SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------------------------
FORM 10-K
(mark one)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended October 3, 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 Identification No.)
incorporation or organization)
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
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Common Stock, $.01 par value American Stock Exchange
3 1/4% Subordinated Convertible
Debentures due 2007 American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to the filing requirements for
at least the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of October 30, 1998, was approximately $91,824,000.
As of October 30, 1998, the Registrant had 18,661,346 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended October 3, 1998, are incorporated by reference into Parts I and II.
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on March 11, 1999, are incorporated by reference into
Part III.
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PART I
Introduction
You may notice some changes in this year's Form 10-K, compared to past
years. The Securities and Exchange Commission is encouraging companies to write
financial documents in plain English. We have re-written our entire Form 10-K in
plain English. Our goal is to discuss our company in language that is more
easily understood.
Item 1. Business
(a) General Development of Business
ThermoTrex Corporation, which we also refer to as "the company or the
registrant," performs advanced technology research and development (R&D) in the
areas of communications, avionics, X-ray detection, signal processing, and
lasers. Government contracts are the primary source of funding for this work. In
addition, ThermoTrex is the parent company of two publicly traded,
majority-owned subsidiaries, Trex Medical Corporation and ThermoLase
Corporation. ThermoTrex also has a third majority-owned subsidiary, Trex
Communications Corporation, which is privately held.
Trex Medical
Through our Trex Medical subsidiary, we design, manufacture, and market
mammography equipment and minimally invasive digital breast-biopsy systems,
general-purpose and specialized medical X-ray equipment, and dental X-ray
systems. Trex Medical has grown through acquisition and now consists of five
operating units. Its largest product line is mammography systems, which are used
to screen for breast cancer. Other specialized medical X-ray systems include R/F
(radiographic/fluoroscopic) units, which are used to diagnose gastrointestinal
problems, and cardiac catheterization laboratories (cath labs), which are used
during diagnostic and interventional cardiac procedures such as balloon
angioplasty. Trex Medical entered the dental X-ray market in April 1998 when it
acquired Trophy Radiologie, a French company that has the distinction of being
the world's largest manufacturer of digital dental X-ray systems for $24.0
million in cash, the repayment of $8.7 million of net debt, and additional
consideration, not to exceed approximately $8.0 million. Trophy also
manufactures conventional dental X-ray systems as well as medical X-ray
equipment. Trophy's medical X-ray equipment is not sold in the U.S. because they
have not been cleared by the FDA for sale in this country.
ThermoLase
Through our ThermoLase subsidiary, we have developed two laser-based
products, the SoftLight(R) system for the removal of unwanted hair, and the
SoftLight Laser Peel for skin resurfacing. The latter is a new service. In May
1998, the U.S. Food and Drug Administration (FDA) cleared ThermoLase's SoftLight
laser for skin resurfacing, and we are marketing this service as the Laser Peel.
These services are marketed in spas operated by ThermoLase in the U.S. through
physician licensees and in other countries, through joint ventures and licensing
arrangements. ThermoLase also manufactures and markets skin-care and bath and
body products and markets dietary supplements.
At ThermoLase, revenues from hair-removal services decreased in fiscal 1998*
from fiscal 1997. Consequently, we reassessed our overall strategy, including
our pricing strategy. We have taken steps to restructure ThermoLase and
reposition its offerings in ways we believe will help improve profitability. An
important part of this strategy was to acquire the management expertise we
needed to diversify the products and services offered at the spas. In June 1998,
ThermoLase acquired The Greenhouse Spa, Inc. for 1,000,000 shares of ThermoLase
common stock and the repayment of $4.2 million in Greenhouse debt. The
Greenhouse Spa operates a luxury destination spa in Arlington, Texas, well-known
for its innovative spa programs and services. Our goal is to apply the
Greenhouse name to our network of spas and provide traditional day spa,
hair-removal, and skin-resurfacing services. To this end, ThermoLase
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* References to fiscal 1998, 1997, and 1996 in this document are for the years
ended October 3, 1998, September 27, 1997, and September 26, 1996,
respectively.
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evaluated all 14 of its domestic Spa Thira locations to determine which could be
converted into full-service, luxury day spas and, in September 1998, decided to
close three domestic spas. ThermoLase is transforming the existing spa lobbies
to include retail space, where ThermoLase will feature Greenhouse products
designed by its Creative Beauty Innovations, Inc. (CBI) subsidiary, in addition
to CBI's own line and other beauty products. ThermoLase plans to offer a full
menu of Greenhouse beauty services and restorative body treatments, along with
its laser hair-removal and skin-resurfacing technologies. ThermoLase expects
that product and gift certificate sales will be critical in its efforts to
improve the profitability of the spas.
In addition, in response to the decrease in revenues and in an attempt to
establish price points and other conditions designed to increase demand and
revenues, ThermoLase significantly reduced treatment prices at its Spa Thira
locations and has begun modifying the terms and conditions of its
physician-licensing program. Under the modified licenses, per-procedure
royalties are reduced or eliminated and a minimum royalty and/or flat periodic
fee requirement has been introduced. In addition, ThermoLase began offering
licensees the opportunity to purchase or lease SoftLight lasers instead of
paying ongoing royalties or periodic fees.
ThermoLase also faced a number of challenges internationally. For example,
in 1996, ThermoLase established a joint venture to commercialize the SoftLight
laser hair-removal process in Japan and since that time has been seeking the
approval of the Japanese Ministry of Health to commercialize the SoftLight
process in that country. We have submitted information requested by the Japanese
Ministry of Health, including the results of clinical trials performed in Japan,
and ThermoLase continues to await a decision by the Japanese Ministry of Health.
Government-sponsored R&D
Government-sponsored contract revenues increased 27% in fiscal 1998. In May,
ThermoTrex received the largest government contract in its history. The U.S. Air
Force awarded ThermoTrex a 30-month, $28.0 million contract to develop an
unconventional imaging system to observe satellites in geosynchronous orbit
(GEO), about 22,000 miles above the earth. The Air Force has an option to
increase the funding by $22.0 million, for a total of $50.0 million over a
four-year period. Through another new government contract, ThermoTrex is
developing lightweight digital image sensors that consume a minimum of power.
This three-year $15.0 million contract is funded by the Ballistic Missile
Defense Organization. To fulfill the contract, we will apply patented technology
developed over the last several years through R&D related to developing a
full-field digital mammography system. Military applications include improved
night-vision systems, but these sensors also show promise for commercial
applications, such as high-definition TV. We continue to follow our strategy of
performing government R&D that we believe has the potential to spawn commercial
products.
We created our Trex Communications subsidiary in fiscal 1997. Since then,
Trex Communications has acquired three companies. Through Computer
Communications Specialists, acquired in July 1997, we design and market
interactive information and voice-response systems. Through Electro-Magnetic
Processes, Inc. (EMP), acquired in May 1998, and LNR Communications, Inc.,
acquired in November 1998, we manufacture and market ground-based satellite
communications systems and related components.
Stock Ownership
On October 3, 1998, our parent company, Thermo Electron Corporation, owned
11,494,908 shares of our common stock. This represented 62% of ThermoTrex's
outstanding shares on that date. Thermo Electron Corporation is a world leader
in monitoring, analytical, and biomedical instrumentation; biomedical products
including heart-assist devices, respiratory-care equipment, and mammography
systems; and paper recycling and papermaking equipment. Thermo Electron also
develops alternative-energy systems and clean fuels, provides a range of
services including industrial outsourcing and environmental-liability
management, and conducts research and development in advanced imaging, laser,
and electronic information-management technologies.
