock,
valued at $8.0 million at the time of the transaction, and the repayment of $4.2
million of debt for all of the outstanding stock of The Greenhouse Spa. The
Greenhouse Spa operates a luxury spa in Arlington, Texas. The purchase price is
subject to a post-closing adjustment, although no information has been gathered
to date that would cause the Company to believe that such post-closing
adjustment will be material.
In May 1998, the Company's Trex Communications subsidiary acquired
Electro-Magnetic Processes, Inc. (EMP), which designs, develops, and
manufactures ground-based satellite communication systems and develops and
integrates telemetry systems used on military aircraft, for 800,000 shares of
Trex Communications common stock, valued at $3.2 million at the time of the
transaction, $2.5 million in cash, and the repayment of $0.7 million of debt.
The purchase price is subject to a post-closing adjustment, however the Company
has gathered no information to date that would cause the Company to believe that
such post-closing adjustment will be material.
In April 1998, Trex Medical acquired the outstanding stock of Trophy
Radiologie, a French manufacturer of dental and medical X-ray systems
specializing in digital dental technology. The purchase price consisted of $24.0
million in cash, the repayment of $8.7 million of net debt, and additional
consideration, not to exceed approximately $8.0 million, if Trophy achieves
certain future earnings targets.
In October 1997, Trex Medical's XRE subsidiary acquired substantially all of
the assets, subject to certain liabilities, of Digitec Corporation, a North
Carolina-based manufacturer of physiological-monitoring equipment and
digital-image archiving and networking systems used in cardiac catheterization
procedures, for $7.2 million in cash, subject to a post-closing adjustment. To
date, no information has been gathered that would cause the Company to believe
that such post-closing adjustment will be material.
These acquisitions have been accounted for using the purchase method of
accounting, and the results of operations have been included in the accompanying
financial statements from the date of acquisition. The cost of these
acquisitions exceeded the estimated fair value of the acquired net assets by
$53.3 million, which is being amortized over periods ranging from 15 to 40
years. Allocation of the purchase price for each acquisition was based on an
estimate of the fair value of the net assets acquired and is subject to
adjustment upon finalization of the purchase price allocation. The Company has
gathered no information that indicates any such final allocation will differ
materially from the preliminary estimates. Pro forma data is not presented as
these acquisitions were not material to the Company's results of operations.
10
<PAGE>
7. Restructuring Costs
During the third quarter of fiscal 1998, ThermoLase recorded restructuring
costs of $1.9 million related to certain actions including the relocation of its
corporate office to its Creative Beauty Innovations, Inc. (CBI) subsidiary in
Carrollton, Texas. The charge consisted primarily of severance for 40 terminated
employees and the write-off of fixed assets no longer of use. Other accrued
expenses in the accompanying fiscal 1998 balance sheet include $0.7 million
associated with these actions.
Item 2 - 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 under the heading "Forward-looking
Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 27, 1997, filed with the Securities and Exchange
Commission.
Overview
The Company operates in three business segments: Medical Products
manufactured by the Company's Trex Medical Corporation subsidiary, Personal-care
Products and Services offered by the Company's ThermoLase Corporation
subsidiary, and Advanced Technology Research, including the laser communications
research performed by the Company's Trex Communications Corporation subsidiary.
Trex Medical designs, manufactures, and markets mammography equipment and
minimally invasive digital breast-biopsy systems, general-purpose X-ray
equipment, and specialized X-ray equipment, including imaging systems used
during diagnostic and interventional vascular and cardiac procedures such as
balloon angioplasty. Trex Medical sells its systems worldwide principally
through a network of independent dealers and, to a lesser extent, through direct
salespeople and specialists. In addition, Trex Medical acts as an original
equipment manufacturer (OEM) for other medical equipment companies. Until April
1998, Trex Medical had four operating units: Lorad, a manufacturer of
mammography and digital breast-biopsy systems; Bennett X-Ray Corporation
(Bennett), a manufacturer of general-purpose X-ray and mammography equipment;
XRE Corporation (XRE), a manufacturer of X-ray imaging systems used in the
diagnosis and treatment of coronary artery disease and other vascular
conditions; and Continental X-Ray Corporation (Continental), a manufacturer of
general-purpose and
11
<PAGE>
Overview (continued)
specialized X-ray systems. In April 1998, Trex Medical acquired the outstanding
stock of Trophy Radiologie, a French manufacturer of dental and medical X-ray
systems specializing in digital dental technology.
ThermoLase has developed a laser-based system called SoftLight(R) for the
removal of unwanted hair. The SoftLight system uses a low-energy, dermatology
laser in combination with a lotion that absorbs the laser's energy to disable
hair follicles. In April 1995, the Company received clearance from the U.S. Food
and Drug Administration (FDA) to commercially market hair-removal services using
the SoftLight system. ThermoLase began earning revenue from the SoftLight system
in the first quarter of fiscal 1996 as a result of opening its first commercial
location (Spa Thira) in November 1995. ThermoLase opened a total of four spas
during fiscal 1996, opened nine additional spas during fiscal 1997, and opened
its fourteenth spa in October 1997. Rather than continuing to open additional
Spa Thira locations, ThermoLase presently intends to concentrate its resources
on attempting both to increase the capacity utilization of its existing spas and
to expand its physicians' licensing program and international licensing
arrangements, discussed below. In connection with its acquisition of The
Greenhouse Spa in June 1998 (Note 6), ThermoLase is modifying its Dallas Spa
Thira to become the first Greenhouse Day Spa, and is evaluating which of its
other locations will be converted into Greenhouse Day Spas. As part of this
evaluation, ThermoLase is considering whether any of its Spa Thira locations
should be closed or sold. The Company's future results of operations would be
affected by any restructuring costs which might result from such actions.
In June 1996, ThermoLase commenced a program to license to physicians and
others the right to perform the Company's patented SoftLight hair-removal
procedure. In this program, ThermoLase licenses its technology and receives a
one-time fee and a per-procedure royalty that varies depending on the anatomical
site treated and pricing plan selected by the client. ThermoLase also provides
the licensees with the lasers and lotion that are necessary to perform the
service.