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Thermo Electron intends to maintain at least 50% ownership of ThermoTrex for
the foreseeable future. This may require Thermo Electron to purchase additional
shares of ThermoTrex common stock from time to time if ThermoTrex sells
additional shares of stock, which would result in a greater number of shares
outstanding. These or any other purchases may be made either in the open market
or directly from the company. During fiscal 1998, Thermo Electron purchased
1,383,000 shares of ThermoTrex common stock in the open market for a total price
of $22.1 million. See Notes 5 and 8 to the Consolidated Financial Statements in
our Fiscal 1998 Annual Report to Shareholders for a description of outstanding
stock options and subordinated convertible debentures.
Forward-looking Statements
We make forward-looking statements throughout this document. We typically
use the words, "believe," "anticipate," "plan," "expect," "seek," "estimate,"
and similar expressions to identify forward-looking statements. Unless a passage
describes an historical event, you should consider it to be a forward-looking
statement. As you make decisions about your investments in ThermoTrex, we
caution you, in keeping with the "Safe Harbor" provision of the Private
Securities Litigation Reform Act of 1995, that forward-looking statements
regarding the company's future expectations and projections are not guarantees
of future performance. They involve risks, uncertainties, and assumptions, and
many of the factors that will determine the company's future results are beyond
our ability to control or predict. Therefore, our actual results may differ
significantly from those suggested by forward-looking statements. You can find
these risk factors detailed under the heading "Forward-looking Statements" in
our Fiscal 1998 Annual Report to Shareholders, which is incorporated in this
document by reference.
(b) Financial Information About Industry Segments
ThermoTrex's business is divided into three industry segments: Medical
Products manufactured by its Trex Medical subsidiary, Personal-care Products and
Services provided by its ThermoLase subsidiary, and Advanced Technology
Research, including research conducted and products distributed by its Trex
Communications subsidiary. The Company's principal products produced and
services in these three segments are described in detail below (see "Principal
Products and Services").
Financial information concerning ThermoTrex's industry segments is provided
in Note 13 to Consolidated Financial Statements in our Fiscal 1998 Annual Report
to Shareholders, which is incorporated in this document by reference.
(c) Description of Business
(i) Principal Products and Services
Medical Products
Trex Medical designs, manufactures, and markets medical and dental imaging
systems and minimally invasive breast-biopsy systems. The company consists of
five operating units: Lorad, Bennett, XRE, Continental, and Trophy.
Trex Medical sells its products through a worldwide network of more than 100
independent dealers and, to a lesser extent, on a direct basis. In addition to
manufacturing and marketing its own systems, Trex Medical manufactures systems
and components as an original equipment manufacturer (OEM) for other medical
equipment companies such as the GE Medical Systems Division of General Electric
Company.
Mammography Systems. Through its Lorad and Bennett subsidiaries, Trex
Medical designs, manufactures, and markets mammography systems. Trex Medical
offers two high-end systems, two mid-tier systems, and two mobile mammography
systems.
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Trex Medical has developed a full-field digital mammography system, which we
believe may provide better images than conventional mammography, particularly of
dense breast tissue, often found in younger women. This system is called the
TDMS(TM) Trex Digital Mammography System, and a 510(k) application seeking
clearance to market this system was submitted to the FDA in December 1997. In
December 1998, Trex Medical received a letter from the FDA notifying it that
based on the data provided, the FDA was unable to determine substantial
equivalence with analog, or "film screen," mammography. As a result, the FDA
considers the Company's 510(k) application seeking clearance to market a
full-field digital mammography system to be withdrawn. In its letter, the FDA
outlines additional data analysis that will be required for clearance. Trex
Medical intends to work closely with the FDA to provide the information
requested and plans to meet with the FDA in early 1999 in an effort to move the
review process forward. Trex Medical's high-end conventional mammography systems
are designed to be upgraded to incorporate this digital technology, if it
becomes available. In October 1998, the TDMS received the CE Marking, which
indicates this system meets the safety requirements for marketing in all
European Union countries.
Trex Medical believes that demand in the market for mammography systems is
driven primarily by technological innovation that results in better image
quality. Although growth of the installed base has slowed, demand for new
systems continues as older models are replaced with those offering technological
innovations. In addition, the company believes that the market outside the U.S.
will grow as more countries adopt mammography quality standards similar to those
adopted in the U.S.
Minimally Invasive Breast-biopsy Systems. Through its Lorad and Bennett
subsidiaries, Trex Medical offers three minimally invasive breast-biopsy
systems. These systems provide an alternative to open surgical biopsy, which is
generally performed under general anesthesia. Minimally invasive biopsies are
typically done on an out-patient basis under local anesthesia and are less
expensive than open surgery.
Trex Medical offers two upright systems, which are used in conjunction with
its mammography systems. For physicians that perform a significant number of
biopsies, Trex Medical sells a dedicated, prone biopsy system called the Trex
Universal Breast Biopsy System (formerly called the StereoGuide(R)). This system
includes a digital "spot" mammography system that enables the doctor to position
the sampling device at the site of the suspicious lesion. When performing a
biopsy with any Trex Medical system, the doctor has a choice of tissue-sampling
devices, which are not manufactured by the company.
Under an agreement with United States Surgical Corporation (U.S. Surgical),
Trex Medical distributed the USS-Trex and the USS-Trex Universal breast-biopsy
systems. Lorad served as the OEM, manufacturing all of the components (a digital
guidance system and a specialized table), with the exception of the device that
excises the tissue. (Formerly, U.S. Surgical marketed the modified system it
bought from Lorad as the ABBI(TM) system.) During 1998, U.S. Surgical was
acquired by Tyco International, Ltd. As a result of this acquisition, Trex
Medical does not expect there will be any future sales to U.S. Surgical. See
"Dependency on a Single Customer."
Trex Medical's Trex Universal breast-biopsy system is the subject of two
lawsuits alleging infringement of two Fischer Imaging Corporation patents. See
"Item 3 - Legal Proceedings."
General-purpose X-ray. Trex Medical addresses the general-purpose X-ray
market primarily through its Bennett, Continental, and Trophy divisions. Bennett
designs, manufactures, and markets basic X-ray systems generally used in medical
outpatient facilities. Continental (and, to a lesser extent, Bennett) markets
the more sophisticated and expensive X-ray systems typically used in hospitals
and clinics. Trophy medical X-ray systems have not been cleared by the FDA for
sale in the U.S. and are only sold outside the U.S. Bennett also manufactures
and markets imaging systems designed specifically for chiropractors and
veterinarians.
The U.S. market for general-purpose X-ray systems is stable, and consists
primarily of replacement sales as customers upgrade older equipment. Trex
Medical believes that the international market is substantially larger than the
U.S. market and that the installed base of systems is still growing,
particularly in developing countries. Trex Medical has recently expanded its
international sales efforts.
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Trex Medical believes digital imaging will have significant application in
the general-purpose and specialized X-ray markets and is developing flat-panel
digital technology for these applications. In general-purpose X-ray
applications, Trex Medical believes digital imaging has the potential to produce
better quality images and reduce operating costs by reducing the need for film,
processing equipment, and chemicals. In addition, digital imaging will permit
the electronic storage of images on magnetic or optical media, as well as the
transmission of images to multiple locations. Furthermore, Trex Medical believes
digital imaging could make the image intensifiers, which are large and expensive
components in certain imaging systems, obsolete.
Cardiac Catheterization, Angiography, and Electrophysiology. Through its XRE
subsidiary, Trex Medical designs, manufactures, and markets cardiac cath labs
and positioners for cardiovascular imaging systems. XRE's imaging equipment is
used in cath labs where angiography (the examination of blood vessels using
X-rays following the injection of a radiopaque contrast medium) is performed by
an interventional cardiologist. XRE systems are designed to provide real-time
images of peripheral blood vessels and of the heart and coronary arteries for
physicians performing diagnostic and interventional procedures such as balloon
angioplasty.
Trex Medical believes vascular and cardiovascular surgeons will increasingly
use balloon angioplasty and other less-invasive techniques to treat vascular
diseases. These procedures are performed under the guidance of X-ray imaging
such as that provided by Trex Medical's equipment.
XRE's products include the Unicath SP(TM), its newest cardiovascular imaging
system, with enhanced features such as Full Frame(TM) Zoom to further improve
visualization of inverventional devices such as stents, which are implanted in a
blood vessel to keep it open once it has been expanded by balloon angioplasty.
To complement the Unicath SP, XRE offers a line of digital image-processing
systems, workstations, and archive alternatives. In fiscal 1998, XRE introduced
TREXnet(TM), a digital data-management system that integrates digital X-ray
images, blood pressure and other physiological data, doctors' notes from the
procedure, and patient demographic information into a single database.
In addition, Trex Medical's Continental subsidiary designs, manufactures,
and sells electrophysiology systems that are used in the diagnosis and treatment
of cardiac arrhythmia, which is characterized by the sudden, erratic beating of
the heart and can result in cardiac arrest.
Radiographic/Fluoroscopic Systems. Through its Continental and Trophy
subsidiaries, Trex Medical designs, manufactures, and markets
radiographic/fluoroscopic (R/F) products. An R/F system is able to record
dynamic events by capturing a series of images in a short period of time. For
example, R/F systems are used for various gastrointestinal procedures to image
in real-time the progress of a radiopaque ingested solution (typically barium)
through the digestive tract.
Continental offers a conventional R/F system and a digital R/F system,
called the DigiSpot(TM) 2000. This high-speed digital imaging system records the
image in an electronic format, permitting the electronic storage of images on
magnetic or optical media, and the transmission of images to multiple locations
with image quality comparable to film-based systems.
Outside the U.S., Trophy sells an R/F system called the Evolution HV
remote-control table. This product has not been cleared by the FDA for sale in
the U.S. The system is remotely controlled, which means that the operator can
stand some feet away, thereby significantly reducing the operator's X-ray
exposure.
Dental X-ray Systems. In April 1998, Trex Medical acquired Paris-based
Trophy Radiologie, the world's largest manufacturer of digital dental X-ray
systems. Through this subsidiary, Trex Medical designs, manufactures, and
markets a variety of conventional and digital dental X-ray systems. In 1987,
Trophy introduced the first digital X-ray system for dentists. The
current-generation product line includes the RVG(TM) digital X-ray system, which
uses 90 percent less radiation than conventional dental X-rays and eliminates
the need for film and the chemicals required to
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develop it. The RVG can be upgraded to incorporate the latest software, such as
the Logicon(TM) Caries Detector, which was approved by the FDA in October 1998.
This software assists dentists in analyzing and diagnosing difficult-to-see
lesions by graphically displaying changes in tooth density as well as lesion
probability. Trophy has entered into a letter of intent to be the exclusive
worldwide distributor of this software, which is designed to detect decay, or
"caries," particularly between teeth. This distributor arrangement remains
subject to the negotiation of a mutually acceptable definitive agreement.
In addition, Trophy also offers an intra-oral camera used to help dentists
communicate with their patients and a panoramic system, which allow the dentist
to image the patient's entire jaw.
Other Products. Trex Medical uses its technological and manufacturing
expertise to produce a number of other products. Trex Medical 's LPX-160
portable imaging system, based on its medical imaging technology, is designed to
produce high-resolution images of metals, composites, and plastics. Customers
for this system have included the United States Air Force, several commercial
airlines, and Canadian and American utilities.
Personal-care Products and Services
Laser-based Hair Removal. The patented SoftLight system uses a low-energy,
dermatology laser in combination with a specially developed lotion that directs
and absorbs the laser's energy to impact hair follicles. Unlike electrolysis,
the SoftLight system can impact numerous hair follicles at one time. As a
result, we can treat large areas, such as the legs or back. The lasers, which
are similar to those used for removing tattoos and birthmarks, are manufactured
by Trex Medical. ThermoLase's CBI subsidiary manufactures the lotion.
During a typical treatment, the SoftLight technician gently cleanses the
area from which hair is to be removed, applies the lotion, which penetrates the
hair duct, and then scans the area several times with the laser beam. The laser
energy is absorbed by the lotion, causing the temperature of the lotion to
increase to a level that impacts the hair follicles. The laser treatment most
effectively impacts hair follicles in the active growing stage of development,
and at any one time, a certain percentage of hair follicles are in the resting
stage. Therefore, to obtain the maximum benefit, we recommend that clients
return for multiple treatments. The number of follow-up sessions recommended and
the time interval between treatment varies depending on the particular
characteristics of the client and the anatomical site being treated.
Cosmetic Skin Resurfacing. In May 1998, the FDA cleared ThermoLase's
SoftLight laser for cosmetic skin-resurfacing. ThermoLase began marketing this
process under the name SoftLight Laser Peel in September 1998. ThermoLase began
development of the skin-resurfacing process after many of its hair-removal
clients reported improvement in their skin's texture and appearance. The process
uses the same laser as our hair-removal process, in combination with a different
formulation of the activating lotion. The laser's energy passes through the
skin's surface and reacts with the lotion, creating heat and mechanical energy
that remove the tough outer layer of dead skin to reveal the younger skin
beneath. The SoftLight Laser Peel is marketed through ThermoLase's spas and
participating licensees.
Traditional Spa Services. With the transformation of ThermoLase's spas into
Greenhouse day spas, ThermoLase is introducing a wide range of traditional spa
services, including a variety of facials and massage treatments, as well as
manicures and pedicures, makeup application, and other beauty treatments.
Beauty Products. ThermoLase's CBI subsidiary develops, manufactures, and
packages most of its products, which include shampoos, lotions, shower creams,
bath salts, and facial treatments. CBI also sells dietary supplements purchased
from a third party under its own brand name. CBI does not manufacture packaging
materials, such as containers and boxes, but contracts with third parties for
these supplies. During fiscal 1998, CBI began to diversify from being primarily
a private-label manufacturer to marketing products under its own brand names.
CBI products are sold through dermatologists, plastic surgeons, and high-end
salons, including those operated by ThermoLase. In addition, its products are
sold through drug stores and large discount chains.