ThermoLase has experienced a decrease in revenues from its hair-removal
services, as discussed in the results of operations below. In response to this
trend, in April 1998 ThermoLase significantly reduced the prices in its Spa
Thira locations for its single- and multiple- treatment plans and similarly
changed the pricing terms of its physicians' licensing program to reduce the
per-procedure royalty paid by the physician-licensees, in an attempt to
establish an optimum price point that will result in increased demand and higher
revenues. In April 1998, as part of its effort to improve profitability,
ThermoLase began to amend the existing agreements with its physician-licensees
to include certain monthly minimum royalties, and intends to require such
minimums with its new physician-licensees. As a result of these changes and
other factors, including the addition of new physician-licensees in fiscal 1998,
there has been a net reduction of 11% in the number of physician-licensees,
compared to the number under agreement at the end of fiscal 1997, and two
contracts with other licensees that accounted for
12
<PAGE>
Overview (continued)
approximately 4% of total hair-removal revenues in fiscal 1997 have been
terminated. As of July 24, 1998, approximately 30% of the physician-licensees
are within a pre-existing contractual time period that allows such licensees to
continue using the SoftLight system without any minimum royalties. This time
period ends in the fourth quarter of fiscal 1998, at which time some of these
licensees may decline to accept the new terms, which may result in the
termination or restructuring of the applicable licenses by ThermoLase. There can
be no assurance that the strategies described above will be successful in
improving ThermoLase's results of operations.
ThermoLase is marketing the SoftLight system internationally through joint
ventures and other licensing arrangements. In January 1996, ThermoLase
established a joint venture in Japan. During fiscal 1997, ThermoLase established
joint ventures in France in November 1996 and England in September 1997, and six
additional licensing arrangements: in Saudi Arabia in November 1996; in Tunisia
and Belgium in December 1996; in the United Arab Emirates and Oman in March
1997; in Switzerland in April 1997; in Brazil in June 1997; and in the United
Kingdom (excluding England) and the Republic of Ireland in September 1997. In
December 1997, the Company established a joint venture to market the SoftLight
system in Australia, Cyprus, Germany, Greece, New Zealand, South Africa, and
Spain. ThermoLase's international arrangements resulted in the opening of spas
in Paris in May 1997 and in Lugano, Switzerland, in October 1997.
In May 1998, ThermoLase received clearance from the FDA to market cosmetic
skin-resurfacing services using the same laser as ThermoLase's hair-removal
system. In this process, the laser's energy reacts with an activating lotion,
creating heat and mechanical energy that remove the tough outer layer of dead
skin. The treatment, known as the SoftLight Laser Peel, is being offered at all
of ThermoLase's Spa Thira locations, as well as through physician-licensees.
ThermoLase also manufactures and markets skin-care, bath, and body products
through its Creative Beauty Innovations, Inc. (CBI) subsidiary, which also
manufactures the lotion used in the SoftLight hair-removal process.
The Company's Advanced Technology Research segment performs research
primarily in the fields of communications, avionics, X-ray detection, signal
processing, and lasers. The Company has developed its expertise in these core
technologies in connection with government-sponsored research and development.
The Advanced Technology Research segment includes the Company's Trex
Communications subsidiary, which is developing a laser communications (lasercom)
technology, designed to move very large amounts of data quickly via lasers
without the need for wires or licensing from the Federal Communications
Commission. In addition, Trex Communications' Computer Communications
Specialists, Inc. (CCS) subsidiary designs and markets interactive information
and voice-response systems, as well as call-automation systems, and its
Electro-Magnetic Processes, Inc. (EMP) subsidiary, acquired in May 1998,
designs, develops, and manufactures ground-based satellite communications
systems and telemetry systems.
13
<PAGE>
Overview (continued)
The Company conducts all of its manufacturing operations, other than those
of Trex Medical's Trophy subsidiary, in the United States and distributes its
products, services, and technologies worldwide. The Company anticipates that an
increasing portion of its revenues will be from sales to customers outside the
United States. Although the Company seeks to charge its customers in the same
currency as its operating costs, the Company's financial performance and
competitive position can be affected by currency exchange rate fluctuations
affecting the relationship between the U.S. dollar and foreign currencies. The
Company may use forward contracts to reduce its exposure to currency
fluctuations.
Results of Operations
Third Quarter Fiscal 1998 Compared With Third Quarter Fiscal 1997
Total revenues increased 22% to $88.9 million in the third quarter of
fiscal 1998 from $72.9 million in the third quarter of fiscal 1997. Medical
Products segment revenues, excluding intersegment sales, increased 28% to $71.2
million in fiscal 1998 from $55.5 million in fiscal 1997. Revenues increased
$10.1 million as a result of the acquisition of Trophy Radiologie in April 1998.
Excluding the impact of revenues from acquisitions, Medical Products segment
revenues increased 10% in fiscal 1998. Revenues increased due to higher demand
for digital radiographic/ fluoroscopic systems manufactured by Continental,
mammography systems and mammography system upgrade components manufactured by
Lorad, and cardiac catheterization laboratories at XRE. These increases were
offset in part by decreased revenues at Bennett as a result of lower demand for
its general-purpose X-ray systems by international customers.
Personal-care Products and Services segment revenues decreased to $8.9
million in the third quarter of fiscal 1998 from $12.9 million in the third
quarter of fiscal 1997. ThermoLase earned revenues from hair-removal services
and related activities of $3.7 million in fiscal 1998, compared with $7.0
million in fiscal 1997. The decrease in revenues resulted in part from reduced
demand and price reductions at ThermoLase's Spa Thira locations in fiscal 1998
compared with fiscal 1997, offset in part by an increase in the number of U.S.
spas to 14, compared with 12 spas open during fiscal 1997. Revenues from
ThermoLase's physicians' licensing program decreased in fiscal 1998 compared
with fiscal 1997, due to a reduction in per-procedure royalties partially as a
result of a reduction in royalty rates and the termination of a significant
licensing contract, described in the overview above, as well as a decrease in
one-time fees due to a decline in the number of new physician-licensees.
Revenues in fiscal 1998 also decreased as a result of the inclusion in fiscal
1997 of $1.1 million of minimum guaranteed payments recorded upon granting
technology rights under ThermoLase's international licensing arrangements. The
amount of minimum guaranteed payments recorded by ThermoLase vary depending on
its ability to enter into additional international licensing arrangements, the
availability of additional
14
<PAGE>
Third Quarter Fiscal 1998 Compared With Third Quarter Fiscal 1997
(continued)
territories, and the terms of any such arrangements. Revenues from hair-removal
services and related activities increased $0.2 million due to the acquisition of
The Greenhouse Spa in June 1998. Revenues at CBI decreased to $5.2 million in
fiscal 1998 from $5.9 million in fiscal 1997, primarily due to a shift by
certain of its retail customers away from health- and beauty-aid sales.
Advanced Technology Research segment revenues, excluding intersegment sales,
increased to $8.8 million in the third quarter of fiscal 1998 from $4.5 million
in the third quarter of fiscal 1997. Revenues increased $3.8 million due to the
inclusion of product revenues from CCS, acquired in July 1997, and EMP, acquired
in May 1998.
The gross profit margin was 39% in the third quarter of fiscal 1998,
compared with 37% in the third quarter of fiscal 1997. The Medical Products
segment gross profit margin, excluding intersegment sales, increased to 43% in
fiscal 1998 from 40% in fiscal 1997, primarily due to increased sales of
higher-margin products at a majority of Trex Medical's operating units. To a
lesser extent, the gross profit margin at Trex Medical increased due to margin
improvements resulting from manufacturing efficiencies, primarily at Continental
and Bennett. The Company's total gross profit margin also increased due to the
inclusion of higher-margin revenues at CCS. The Personal-care Products and
Services segment gross profit margin, excluding intersegment eliminations, was
5% in fiscal 1998, compared with 25% in fiscal 1997. ThermoLase's hair-removal
business reported gross profit of negative $1.2 million in fiscal 1998, compared
with gross profit of $1.4 million in fiscal 1997. Each period was impacted by
the operations of the Spa Thira business, which has been operating below maximum
capacity as ThermoLase seeks to develop its client base, expand its product
lines, and refine its process and operating procedures, offset in part by the
effect of physicians' licensing fees and, in fiscal 1997, minimum guaranteed
payments relating to international licensing arrangements, which have a
relatively high gross profit margin. In addition, fiscal 1997 was negatively
impacted by pre-opening costs incurred in connection with new spa openings.
Gross profit decreased in fiscal 1998 primarily due to the decrease in revenues,
as well as increased fixed costs associated with operating more spas in fiscal
1998. During the remainder of fiscal 1998, the effect of operating each spa
below maximum capacity, as ThermoLase seeks to develop its client base and
expand its product lines, will continue to have a negative impact on its gross
profit margin. ThermoLase believes that improvements in the efficacy and
duration of the SoftLight process, and increasing spa utilization by broadening
the array of spa-related services and products offered, including the conversion
of certain Spa Thiras into Greenhouse Day Spas, are critical elements in its
ability to improve the profitability of its spas. The degree to which
ThermoLase's recent changes in pricing structure are successful will also affect
its gross profit margin. The gross profit margin at CBI was 31% in both periods.
15
<PAGE>
Third Quarter Fiscal 1998 Compared With Third Quarter Fiscal 1997
(continued)
Selling, general, and administrative expenses as a percentage of revenues
was 26% in both periods. The favorable impact of the increase in the relative
size of the Medical Products segment, which has lower expenses as a percentage
of revenues, was offset by the effect of the acquisition of CCS, which has
higher costs as a percentage of revenues. Within the Medical Products segment,
the impact of a slight decline in selling, general, and administrative expenses
as a percentage of revenues in Trex Medical's existing operations was offset by
the impact of the acquisition of Trophy, which has higher costs as a percentage
of revenues.
Research and development expenses increased to $9.9 million in the third
quarter of fiscal 1998 from $8.4 million in the third quarter of fiscal 1997,
primarily due to increased spending at Trex Medical, offset in part by a
decrease in spending at ThermoLase. Trex Medical's increase in spending reflects
the inclusion of $0.9 million of expense at Trophy, as well as Trex Medical's
continued efforts to develop and commercialize new products, including the
full-field digital mammography system and direct-detection X-ray sensor, and
enhancements of existing systems. ThermoLase's decrease in spending related
primarily to a reduction in the number of outside testing facilities and
consultants used, as well as a reduction in payroll costs (Note 7). ThermoLase
continues to seek to improve the efficacy and duration of the SoftLight process
as well as to develop its laser skin treatments and investigate other health and
beauty applications for its proprietary laser technology, in addition to the
skin resurfacing services discussed above. In addition, research and development
expenses increased due to the inclusion of $0.7 million of expense at CCS,
acquired July 1997.
During the third quarter of fiscal 1998, ThermoLase recorded restructuring
costs of $1.9 million related to certain actions including the relocation of its
corporate office to its CBI subsidiary in Carrollton, Texas (Note 7).
Interest income increased to $3.3 million in the third quarter of fiscal
1998 from $0.9 million in the third quarter of fiscal 1997, primarily due to
interest income earned on the invested proceeds from the Company's November 1997
issuance of $124.5 million principal amount of 3 1/4% subordinated convertible
debentures (Note 3), ThermoLase's August 1997 issuance of $115.0 million
principal amount of 4 3/8% subordinated convertible debentures, and Trex
Medical's February 1998 sale of 5,175,000 shares of its common stock for net
proceeds of $66.9 million (Note 4). Interest expense increased to $2.4 million
in fiscal 1998 from $11,000 in fiscal 1997, primarily due to the issuances of
subordinated convertible debentures.
Equity in losses of joint ventures in the accompanying statement of
operations represents ThermoLase's proportionate share of losses from its
international joint ventures.
16
<PAGE>
Third Quarter Fiscal 1998 Compared With Third Quarter Fiscal 1997
(continued)
Minority interest expense was $1.7 million in the third quarter of fiscal
1998, compared with minority interest income of $0.5 million in the third
quarter of fiscal 1997, primarily due to the Company's inability to record
minority interest income in ThermoLase's net loss, because the Company's
minority interest liability related to ThermoLase has been reduced to zero. In
addition, minority interest expense increased in fiscal 1998 due to an increase
in Trex Medical's net income and its higher minority ownership percentage
following its February 1998 stock offering.
The effective tax rate exceeded the statutory federal income tax rate in
both periods primarily due to the impact of state income taxes and certain
nondeductible expenses, including amortization of cost in excess of net assets
of acquired companies. In addition, the effective tax rate in fiscal 1998
reflects the establishment of a valuation allowance for the tax benefit
associated with losses arising at ThermoLase during the quarter. The Company
establishes valuation allowances in accordance with the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The
Company believes that it is more likely than not that tax benefits that arose
during the quarter will not be used by ThermoLase prior to their expiration.
In May 1998, a complaint, styled as a class action, was filed in
California Superior Court against ThermoLase alleging that certain
advertisements and representations made by ThermoLase and/or its licensees
relating to the ThermoLase SoftLight laser hair-removal process were misleading.
ThermoLase believes that its representations and advertisements relating to the
SoftLight process which may be implicated in the lawsuit are not misleading, and
intends to vigorously defend itself against this lawsuit; however, given the
inherent uncertainties of dispute resolution, no assurances can be given that an
unfavorable outcome would not have a material adverse effect on the Company's
results of operations.
The Company is currently assessing the potential impact of the year 2000 on
the processing of date-sensitive information by the Company's computerized
information systems and on products sold as well as products purchased by the
Company. The Company believes that its internal information systems and current
products are either year 2000 compliant or will be so prior to the year 2000
without incurring material costs. There can be no assurance, however, that the
Company will not experience unexpected costs and delays in achieving year 2000
compliance for its internal information systems and current products, which
could result in a material adverse effect on the Company's future results of
operations.