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Advanced Technology Research
ThermoTrex is currently focusing its advanced technology research efforts on
the areas of communications, avionics, X-ray detection, signal processing, and
lasers. We have developed our expertise in these core technologies in connection
with government-sponsored research and development.
Satellite Communications and Computer Telephony. Through its three
operating units, our Trex Communications subsidiary serves the satellite
communications industry and computer telephony industry. Through Computer
Communications Specialists (CCS), acquired in July 1997, we design and market
interactive information and voice-response systems, which are marketed through
direct sales and value-added resellers. Through Electro-Magnetic Processes,
Inc., now called EMP TrexCom, acquired in May 1998, and LNR Communications,
Inc., now called LNR TrexCom, acquired in November 1998, we manufacture and
market ground-based satellite communication systems and related components. EMP
TrexCom manufactures ground stations that incorporate large satellite antennas,
ranging in size from 3 to 10 meters. Government and commercial customers use
these systems to uplink and downlink data. EMP TrexCom also develops and
integrates telemetry systems used on military aircraft, enabling these planes to
be tracked and tested. LNR, now called LNR TrexCom, markets ground stations that
use smaller antennas and are designed for commercial and private use. LNR
TrexCom also offers transportable systems that use collapsible antennas that can
be quickly assembled for use in remote locations around the world. Both EMP
TrexCom and LNR TrexCom market their products through direct sales and a network
of distributors.
Laser Communication System (lasercom). Trex Communications has developed
and is in early-stage testing of its laser communication technology, which is
designed to move very large amounts of data quickly via lasers without the need
for wires or licensing from the Federal Communications Commission. R&D related
to lasercom has been funded under approximately $19.0 million of government
contracts since 1989; however, Trex Communications currently has no backlog of
government-sponsored lasercom R&D. This reduction reflects our decision to move
Trex Communications away from government funding and direct our focus toward the
commercialization of products and services. By applying its laser communication
technology, Trex Communications intends to commercialize products to meet the
growing demand for high-speed digital telecommunications technology, including
opportunities in ground-based networks, satellite-to-satellite crosslinks, and
air-based systems.
Passive Millimeter-wave Camera. We are developing a passive millimeter-wave
camera (PMC), which is designed to enable the user to see objects hidden by fog
and clouds and to see through certain opaque objects, such as building
partitions. The PMC will be a totally passive device that emits no radiation and
can produce real-time video images during the day or night without the clutter
typical of radar.
We believe the largest potential application of the PMC would be the
incorporation of the device into airplanes for use during takeoffs, landings,
and taxiing in adverse weather conditions. PMC acceptance is subject to
certification by the Federal Aviation Administration (FAA). The U.S. Army has
provided approximately $12.9 million in funding for PMC development over the
last six years. In June 1998, through a modification to an existing contract,
the U.S. Army Research Laboratory awarded an additional $2.5 million to continue
development of the PMC.
Under a two-year $700,000 grant from the National Institute of Justice,
awarded in fiscal 1997, the Company plans to conduct a PMC technology
demonstration and evaluation program in cooperation with local law enforcement
agencies.
Government-funded Projects. ThermoTrex is currently working on
government-funded projects in several areas, including:
(1)Surveillance of GEO satellites - In fiscal 1998, we received a 30-month,
$28 million award (and an option for an additional $22 million) from the
U.S. Air Force Research Laboratory, under which we will be the prime
contractor on a project to develop GLINT, the GEO Light Imaging National
Testbed. GLINT is being developed to observe satellites in geosynchronous
orbit. In fiscal 1998, we received $7.5 million in funding under this
contract.
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(2)Imaging - In fiscal 1998, the company received a three-year, $15 million
contract from the Ballistic Missile Defense Organization (BMDO) to
develop digital image sensors for military applications that include
improved night-vision systems. In fiscal 1998, the company received $3
million in funding under this contract.
(3)Surveillance of LEO satellites - Under a contract awarded in 1993 by the
U.S. Air Force Research Laboratory (formerly the U.S. Air Force Phillips
Laboratory), we are designing and building a system to produce
high-resolution images of low-earth-orbit (LEO) satellites. Through
fiscal 1998, we have received $11.8 million under this contract.
(4)ROBS (rapid optical beam steering) laser radar system - We have
developed and extensively tested the ROBS system over the last 11 years,
supported by more than $29.8 million in government funding. In fiscal
1996, we received a three-year, $8.8 million contract from the U.S. Naval
Air Warfare Center at China Lake, California, to continue development of
this system. Through fiscal 1998, ThermoTrex received funding of $2.6
million under this contract. Also in fiscal 1996, we received a $5.9
million contract, with options for an additional $7.2 million, from the
U.S. Army Missile Command to build a new version of ROBS, called TCATS.
Through fiscal 1998, the Company received $5.8 million in funding under
this contract.
(ii) New Products
The Company's business includes the research and development of new products
(see "Principal Products and Services").
(iii) Raw Materials
The raw materials, components, and supplies we purchase are available from a
number of different suppliers. If necessary, we believe that we could develop
alternative sources without a material adverse effect on our results. To date,
we have not experienced any difficulty in obtaining these materials.
(iv) Patents, Licenses, and Trademarks
ThermoTrex protects its intellectual property through patents, trademarks,
and trade secrets. In addition to relying on patents, we protect some of our
technology as trade secrets, and we use trademarks in association with certain
products. ThermoTrex also enters into licensing arrangements to acquire rights
to technology.
The technology underlying the SoftLight system, including all patents issued
thereon, belongs to ThermoLase by virtue of a license agreement executed in
February 1993 between ThermoLase and the inventor of the system, which grants
ThermoLase an irrevocable, exclusive, worldwide, perpetual license to the
technology in exchange for a $0.1 million commitment fee and a royalty equal to
0.25% of revenues generated from the sale or use of the SoftLight system through
February 10, 2010.
In addition, we have a patent application pending in the United States and
have reserved our rights to file patent applications in PCT-member countries,
related to a laser-based drug-delivery system using a concept similar to our
laser-based hair-removal system.
CBI relies primarily on trade secret protection for the proprietary
formulations that form the basis of its products. CBI generally retains the
proprietary rights to the formulations it develops, either for itself or for a
specific customer.
ThermoTrex's patented inventions include certain mammography and other X-ray
equipment, lasers, telescopes, high-power diamond switches, laser-radar devices,
microwave cameras, a laser-based hair-removal process, a Sonic CT system, a
wind-shear detector, and methods of producing composites and ultrafine
particles. Patent applications are pending on certain mammography equipment, a
passive microwave camera, and a free-space laser communication system.
9
<PAGE>
Trex Medical is a defendant in two patent-infringement lawsuits and a
lawsuit alleging it misappropriated certain other technology owned by a third
party. See information under the heading "Intellectual Property Rights,
Uncertainties, and Litigation" under the heading "Forward-looking Statements" in
the Registrant's Fiscal 1998 Annual Report to Shareholders, which is
incorporated in this document by reference and "Item 3 - Legal Proceedings."
Several of our patents were the result of research programs funded by the
U.S. government. With the exception of a prohibition on disclosure of classified
technology, the government does not impose significant restrictions on our use
of government-sponsored technology. The government retains a non-exclusive,
royalty-free license to use technology developed under government contracts for
government purposes, and could, in certain circumstances, transfer all
commercial rights to technology to a third party if ThermoTrex does not pursue
its development.