The Company is presently assessing the effect that the year 2000 issue may
have on its previously sold products. The Company is also assessing whether its
key suppliers are adequately addressing this issue and the effect this might
have on the Company. The Company has not completed its analysis and is unable to
conclude at this time that the year 2000 issue as it relates to its previously
sold products and products purchased from key suppliers is not reasonably likely
to have a material adverse effect on the Company's future results of operations.
17
<PAGE>
First Nine Months Fiscal 1998 Compared With First Nine Months Fiscal 1997
Total revenues increased 25% to $257.0 million in the first nine months of
1998 from $205.8 million in the first nine months of fiscal 1997. Medical
Products segment revenues, excluding intersegment sales, increased 25% to $201.0
million in fiscal 1998 from $161.2 million in fiscal 1997. Revenues increased
$11.8 million as a result of the acquisitions of Trophy in April 1998 and
Digitec in October 1997. Excluding the impact of revenues from acquisitions,
Medical Products segment revenues increased 17% in fiscal 1998, primarily due to
increases at XRE and Lorad, due to the reasons discussed in the results of
operations for the third quarter.
Personal-care Products and Services segment revenues decreased to $30.5
million in the first nine months of fiscal 1998 from $33.2 million in the first
nine months of fiscal 1997. ThermoLase earned revenues from hair-removal
services and related activities of $13.6 million in fiscal 1998, compared with
$14.7 million in fiscal 1997. The decrease in revenues resulted in part from a
decrease in Spa Thira revenues due to the reasons described in the results of
operations for the third quarter. In addition, revenues from the physicians'
licensing program decreased as a result of a reduction in one-time fees, due to
a decline in the number of new physician-licensees, and a reduction in
per-procedure royalties, due to the termination of a significant licensing
contract, described in the overview above. Revenues from hair-removal services
and related activities included $2.8 million in fiscal 1998 and $2.7 million in
fiscal 1997 for minimum guaranteed payments recorded upon granting technology
rights under ThermoLase's international licensing arrangements. Revenues from
hair-removal services and related activities increased $0.2 million due to the
acquisition of The Greenhouse Spa in June 1998. Revenues at CBI decreased to
$16.9 million in fiscal 1998 from $18.5 million in fiscal 1997, due to the
reasons described in the results of operations for the third quarter.
Advanced Technology Research segment revenues, excluding intersegment sales,
increased to $25.5 million in the first nine months of fiscal 1998 from $11.4
million in the first nine months of fiscal 1997. Revenues increased $11.0
million due to the inclusion of product revenues from CCS, acquired in July
1997, and EMP, acquired in May 1998. In addition, revenues increased due to
expanded efforts on certain research and development contracts.
The gross profit margin was 38% in the first nine months of fiscal 1998,
compared with 35% in the first nine months of fiscal 1997. The Medical Products
segment gross profit margin, excluding intersegment sales, increased to 42% in
fiscal 1998 from 39% in fiscal 1997, primarily due to the reasons discussed in
the results of operations for the third quarter. The Company's total gross
profit margin also increased due to the inclusion of higher-margin revenues at
CCS. The Personal-care Products and Services segment gross profit margin,
excluding intersegment eliminations, was 10% in fiscal 1998, compared with 22%
in fiscal 1997. ThermoLase's hair-removal business reported gross profit of
negative $2.2 million in fiscal 1998, compared with gross profit of $1.2 million
in fiscal 1997. Each period was impacted by the factors discussed in the
18
<PAGE>
First Nine Months Fiscal 1998 Compared With First Nine Months Fiscal 1997
(continued)
results of operations for the third quarter. Gross profit decreased in fiscal
1998 primarily due to the decrease in revenues at ThermoLase's Spa Thira
locations and in the physicians' licensing program, as well as increased fixed
costs associated with operating more spas in fiscal 1998. The gross profit
margin at CBI decreased slightly to 31% in fiscal 1998 from 32% in fiscal 1997,
primarily due to a decrease in revenues.
Selling, general, and administrative expenses as a percentage of revenues
was 25% in both periods, primarily due to the reasons discussed in the results
of operations for the third quarter.
Research and development expenses increased to $28.8 million in 1998 from
$23.5 million in 1997, primarily due to the reasons described in the results of
operations for the third quarter, including the impact of $2.8 million of
expense due to the acquisitions of CCS and Trophy.
During the third quarter of fiscal 1998, ThermoLase recorded restructuring
costs of $1.9 million, as discussed in the results of operations for the third
quarter (Note 7).
Interest income increased to $10.2 million in the first nine months of 1998
from $3.3 million in the first nine months of 1997, primarily due to interest
income earned on the invested proceeds from the Company's November 1997 issuance
of $124.5 million principal amount of 3 1/4% subordinated convertible debentures
(Note 3) and ThermoLase's August 1997 issuance of $115.0 million principal
amount of 4 3/8% subordinated convertible debentures. Interest expense increased
to $7.2 million in 1998 from $0.1 million in 1997, primarily due to the
issuances of subordinated convertible debentures.
The Company has adopted a strategy of spinning out certain of its
businesses into separate subsidiaries and having these subsidiaries sell
minority interest to outside investors. The Company believes that this strategy
provides additional motivation and incentives for the management of the
subsidiaries through the establishment of subsidiary-level stock option
incentive programs, as well as capital to support the subsidiaries' growth. As a
result of the sale of stock by Trex Medical, the Company recorded a gain on
issuance of stock by subsidiary of $23.8 million in the first nine months of
fiscal 1998 (Note 4). 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 would be significant changes in the way the Company records
certain transactions of its controlled subsidiaries. Among those changes, any
sale of the stock of a subsidiary that does not result in a loss of control
would be accounted for as a transaction in the equity of the consolidated entity
with no gain or loss being recorded. The FASB
19
<PAGE>
First Nine Months Fiscal 1998 Compared With First Nine Months Fiscal 1997
(continued)
continues to deliberate on this issue and the timing and contents of any final
statement are uncertain. Accordingly, there can be no assurance that the Company
will be able to realize gains from such transactions in the future.
Equity in losses of joint ventures in the accompanying statement of
operations represents ThermoLase's proportionate share of losses from its
international joint ventures.
Minority interest expense was $3.9 million in the first nine months of
fiscal 1998, compared with minority interest income of $1.2 million in the first
nine months of fiscal 1997, primarily due to the reasons described in the
results of operations for the third quarter.
The effective tax rate differed from the statutory federal income tax rate
in the first nine months of fiscal 1998 primarily due to a nontaxable gain on
the issuance of stock by subsidiary, offset in part by the impact of state
income taxes and certain nondeductible expenses, including amortization of cost
in excess of net assets of acquired companies. In addition, the effective tax
rate for the first nine months of fiscal 1998 reflects the establishment of a
valuation allowance for the tax benefit associated with losses arising at
ThermoLase after the first quarter of fiscal 1998. The Company believes that it
is more likely than not that such tax benefits will not be used by ThermoLase
prior to their expiration.
Liquidity and Capital Resources
Consolidated working capital was $294.4 million at July 4, 1998, compared
with $202.3 million at September 27, 1997. Included in working capital are cash,
cash equivalents, and available-for-sale investments of $207.8 million at July
4, 1998, compared with $153.2 million at September 27, 1997. Of the $207.8
million balance at July 4, 1998, $115.5 million was held by the Company's
majority-owned subsidiaries, and the remainder was held by the Company and its
wholly owned subsidiary.
Net cash used in operating activities during the first nine months of fiscal
1998 was $29.8 million. An increase in accounts receivable, primarily at Trex
Medical, used $17.7 million of cash. The increase in accounts receivable at Trex
Medical was primarily due to increased sales and, to a lesser extent, slower
customer payment patterns as a result of increased export and direct sales at a
majority of its operations, extended payment terms for a significant customer,
and a shift from OEM sales to direct and dealer sales at XRE. The Company used
$7.9 million of cash during the period to fund an increase in inventories,
primarily to support an increase in sales at Trex Medical. The Company used
$12.7 million during the period to reduce accounts payable and other current
liabilities, related in part to payments made by Trex Medical for federal and
state income tax obligations.
20
<PAGE>
Liquidity and Capital Resources (continued)
Excluding available-for-sale investments activity, the Company's primary
investing activities during the first nine months of fiscal 1998 included
acquisitions and capital expenditures. The Company expended $44.5 million, net
of cash acquired, for acquisitions (Note 6) and $7.5 million for property,
plant, and equipment.
In connection with certain of ThermoLase's joint venture arrangements,
ThermoLase provided funding of $2.3 million, including a note receivable issued
for $1.7 million (Note 2), during the first nine months of fiscal 1998.
ThermoLase has agreed to provide additional funding of up to approximately $4.4
million under these joint venture arrangements.
In connection with the acquisition of The Greenhouse Spa (Note 6), in July
1998 the Company loaned $3.0 million to a corporation controlled by the
president of ThermoLase's spa division and former owner of The Greenhouse Spa.
Of the total principal amount, $1.5 million is due on July 7, 2001, and $1.5
million is due on July 7, 2002. The note bears interest, payable quarterly at
the Applicable Federal Rate, as defined in the regulations to the Internal
Revenue Code of 1986, as amended. The note is secured by 806,800 shares of
ThermoLase common stock, which had a value of $5.7 million on July 4, 1998.
Trex Communications has signed a nonbinding letter of intent to acquire a
company for approximately $18.0 million in cash and Trex Communications common
stock valued at approximately $5.0 million. The proposed acquisition is subject
to certain conditions, including completion of due diligence and negotiation of
definitive agreements, as well as approval by the Company's board of directors
and the stockholders of the potential acquiree. The final terms of this
acquisition have not been determined, and there can be no assurance that it will
be completed.
The Company's financing activities provided $139.5 million of cash during
the first nine months of fiscal 1998. In November 1997, the Company sold at par
value $124.5 million principal amount of 3 1/4% subordinated convertible
debentures due 2007 for net proceeds of $121.8 million (Note 3). The Company
used a portion of such proceeds to repay in January 1998 an $11.0 million note
payable to Thermo Electron Corporation. In February 1998, the Company's Trex
Medical subsidiary sold 5,175,000 shares of its common stock in a public
offering at $13.75 per share, for net proceeds of $66.9 million.
In November 1997 and August 1998, the Company's Board of Directors
authorized the repurchase by the Company of up to $30.0 million of its
securities, through August 1999, in the open market or in negotiated
transactions. During the first nine months of fiscal 1998, the Company
repurchased 878,652 shares of its common stock for $20.0 million. In March 1998,
the Company's board of directors authorized the repurchase by the Company of up
to 2,000,000 shares of ThermoLase common stock in the open market or through
negotiated transactions. During the first nine months of fiscal 1998, the
Company purchased 2,000,000 shares of ThermoLase common stock for $10.0 million.
During the first nine months of fiscal 1998, ThermoLase repurchased 643,000
shares of its common stock for $8.8 million.
21
<PAGE>
Liquidity and Capital Resources (continued)
ThermoLase's capital expenditures during the remainder of fiscal 1998 will
primarily be affected by the number of physicians and other domestic and
international licensees engaged in its licensing programs and the extent to
which existing Spa Thira locations are converted to Greenhouse Day Spas.
Depending on the extent of renovations necessary, the cost of converting each
spa is expected to be approximately $50,000 to $150,000. In addition, ThermoLase
plans to expend approximately $1.0 million to renovate The Greenhouse Spa. In
addition to expenditures by ThermoLase, the Company plans to make capital
additions of approximately $1.8 million for its other businesses during the
remainder of fiscal 1998. The Company expects that it will finance growth at its
majority-owned and wholly owned subsidiaries through a combination of internal
funds and/or short-term borrowings from Thermo Electron, although it has no
agreement to ensure that funds will be available from Thermo Electron on
acceptable terms or at all. The Company believes its existing resources are
sufficient to meet the capital requirements of its existing operations for the
foreseeable future.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On April 7, 1998, Fischer Imaging Corporation commenced a lawsuit in the
United States District Court, District of Colorado, against Trex Medical,
alleging that its manufacture of breast-imaging equipment and breast-biopsy
systems incorporating a digital imaging system, including Lorad's prone
breast-biopsy system, infringe a Fischer patent entitled Motorized Mammographic
Biopsy Apparatus, which issued April 7, 1998. This lawsuit is the second patent
lawsuit filed by Fischer against the Company with respect to the breast-biopsy
system and requests a permanent injunction, treble damages, attorneys' fees, and
expenses. These two lawsuits have been consolidated into a single lawsuit.