(v) Seasonal Influences
There are no significant seasonal influences on our sales of products and
services.
(vi) Working Capital Requirements
There are no special inventory requirements or credit terms extended to
customers that would have a material adverse effect on our working capital.
(vii) Dependency on a Single Customer
Medical Products segment revenues from OEM sales of a modified design of
Trex Medical's stereotactic prone breast-biopsy system to United States Surgical
Corporation (U.S. Surgical) accounted for 14% of Medical Products segment
revenues and 11% of ThermoTrex's total revenues in fiscal 1998. During 1998,
U.S. Surgical was acquired by Tyco International, Ltd. As a result of this
acquisition, the company does not expect that there will be any future sales to
U.S. Surgical. No single customer accounted for more than 10% of the revenues of
the Personal-care Products and Services segment in fiscal 1998. Almost all of
the Advanced Technology Research segment revenues in fiscal 1998 were derived
from government contracts. If certain of these contracts were cancelled or not
fully funded, it would have a material adverse effect on this segment of our
business.
(viii) Backlog
The backlog of firm orders for the Medical Products segment was $62.7
million as of October 3, 1998, compared with $49.3 million as of September 27,
1997. The backlog of firm orders for the Personal-care Products and Services
segment, which consisted exclusively of orders for CBI's products, was $4.1
million as of October 3, 1998, compared with $2.8 million as of September 27,
1997. The backlog of firm orders for the Advanced Technology Research segment
was $27.8 million as of October 3, 1998, compared with $15.0 million as of
September 27, 1997. Substantially all government contract orders included in
this backlog were funded at October 3, 1998. The Company does not believe that
the increases in backlog is necessarily indicative of a trend. We anticipate
that substantially all of our fiscal 1998 backlog will be shipped or completed
during fiscal 1999.
(ix) Government Contracts
Less than 10% of ThermoTrex's total revenues in fiscal 1998 were derived
from contracts or subcontracts with the federal government, which are subject to
renegotiation of profits or termination. There are no pending or, to our
knowledge, threatened renegotiations or terminations that are material to
ThermoTrex.
10
<PAGE>
(x) Competition
Medical Products
The healthcare industry in general, and the market for imaging products in
particular, is highly competitive. Trex Medical competes with a number of
companies, many of which have substantially greater financial, marketing, and
other resources. The company's competitors include large companies such as GE,
Philips N.V., the Siemens Corporation subsidiary of Siemens AG, Toshiba Inc.,
American Medical Systems, Inc., Toshiba, Inc., Shimadzu Corporation, and Picker
International, Inc., which compete in most diagnostic imaging modalities,
including X-ray imaging. Outside the U.S., in the dental-imaging field, the
company's competitors include Planmeca OY, Sirona Dental Systems, and the
Soredex division of Orion Corporation. In the U.S., in the dental-imaging field,
the company's competitors include Schick Technologies, Inc., Dexis, the Gendex
and New Image divisions of DENTSPLY International, Inc., Sygnus Imaging, and the
Dent-X subsidiary of AFP Imaging Corporation. In addition, a significant portion
of the company's sales are through OEM arrangements. The products sold through
such OEM agreements compete with those offered by the company directly and
through its independent dealers. Trex Medical's three minimally invasive
breast-biopsy systems compete with products offered by GE, Fischer Imaging
Corporation, and Philips, and with conventional surgical biopsy procedures. The
company competes primarily on the basis of product features, product
performance, and reputation as well as price and service. Trex Medical believes
that competition is likely to increase as a result of healthcare
cost-containment pressures and the development of alternative diagnostic and
interventional technologies.
Personal-care Products and Services
When ThermoLase first introduced its SoftLight laser hair-removal system, it
was the only company to have FDA clearance and thus, electrologists were its
principal competitors. Since then, a number of other companies have received FDA
clearance for laser hair removal. We believe additional companies are working to
develop similar technologies and products that may compete directly with the
SoftLight hair-removal system. We believe that the SoftLight hair-removal system
competes primarily on the basis of safety, effectiveness, and price. Because the
proprietary SoftLight system reacts with the lotion, instead of the native
structures of the skin, ThermoLase is able to use an energy level significantly
lower than competing products.
We expect that our principal competition for our skin-resurfacing treatment
will be providers of carbon dioxide and erbium laser skin resurfacing, as well
as chemical peels. We believe the SoftLight Laser Peel will compete primarily
based on effectiveness, safety, comfort, and convenience.
The professional skin-care, bath and body product, and dietary supplement
markets are highly competitive and fragmented, with no single competitor
dominating the market. Many small manufacturers, as well as divisions of larger
companies, may have substantially greater financial, marketing, and research and
development resources than ThermoLase. CBI competes primarily on the basis of
quality and price.
Advanced Technology Research
Trex Communications is engaged in segments of the telecommunications
industry that are extremely competitive. Its EMP and LNR units serve the
infrastructure segment of the global space industry by providing satellite
ground stations and related components. They compete with a number of companies
that have greater financial, technical, marketing, and other resources than Trex
Communications. EMP's major competitors include Datron/Transco Inc. and the
Communications and Tracking Systems division of Scientific Atlanta Inc. LNR's
primary competitors include SSE Telecom, Inc., Advent Communications Limited,
Wahlberg-Selin AB, Miteq, Inc., Comtech Telecommunications Corporation, and RSI
Anghel Laboratories, a subsidiary of TBG Industries, Inc. EMP and LNR both
compete primarily on the basis of product features, product performance, and
price.
11
<PAGE>
Trex Communications' CCS subsidiary competes with a number of
call-automation companies, primarily on the basis of product features, product
performance, and reputation, as well as price and service. Its primary
competitors include Periphonics Corporation, Edify Corporation, and Intervoice
Inc. Many of CCS' competitors have greater financial, technical, marketing, and
other resources.
ThermoTrex competes for its research and development programs principally on
the basis of technological innovations. As government funding becomes more
scarce, particularly for defense projects, the competition for such funding will
become more intense. In addition, as our programs move from the development
stage to procurement of large-scale, electro-optical systems, competition is
expected to develop and intensify. Many of our competitors for research and
development funding and procurement have substantially greater resources.
As ThermoTrex develops commercial products, it expects to encounter
competition from various sources, including companies that will have
substantially greater technical, marketing, and financial resources than us. We
believe that our overall success will depend primarily on our ability to
continue to make technological advances.
(xi) Research and Development
During fiscal 1998, 1997, and 1996, ThermoTrex expended $39,826,000,
$32,067,000, and $24,986,000, respectively, on internally sponsored research and
development programs, and $16,223,000, $11,667,000, and $10,278,000,
respectively, on research and development programs sponsored by others.
Approximately 407 professional employees were engaged full-time in research and
development activities at October 3, 1998.
(xii) Environmental Protection Regulations
We believe that compliance with federal, state, and local environmental
regulations will not have a material adverse effect on our capital expenditures,
earnings, or competitive position.
(xiii) Number of Employees
As of October 3, 1998, ThermoTrex employed 2,230 people.
(d) Financial Information about Exports by Domestic Operations
Financial information about exports by domestic operations is summarized in
Note 13 to Consolidated Financial Statements in the Registrant's Fiscal 1998
Annual Report to Shareholders, which is incorporated in this document by
reference.