Item 5 - Other Information
Pursuant to recent amendments to the rules relating to proxy statements
under the Securities Exchange Act of 1934, as amended (the Exchange Act),
shareholders of the Company are hereby notified that any shareholder proposal
not included in the Company's proxy materials for its 1999 Annual Meeting of
shareholders (the Annual Meeting) in accordance with Rule 14a-8 under the
Exchange Act will be considered untimely for the purposes of Rules 14a-4 and
14a-5 under the Exchange Act if notice thereof is received by the Company after
December 8, 1998. Management proxies will be authorized to exercise
discretionary voting authority with respect to any shareholder proposal not
included in the Company's proxy materials for the Annual Meeting unless (a) the
Company receives notice of such proposal by December 8, 1998, and (b) the
conditions set forth in Rule 14a-4(c)(2)(i)-(iii) under the Exchange Act are
met.
Item 6 - Exhibits
See Exhibit Index on the page immediately preceding exhibits.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 12th day of August 1998.
THERMOTREX CORPORATION
Paul F. Kelleher
---------------------------
Paul F. Kelleher
Chief Accounting Officer
John N. Hatsopoulos
---------------------------
John N. Hatsopoulos
Chief Financial Officer and
Senior Vice President
23
<PAGE>
THERMOTREX CORPORATION
EXHIBIT INDEX
Exhibit
Number Description of Exhibits
- -------------------------------------------------------------------------------
10.1 Promissory Note of SMK Group LLC, dated July 7, 1998, payable to
the order of the Company.
10.2 Pledge and Security Agreement, dated July 7, 1998, by and between
SMK Group LLC and the Company.
27 Financial Data Schedule.
24
NOTE
July 7, 1998
FOR VALUE RECEIVED, SMK GROUP LLC, a Delaware limited liability company
(the "Maker"), promises to pay to the order of THERMOTREX CORPORATION, a
Delaware corporation ("Payee"), at its address at 10455 Pacific Center Court,
San Diego, CA 92121-4339, or at such other place as Payee may from time to time
designate in writing, the principal sum of THREE MILLION DOLLARS ($3,000,000) or
such lesser amount as shall be shown on the records of Payee as the unpaid
principal balance of this Note, together with interest thereon at the rate set
forth hereinbelow, all on the dates set forth hereinbelow and all in lawful
money of the United States of America, and in accordance with the other terms
and conditions described below.
1. Payment.
(a) Interest. Maker promises to pay interest on the unpaid
principal balance of this Note at an annual rate equal to the Applicable Federal
Rate (as defined in regulations to the Internal Revenue Code of 1986, as
amended) on the date the principal sum due hereunder is disbursed to Maker by
Payee. Accrued interest shall be payable quarterly during the term hereof on the
first day of the months of July, October, January and April until the principal
amount of, and all accrued interest on, this Note have been paid in full.
(b) Principal. Maker promises to pay no less than one half of the
outstanding principal balance due under this Note on or before July 7, 2001,
with the remainder of the outstanding principal balance due and payable (along
with all accrued and unpaid interest due thereon) on July 7, 2002.
2. Interest Computation. Interest shall be computed on the basis of
a 360-day year for the actual number of days elapsed (365 or 366/360, as the
case may be).
3. Late Charges. Maker shall pay to Payee a late charge for any payment
of principal and/or interest received by Payee fifteen days after it is due
hereunder in an amount equal to five percent (5.0%) of any overdue amount.
4. Application of Payments. All payments shall be applied first to the
payment in full of any costs incurred in the collection of any sum due under
this Note, including (without limitation) reasonable attorneys' fees, then to
the payment in full of any late charges, then to the payment in full of accrued,
unpaid interest and finally to the reduction of the unpaid principal balance of
this Note.
5. Security. This Note is secured, and payment hereof is assured, by
that certain Pledge and Security Agreement dated of even date herewith, granted
to Payee by Maker by which Maker has pledged as security for its obligations
hereunder the Collateral secured thereby.
6. Event of Default. It shall be considered an Event of Default
hereunder upon:
(a) the occurrence of an Event of Default under the Pledge and
Security Agreement which shall continue uncured within the cure periods set
forth therein, if any, or unwaived by Payee; or
(b) the failure of Maker to pay any sums due and payable hereunder
within ten (10) days after written demand therefor by Payee.
7. Rights and Remedies.
(a) Upon the occurrence of an Event of Default hereunder, upon
fifteen days written notice to Maker, all amounts owed hereunder shall become
automatically due and payable.
(b) Payee may exercise any of its rights and remedies set forth in
the Pledge and Security Agreement, and all other documents and instruments
executed pursuant to this Note and the Pledge and Security Agreement.
(c) The remedies of Payee shall be cumulative and concurrent, and
may be pursued singly, successively, or together, at its sole discretion, and
may be exercised as often as the occasion therefor shall occur; and the failure
to exercise any such right or remedy shall in no event be construed as a waiver
or release thereof.
8. Limited Liability. The liability of Maker hereunder is limited
strictly to the Collateral pledged to Payee under the Pledge and Security
Agreement and shall not extend in any way to any other assets or property of
Maker, its members or any officers, directors, agents, or trustees thereof.
9. Waivers. Maker waives presentment for payment, demand, notice of
dishonor, protest, and notice of protest with regard to this Note, all errors,
defects and imperfections in any proceedings instituted by Payee under the terms
of this Note, or under the Pledge and Security Agreement, and all benefit that
might accrue to Maker by virtue of any present or future laws exempting any
property or any part of the proceeds arising from any sale of any such property,
from attachment, levy, or sale under execution, or providing for any stay of
execution, exemption from civil process, or extension of time for payment.
10. Construction. This Note shall be construed and enforced in
accordance with the domestic, internal law of the Commonwealth of
Massachusetts.
11. Severability. Any provision contained in this Note which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
12. Successors, Heirs and Assigns. The provisions of this Note shall
bind and inure to the benefit of Maker and Payee and their respective
successors, heirs, personal representatives and permitted assigns.
IN WITNESS WHEREOF, the Maker, intending to be legally bound hereby, has
caused this Note to be duly executed by its authorized members this 7th day of
July, 1998.
SMK GROUP LLC
By: Its Members
/s/ Lydia Katzoff
Lydia Katzoff
The Stuart Katzoff Trust
By: /s/ Gerald Katzoff
Gerald Katzoff, Trustee
EXHIBIT 10.2
PLEDGE AND SECURITY AGREEMENT
GRANTOR: SMK GROUP, LLC
7 East Skippack Pike
Ambler, PA 19002
LENDER: THERMOTREX CORPORATION
10455 Pacific Center Court
San Diego, CA 92121-4339
THIS PLEDGE AND SECURITY AGREEMENT is entered into between SMK GROUP, LLC
referred to below as "Grantor"); and THERMOTREX CORPORATION (referred to below
as "Lender").
A. GRANT OF SECURITY INTEREST. For valuable consideration, Grantor
grants to Lender a security interest in the Collateral to secure the
Indebtedness and agrees that Lender shall have the rights stated in this
Agreement with respect to the Collateral, in addition to all other rights which
Lender may have by law.
B. DEFINITIONS. The following words shall have the following
meanings when used in this Agreement:
1. Agreement. The word "Agreement" means this Pledge and Security
Agreement, as this Pledge and Security Agreement may be amended or modified from
time to time, together with all exhibits and schedules attached to this
commercial Pledge and Security Agreement from time to time.
2. Collateral. The word "Collateral" means 806,800 shares of
common stock of ThermoLase Corporation, which Grantor has delivered or agrees to
deliver (or cause to be delivered or appropriate book-entries made) immediately
to Lender.
3. Event of Default. The words "Event of Default" means and
include without limitation any of the Events of Default set forth below in
the section titled "Events of Default."
4. Grantor. The word "Grantor" means SMK GROUP LLC, a
Delaware limited liability company.
5. Income and proceeds. The words "Income and proceeds" mean all
present and future income, proceeds, earnings, increases, and substitutions from
or for the Collateral of every kind and nature, including without limitation all
payments, profits, distributions, benefits, rights, options, warrants,
dividends, stock dividends, stock splits, stock rights, regulatory dividends,
distributions, subscriptions, monies, claims for money due and to become due,
shares of stock of different par value or no par value issued in substitution or
exchange for the Collateral.
6. Indebtedness. The word "Indebtedness" means only the
indebtedness evidenced by the Note, including all principal and interest,
together with all costs and expenses for which Grantor is responsible under this
Agreement or under the Note.
7. Lender. The word "Lender" means THERMO ELECTRON
CORPORATION, a Delaware corporation.
8. Note. The word "Note" means the Note dated July 7, 1998
between Grantor and Lender.
C. GRANTOR'S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE
COLLATERAL. Grantor represents and warrants to Lender that:
1. Ownership. Grantor is the lawful owner of the Collateral
free and clear of all security interests, liens, encumbrances and claims of
others.
2. Right to Pledge. Grantor has the full right, power and
authority to enter into this Agreement and to pledge the Collateral.
3. Binding Effect. This Agreement is binding upon Grantor, as
well as Grantor's successors, representatives and assigns, and is legally
enforceable in accordance with its terms.
4. No Further Assignment. Grantor has not, and will not, sell,
assign, transfer, encumber or otherwise dispose of any of Grantor's rights in
the Collateral except as provided in this Agreement.
5. No Violation. The execution and delivery of this Agreement
will not violate any law or agreement governing Grantor or to which Grantor
is a party.
D. THE RIGHTS AND OBLIGATIONS OF LENDER AND GRANTOR WITH RESPECT TO
COLLATERAL.
1. Lender may hold the Collateral until the Indebtedness has been
paid and satisfied and thereafter shall deliver the Collateral to the Grantor.
However, during the term of this Agreement Grantor shall have the right to vote
the shares of stock held as Collateral and exercise all other rights of
ownership over the Collateral except as restricted by the terms of this
Agreement.
2. Commencing July 7, 1999, upon the request of Grantor, Lender
shall sell part or all of the Collateral in such amounts and in accordance with
Grantor's instructions, and apply the net proceeds of such sales to the amounts
due under the Note in accordance with its terms.
3. Upon Grantor's request Lender shall release to Grantor all
Collateral in excess of two hundred percent (200%) of the amount of the
Indebtedness due under the Note at the time of Grantor's request for the release
of Collateral.
4. Income and Proceeds from the Collateral. All Income and
Proceeds received, paid, or delivered in substitution or in exchange of the
Collateral shall be received by or delivered to Lender as Collateral hereunder
unless cash is so received, paid or delivered in substitution or exchange of the
Collateral, then it shall be applied to the outstanding amounts due under the
Note, in accordance with its terms. All Income and Proceeds from the Collateral
which may be received by, paid, or delivered as an addition to the Collateral
(such as dividends) shall be paid to, received by or delivered to Grantor.
5. Perfection of Security Interest. Upon request of Lender,
Grantor will deliver to Lender any and all of the documents evidencing or
constituting the Collateral. When applicable law provides more than one method
of perfection of Lender's security interest, Lender may choose the method(s) to
be used. Upon request of Lender, Grantor will sign and deliver any writings
necessary to perfect Lender's security interest. If the Collateral consists of
securities for which no certificate has been issued, Grantor agrees, at Lender's
option, either to request issuance of an appropriate certificate or to execute
appropriate instructions on Lender's forms instructing the issuer, to record on
its books or records, by book-entry or otherwise, Lender's security interest in
the Collateral. Grantor hereby appoints Lender as Grantor's irrevocable
attorney-in-fact for the purpose of executing any documents necessary to perfect
or to continue the security interest granted in this Agreement.
E. EXPENDITURES BY LENDER. If not discharged or paid when due, Lender
may (but shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement or the Note, including
without limitation all taxes, liens, security interests, encumbrances, and other
claims, at any time levied or placed on the Collateral. All such expenditures
incurred or paid by Lender for such purposes will then bear interest at the rate
charged under the Note from the date incurred or paid by Lender to the date of
repayment by Grantor. All such expenses shall become a part of the Indebtedness
and, at Lender's option, will be added to the balance of the Note due and
payable at the Note's maturity. This Agreement also will secure payment of these
amounts. Such right shall be in addition to all other rights and remedies to
which Lender may be entitled upon the occurrence of an Event of Default.
F. LIMITATIONS ON OBLIGATIONS OF LENDER. Lender shall use ordinary
reasonable care in the physical preservation and custody of the Collateral in
Lender's possession, but shall have no other obligation to protect the
collateral or its value and Lender shall have no liability for depreciation or
deterioration of the Collateral.
G. EVENTS OF DEFAULT. Each of the following shall constitute an
Event of Default under this Agreement:
1. Default under the Note. The occurrence of an Event of Default
under the Note, in accordance with its terms.
2. Other Defaults. Failure of Grantor to comply with or to
perform any other term, obligation, covenant or condition contained in this
Agreement after receipt of a notice of its failure to comply and a reasonable
opportunity to cure such failure.
3. Insolvency. The dissolution or termination of Grantor's
existence, the insolvency of Grantor, the appointment of a receiver for any part
of Grantor's property, any assignment for the benefit of creditors, any type of
creditor workout, or the commencement of any proceeding under any bankruptcy or
insolvency laws by or against Grantor.
4. Creditor or Forfeiture Proceedings. Commencement of
foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral securing the
Indebtedness. This includes a garnishment of any of Grantor's deposit account
with Lender.
H. RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under
this Agreement, at any time thereafter, Lender may exercise any one or more of
the following rights and remedies:
1. Collect the Collateral. Collect and retain possession of
the Collateral.