<TABLE>
<CAPTION>
(e) Executive Officers of the Registrant
<S> <C> <C>
Name Age Present Title (Fiscal Year First Became Executive Officer)
---------------------------- ------ -----------------------------------------------------------
Gary S. Weinstein 41 Chief Executive Officer (1996)
John N. Hatsopoulos* 64 Chief Financial Officer and Senior Vice President (1990)
Dr. Kenneth Y. Tang 51 Senior Vice President (1990)
Barry M. Lyons 40 Vice President, Finance (1998)
Paul F. Kelleher 56 Chief Accounting Officer (1990)
--------------------
* John N. Hatsopoulos will retire as chief executive officer and senior
vice president effective December 31, 1998. Theo Melas-Kyriazi has been
appointed to succeed Mr. Hatsopoulos as chief financial officer.
</TABLE>
12
<PAGE>
Each executive officer serves until his or her successor is chosen or
appointed by the Board of Directors and qualified, or until earlier resignation,
death, or removal. All executive officers, except Messrs. Weinstein and Lyons
have held comparable positions for at least five years with ThermoTrex or Thermo
Electron. Mr. Weinstein has been chief executive officer of ThermoTrex since
February 1996. For at least five years prior to joining the company, Mr.
Weinstein held various positions at Lehman Brothers, an investment banking firm,
including heading its global syndicate and equity capital market group from
March 1995 until joining the company. Mr. Lyons has been vice president of
finance of ThermoTrex since April 1998. For at least five years prior to joining
ThermoTrex, Mr. Lyons held various senior financial management positions at
Merit Behavioral Care Corporation, a managed behavioral healthcare services
company, including vice president of finance for its Continuum Behavioral
Healthcare and Assured Health Systems subsidiaries. Messrs. Hatsopoulos and
Kelleher are full-time employees of Thermo Electron, but devote as much time to
the affairs of the company as is reasonably required. Mr. Melas-Kyriazi joined
Thermo Electron in 1986 as assistant treasurer, and became treasurer in 1988. He
was named president and chief executive officer of ThermoSpectra Corporation, a
public subsidiary of Thermo Instrument Systems Inc., in 1994. In 1997, he became
vice president of corporate strategy for Thermo Electron. Mr. Melas-Kyriazi will
remain a full-time employee of Thermo Electron, and, when he succeeds Mr.
Hatsopoulos as chief financial officer, will also devote such time to the
affairs of the company as the company's needs reasonably require.
Item 2. Properties
The location and general character of ThermoTrex's principal properties as
of October 3, 1998, are as follows:
Medical Products
Trex Medical owns two office and manufacturing facilities: a
62,500-square-foot facility in Danbury, Connecticut, and a 145,000-square-foot
facility in Broadview, Illinois. The company leases a 120,000-square-foot office
and manufacturing facility in Copiague, New York, under a lease expiring in
2005; a 156,000-square-foot office and manufacturing facility in Littleton,
Massachusetts, under a lease expiring in 2012; a 60,000-square-foot office and
manufacturing facility in Danbury, Connecticut, under a lease expiring in 2007;
a 120,000-square-foot office, manufacturing and lab facility in Paris, France,
under a lease expiring in 2002; and a 10,750-square-foot office and
manufacturing facility in Saint Eitenne, France, under a lease expiring in 2007.
It also leases facilities in Italy, Germany, Japan, Belgium, Spain, and the
United Kingdom; and owns buildings in Turkey and Indonesia.
Personal-care Products and Services
ThermoLase occupies approximately occupies 213,000 square feet of office and
manufacturing space in Carrollton, Texas, under a lease expiring in 2004,
through its CBI subsidiary. ThermoLase also leases approximately 77,000 square
feet of retail space for its Spa Thira salons, under leases expiring from 2000
through 2013. In addition, they own a 60,000 square foot building in Arlington,
Texas, which is used for the Greenhouse Spa operations. We believe that these
facilities are in good condition and are suitable and adequate for its current
operations.
Advanced Technology Research
Trex Communications currently leases 90,000 square feet of office,
engineering, and laboratory space in San Diego, California, under a lease
expiring in 2006. ThermoTrex also leases 25,000 square feet of office and
warehouse facilities in San Diego, California, under leases expiring in fiscal
1998. In addition, Trex Communications leases office, engineering, and
manufacturing space of 42,000 square feet in Norcross, Georgia, under a lease
expiring 2000. Trex Communications leases 30,000 square feet in Chatsworth,
California, under a lease expiring in 1999. Trex Communications also leases
1,700 square feet of office space in Houston, Texas, expiring in 2001.
ThermoTrex believes these facilities are in good condition and are suitable
and adequate to meet our current needs.
13
<PAGE>
Item 3. Legal Proceedings
On April 2, 1992, Fischer Imaging Corporation filed a lawsuit in the United
States District Court, District of Colorado, against Trex Medical's Lorad
division, alleging that Lorad's prone breast-biopsy system infringes a Fischer
patent on a precision mammographic needle-biopsy system. As of October 3, 1998,
Trex Medical had recorded revenues of approximately $145.7 million from the sale
of these systems; $34.4 million of the total was from sales that were recorded
before October 16, 1995, which is the date that Lorad was transferred from
ThermoTrex to Trex Medical. On April 7, 1998, Fischer filed a second lawsuit in
the United States District Court, district of Colorado, against Trex Medical,
alleging that its manufacture of breast-imaging equipment and breast-biopsy
system infringes on a second Fischer patent, which was issued April 7, 1998.
These two lawsuits have been consolidated into a single lawsuit
Fischer is seeking a permanent injunction, treble damages, and attorneys'
fees and expenses. If the company is unsuccessful in defending this lawsuit, it
may be enjoined from manufacturing and selling its prone breast-biopsy system
without a license from Fischer. If a license were required, there is no
assurance that the company will be able to obtain one on commercially reasonable
terms, or on any terms. In addition, the company may be subject to damages for
past infringement. As of October 3, 1998, Trex Medical had accrued approximately
$1.1 million for costs associated with this litigation.
Trex Medical's Trophy subsidiary, is party to a lawsuit filed March 21,
1996, in the United States District Court for the Eastern District of New York
against Schick Technologies, Inc. alleging infringement of a Trophy patent
relating to dental X-ray apparatus. Schick has filed a counterclaim against
Trophy alleging infringement of a Schick patent that also relates to dental
X-ray apparatus. Each of the parties is seeking a declaration that the opposing
party's patent is invalid, a permanent injunction, treble damages, and
attorneys' fees and expenses.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
14
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information concerning the market and market price for the Registrant's
Common Stock, $.01 par value, and dividend policy is included under the sections
labeled "Common Stock Market Information" and "Dividend Policy" in the
Registrant's Fiscal 1998 Annual Report to Shareholders, which is incorporated in
this document by reference.
Item 6. Selected Financial Data
The information required under this item is included under the sections
labeled "Selected Financial Information" and "Dividend Policy" in the
Registrant's Fiscal 1998 Annual Report to Shareholders, which is incorporated in
this document by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required under this item is included under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Registrant's Fiscal 1998 Annual Report to Shareholders, which
is incorporated in this document by reference.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
The information required under this item is included under the caption
"Market Risk" in the Registrant's Fiscal 1998 Annual Report to Shareholders,
which is incorporated in this document by reference.
Item 8. Financial Statements and Supplementary Data
The Registrant's Consolidated Financial Statements and Supplementary Data
are included in the Registrant's Fiscal 1998 Annual Report to Shareholders,
which are incorporated in this document by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not applicable.
15
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information concerning directors required under this item is
incorporated in this document by reference from the material contained under the
caption "Election of Directors" in the Registrant's definitive proxy statement
to be filed with the Securities and Exchange Commission pursuant to Regulation
14A, not later than 120 days after the close of the fiscal year. The information
concerning delinquent filers pursuant to Item 405 of Regulation S-K is
incorporated herein by reference from the material contained under the heading
"Section 16(a) Beneficial Ownership Reporting Compliance" under the caption
"Stock Ownership" in the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A, not
later than 120 days after the close of the fiscal year.
Item 11. Executive Compensation
The information required under this item is incorporated in this document by
reference from the material contained under the caption "Executive Compensation"
in the Registrant's definitive proxy statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this item is incorporated in this document by
reference from the material contained under the caption "Stock Ownership" in the
Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
The information required under this item is incorporated in this document by
reference from the material contained under the caption "Relationship with
Affiliates" in the Registrant's definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the close of the fiscal year.
16
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a, d) Financial Statements and Schedules
(1) The consolidated financial statements set forth in the list
below are filed as part of this Report.
(2) The consolidated financial statement schedule set forth in the list
below is filed as part of this Report.
(3) Exhibits filed herewith or incorporated herein by reference are set
forth in Item 14(c) below.
List of Financial Statements and Schedules Referenced in this Item 14
Information incorporated by reference from Exhibit 13 filed herewith:
Consolidated Statement of Operations
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Shareholders' Investment
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Financial Statement Schedules filed herewith:
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or not
required, or because the required information is shown either in the
financial statements or in the notes thereto.
(b) Reports on Form 8-K
On August 13, 1998, ThermoTrex filed a Current Report on Form 8-K dated
August 12, 1998, with respect to a proposed corporate reorganization of
Thermo Electron Corporation.
On September 30, 1998, ThermoTrex filed a Current Report on Form 8-K
dated September 29, 1998, with respect to restructuring and other
charges recorded during the fourth quarter of fiscal 1998.
(c) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed by
the undersigned, thereunto duly authorized.
Date: December 23, 1998 THERMOTREX CORPORATION
By: /s/ Gary S. Weinstein
Gary S. Weinstein
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated, as of December 23, 1998.
Signature Title
By: /s/ Gary S. Weinstein Chief Executive Officer,
Gary S. Weinstein Chairman of the Board, and Director
By: /s/ John N. Hatsopoulos Chief Financial Officer, Senior
John N. Hatsopoulos Vice President, and Director
By: /s/ Paul F. Kelleher Chief Accounting Officer
Paul F. Kelleher
By: /s/ Morton Collins Director
Morton Collins
By: /s/ Peter O. Crisp Director
Peter O. Crisp
By: /s/ Paul F. Ferrari Director
Paul F. Ferrari
By: /s/ Dr. George N. Hatsopoulos Director
Dr. George N. Hatsopoulos
By: /s/ Robert C. Howard Director
Robert C. Howard
By: /s/ John T. Keiser Director
John T. Keiser
By: /s/ Nicholas T. Zervas Director
Nicholas T. Zervas
18
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Board of Directors of ThermoTrex Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in ThermoTrex Corporation's
Annual Report to Shareholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated December 21, 1998. Our audits were made for
the purpose of forming an opinion on those statements taken as a whole. The
schedule listed in Item 14 on page 17 is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the consolidated financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
December 21, 1998
19
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
THERMOTREX CORPORATION
Valuation and Qualifying Accounts
(In thousands)
<S> <C> <C> <C> <C> <C>
Description Balance at Provision Accounts Other (a) Balance
Beginning Charged Written at End
of to Off of Year
Year Expense
- ------------------------------------------------------------------------------------------------------------
Allowance for Doubtful Accounts
Year Ended October 3, 1998 $ 1,969 $ 970 $ (766) $ 1,498 $ 3,671
Year Ended September 27, 1997 $ 1,586 $ 279 $ (164) $ 268 $ 1,969
Year Ended September 28, 1996 $ 1,141 $ 336 $ (163) $ 272 $ 1,586
(a) Includes allowances of businesses acquired during the year as described in
Note 3 to Consolidated Financial Statements in the Registrant's Fiscal 1998
Annual Report to Shareholders and the effect of currency translation.
Description Balance at Established Activity Other (c) Balance
Beginning as Cost at End
of of Charged of Year
Year Acquisitions to
Reserve
- ------------------------------------------- ------------ ------------- ----------- ------------ ------------
Accrued Acquisition Expenses (b)
Year Ended October 3, 1998 $ 2,506 $ 2,435 $(1,853) $ 174 $ 3,262
Year Ended September 27, 1997 $ 3,317 $ - $ (811) $ - $ 2,506
Year Ended September 28, 1996 $ 3,452 $ 1,159 $(1,294) $ - $ 3,317
- --------------------
(b) The nature of activity in this account is described in Note 3 to
consolidated Financial Statements in the Registrant's Fiscal 1998 Annual
Report to Shareholders.
(c) Includes the effect of foreign currency translation.
Description Balance at Restructuring Assets Balance
Beginning Costs Written Cash Payment at End
of Incurred Off of Year
Year
- ------------------------------------------- ----------- ------------- ------------ ------------ ------------
Accrued Restructuring Costs (d)
Year Ended October 3, 1998 $ - $10,155 $(4,193) $ (809) $ 5,153
- --------------------
(d) The nature of activity in this account is described in Note 13 to
Consolidated Financial Statements in the Registrants Fiscal 1998 Annual
Report to Shareholders.
</TABLE>
20
<PAGE>
EXHIBIT INDEX
1
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
3.1 Restated Certificate of Incorporation, as amended (filed as Exhibit
3(i) to the Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 2, 1994 [File No. 1-10791] and incorporated herein
by reference).
3.2 By-Laws of the Registrant, as amended and restated (filed as Exhibit
3.2 to the Registrant's Transition Report on Form 10-K for the
transition period January 1, 1995, through September 30, 1995 [File
No. 1-10791] and incorporated herein by reference).
4.1 Indenturedated as of October 28, 1997, by and among the Registrant,
Thermo Electron Corporation, and Bankers Trust Company, as Trustee,
relating to $124.5 principal amount of the Registrant's 3 1/4%
Subordinated Convertible Debentures due 2007 (filed as Exhibit 4.1
to the Registrant's Current Report on Form 8-K dated October 28,
1997, and filed with the Securities and Exchange Commission on
October 29, 1997, and incorporated herein by reference).
4.2 Fiscal Agency Agreement dated as of August 12, 1997, among ThermoLase
Corporation, Thermo Electron Corporation, and Bankers Trust Company,
as Fiscal Agent, relating to $115,000,000 principal amount of
ThermoLase's 4 3/8% Subordinated Convertible Debentures due 2004
(filed as Exhibit 4.3 to ThermoLase Corporation's Annual Report on
Form 10-K for the fiscal year ended September 27, 1997 [File No.
1-13104] and incorporated herein by reference).