2. Sell the Collateral. Sell the Collateral, at Lender's
discretion, as a unit or in parcels, at one or more public or private sales.
Lender shall give or mail to Grantor, notice at least ten (10) days in advance
of the time and place of any public sale, or of the date after which any private
sale may be made. Grantor agrees that any requirement of reasonable notice is
satisfied if Lender mails notice by ordinary mail addressed to Grantor, or any
of them, at the last address Grantor has given Lender in writing.
3. Register Securities. Register any securities included in
the Collateral in Lender's name and exercise any rights normally incident to
the ownership of securities.
4. Sell Securities. Sell any securities included in the
Collateral in a manner consistent with applicable federal and state securities
laws, notwithstanding any other provision of this or any other agreement. If,
because of restrictions under such laws, Lender is or believes it is unable to
sell the securities in an open market transaction, Grantor agrees that Lender
shall have no obligation to delay sale until the securities can be registered,
and may make a private sale to one or more persons or to a restricted group of
persons, even though such sale may result in a price that is less favorable than
might be obtained in an open market transaction, and such a sale shall be
considered commercially reasonable.
5. Other Rights and Remedies. Have and exercise any or all of the
rights and remedies of a secured creditor under the provisions of the Uniform
Commercial Code, at law, in equity, or otherwise.
6. Application of Proceeds. Apply any cash which is received from
the collection or sale of the Collateral, to reimbursement of any expenses,
including any costs for registration of securities, commissions incurred in
connection with a sale, reasonable attorney fees, and court costs, whether or
not there is a lawsuit and including any fees on appeal, incurred by Lender in
connection with the collection and sale of such Collateral and to the payment of
the Indebtedness of Grantor to Lender, with any excess funds to be paid to
Grantor as the interest of Grantor may appear.
7. Cumulative Remedies. All of Lender's rights and remedies,
whether evidenced by this Agreement or by any other writing, shall be cumulative
and may be exercised singularly or concurrently. Election by Lender to pursue
any remedy shall not exclude pursuit of any other remedy, and an election to
make expenditures or to take action to perform an obligation of Grantor under
this Agreement, after Grantor's failure to perform, shall not affect Lender's
right to declare a default and to exercise its remedies.
8. Limitation of Liability. Grantor's liability hereunder and
under the Note is strictly limited to the Collateral pledged hereunder and shall
not extend in any way to any other assets or property of the Maker, its members
or any officers, directors, agents or trustee thereof.
I. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions
are a part of this Agreement:
1. Amendments. This Agreement, together with the Note,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the party or
parties sought to be charged or bound by the alteration or amendment.
2. Applicable Law. If there is a lawsuit, Grantor agrees upon
Lender's request to submit to the jurisdiction of the courts of the Commonwealth
of Massachusetts. Lender and Grantor hereby waive the right to any jury trial in
any action, proceeding, or counterclaim brought by either Lender or Grantor
against the other. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts.
3. Caption Headings. Caption headings in this Agreement are
for convenience purposes only and are not to be used to interpret or define
the provisions of this Agreement.
4. Notices. All notices required to be given under this Agreement
shall be given in writing, may be sent by facsimile (unless otherwise required
by law), and shall be effective when actually delivered or when deposited with a
nationally recognized overnight courier or deposited in the United States mail,
first class, postage prepaid, addressed to the party to whom the notice is to be
given at the address shown above. Any party may change its address for notices
under this Agreement by giving formal written notice to the other parties,
specifying that the purpose of the notice is to change the party's address. To
the extent permitted by applicable law, if there is more than one Grantor,
notice to any Grantor will constitute notice to all Grantors. For notice
purposes, Grantor will keep Lender informed at all times of Grantor's current
address(es).
5. Severability. If a court of competent jurisdiction finds any
provision of this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any such
offending provision shall be deemed to be modified to be within the limits of
enforceability or validity; however, if the offending provision cannot be so
modified, it shall be stricken and all other provisions of this Agreement in all
other respects shall remain valid and enforceable.
6. Successor Interests. The terms of this Agreement shall be
binding upon Grantor, and upon Grantor's personal representatives, successors,
and assigns, and shall be enforceable by Lender and its successors and assigns.
7. Waiver. Lender shall not be deemed to have waived any rights
under this Agreement unless such waiver is given in writing and signed by
Lender. No delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of a
provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or any
other provision of this Agreement. No prior waiver by Lender, nor any course of
dealing between Lender and Grantor, shall constitute a waiver of any of Lender's
rights or of any of Grantor's obligations as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the granting of
such consent by Lender in any instance shall not constitute continuing consent
to subsequent instances where such consent is required and in all cases such
consent may be granted or withheld in the sole discretion of Lender.
J. GRANTOR AND LENDER ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF
THIS PLEDGE AND SECURITY AGREEMENT, AND EACH AGREES TO ITS TERMS. THIS
AGREEMENT IS DATED JULY 7, 1998. .
THIS AGREEMENT HAS BEEN SIGNED AND SEALED BY THE UNDERSIGNED.
GRANTOR:
SMK GROUP LLC
By: Its Members:
/s/ Lydia Katzoff
Lydia Katzoff
The Stuart Katzoff Trust
By: /s/ Gerald Katzoff
Gerald Katzoff, Trustee
LENDER:
THERMOTREX CORPORATION
By: /s/ Gary S. Weinstein
Name: Gary S. Weinstein
Title: Chairman
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMOTREX
CORPORATION'S REPORT ON FORM 10-Q FOR THE PERIOD ENDED JULY 4, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-END> JUL-04-1998
<CASH> 194,653
<SECURITIES> 13,127
<RECEIVABLES> 93,196
<ALLOWANCES> 3,647
<INVENTORY> 69,519
<CURRENT-ASSETS> 386,695
<PP&E> 83,518
<DEPRECIATION> 19,998
<TOTAL-ASSETS> 626,525
<CURRENT-LIABILITIES> 92,288
<BONDS> 229,500
0
0
<COMMON> 196
<OTHER-SE> 164,676
<TOTAL-LIABILITY-AND-EQUITY> 626,525
<SALES> 257,007
<TOTAL-REVENUES> 257,007
<CGS> 158,871
<TOTAL-COSTS> 158,871
<OTHER-EXPENSES> 30,687
<LOSS-PROVISION> 818
<INTEREST-EXPENSE> 7,178
<INCOME-PRETAX> 29,343
<INCOME-TAX> 10,057
<INCOME-CONTINUING> 15,373
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,373
<EPS-PRIMARY> 0.82
<EPS-DILUTED> 0.73
</TABLE>