4.3 First Supplemental Indenture dated as of February 6, 1998, by and
among the Registrant, Thermo Electron Corporation, and Bankers'
Trust Company, as Trustee (filed as Exhibit 4.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended April 4, 1998
[File No. 1-10791] and incorporated herein by reference).
10.1 Asset Transfer Agreement dated December 29, 1990, between Thermo
Electron Corporation and the Registrant (filed as Exhibit 10(a) to
the Registrant's Registration Statement on Form S-1 [Reg. No.
33-40972] and incorporated herein by reference).
10.2 Amended and Restated Corporate Services Agreement dated January 3,
1993, between Thermo Electron Corporation and the Registrant (filed
as Exhibit 10(b) to the Registrant's Annual Report on Form 10-K for
the fiscal year ended January 2, 1993 [File No. 1-10791] and
incorporated herein by reference).
10.3 Form of Indemnification Agreement between the Registrant and its
officers and directors (filed as Exhibit 10(f) to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-40972] and
incorporated herein by reference).
10.4 Thermo Electron Corporate Charter as amended and restated effective
January 3, 1993 (filed as Exhibit 10(g) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 2, 1993 [File
No. 1-10791] and incorporated herein by reference).
10.5 Stock Option Agreement granted to Anthony J. Pellegrino dated
November 16, 1992 (filed as Exhibit 10(n) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 2, 1993 [File
No. 1-10791] and incorporated herein by reference).
21
<PAGE>
Exhibit
Number Description of Exhibit
- -------------------------------------------------------------------------------
10.6 Stock Option Agreement granted to Hal Kirshner dated November 16,
1992 (filed as Exhibit 10(o) to the Registrant's Annual Report on
Form 10-K for the fiscal year ended January 2, 1993 [File No.
1-10791] and incorporated herein by reference).
10.7 Lease dated October 12, 1988, between CBI Laboratories, Inc.,
Trammell Crow Company No. 91, and Petula Associates Ltd., as amended
(filed as Exhibit 10.18 to the Registrant's Annual Report on Form
10-K for the fiscal year ended January 1, 1994 [File No. 1-10791] and
incorporated herein by reference).
10.8 Lease dated September 1, 1993, between CBI Laboratories, Inc.
and Lincoln Valwood, Ltd. (filed as Exhibit 10.19 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended January 1, 1994 [File No. 1-10791] and incorporated
herein by reference).
10.9 Master Repurchase Agreement dated as of January 1, 1994, between the
Registrant and Thermo Electron Corporation (filed as Exhibit 10.9 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
September 27, 1997, and incorporated herein by reference).
10.10 Amended and Restated Master Guarantee Reimbursement and Loan
Agreement dated as of January 1, 1994, among the Registrant,
ThermoLase Corporation, and Thermo Electron Corporation (filed as
Exhibit 10.6 to ThermoLase's Registration Statement on Form S-1 [Reg.
No. 33-78052] and incorporated herein by reference).
10.11 Lease executed February 9, 1995, between LMP Properties Ltd. and the
Registrant (filed as Exhibit 10.22 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1994 [File No.
1-10791] and incorporated herein by reference).
10.12 Stock Purchase Agreement dated as of September 15, 1995, by and among
Bennett X-Ray Corporation, ThermoTrex Corporation, and Calvin
Kleinman, Robert P. Coe, Walter F. Schneider, and Martin Koening
(filed as Exhibit 2 to the Registrant's Current Report on Form 8-K
dated September 14, 1995 [File No. 1-10791] and incorporated herein
by reference).
10.13 Lease dated as of September 15, 1995, by and among the Registrant and
BK Realty Associates, L.P. and Calrob Realty Associates (filed as
Exhibit 10.26 to the Registrant's Transition Report on Form 10-K for
the transition period January 1, 1995, through September 30, 1995
[File No. 1-10791] and incorporated herein by reference).
10.14 Incentive Stock Option Plan of the Registrant (filed as Exhibit 10(h)
to the Registrant's Registration Statement on Form S-1 [Reg. No.
33-40972] and incorporated herein by reference). (Maximum number of
shares issuable in the aggregate under this plan and the Registrant's
Nonqualified Stock Option Plan is 1,945,000 shares, after adjustment
to reflect share increases approved in 1992 and 1993 and 3-for-2
stock split effected in October 1993).
10.15 Nonqualified Stock Option Plan of the Registrant (filed as Exhibit
10(i) to the Registrant's Registration Statement on Form S-1 [Reg.
No. 33-40972] and incorporated herein by reference). (Maximum number
of shares issuable in the aggregate under this plan and the
Registrant's Incentive Stock Option Plan is 1,945,000 shares, after
adjustment to reflect share increases approved in 1992 and 1993 and
3-for-2 stock split effected in October 1993).
22
<PAGE>
Exhibit
Number Description of Exhibit
- ----------------------------------------------------------------------------
10.16 ThermoTrex Corporation - ThermoLase Corporation (formerly ThermoLase
Inc.) Nonqualified Stock Option Plan (filed as Exhibit 10.53 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
January 1, 1994 [File No. 1-10791] and incorporated herein by
reference).
10.17 ThermoTrex Corporation - Trex Medical Corporation Nonqualified Stock
Option Plan (filed as Exhibit 10.73 to Thermo Cardiosystems' Annual
Report on Form 10-K for the fiscal year ended December 30, 1995 [File
No. 1-10114] and incorporated
herein by reference).
10.18 ThermoTrex Corporation - Trex Communications Corporation
Nonqualified Stock Option Plan.
10.19 Directors Stock Option Plan of the Registrant (filed as Exhibit 10.26
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 [File No. 1-10791] and incorporated herein by
reference).
In addition to the stock-based compensation plans of the Registrant,
the executive officers of the Registrant may be granted awards under
stock-based compensation plans of Thermo Electron for services
rendered to the Registrant. The terms of such plans are substantially
the same as those of the Registrant's Equity Incentive Plan.
10.20 Operating Agreement of ThermoLase Japan L.L.C. dated as of January
22, 1996, between ThermoLase Corporation and Fox River Japan
Partners, L.P. (filed as Exhibit 10.1 to ThermoLase's Quarterly
Report on Form 10-Q for the quarter ended December 30, 1995 [File No.
1-13104] and incorporated herein by reference).
10.21 License Agreement dated as of January 22, 1996, between ThermoLase
Corporation and ThermoLase Japan L.L.C. (filed as Exhibit 10.2 to
ThermoLase's Quarterly Report on Form 10-Q for the quarter ended
December 30, 1995 [File No. 1-13104] and incorporated herein by
reference).
10.22 Option Agreement dated as of January 22, 1996, between ThermoLase
Corporation and Fox River Japan Partners, L.P. (filed as Exhibit 10.3
to ThermoLase's Quarterly Report on Form 10-Q for the quarter ended
December 30, 1995 [File No. 1-13104] and incorporated herein by
reference).
10.23 Amendment to Operating Agreement of ThermoLase Japan L.L.C. dated as
of May 1, 1996, by and among ThermoLase Corporation, Fox River
Partners L.P., and ThermoLase Japan L.L.C. (filed as Exhibit 10.29 to
ThermoLase Corporation's Annual Report on Form 10-K for the fiscal
year ended September 27, 1997 [File No. 1-13104] and incorporated
herein by reference).
10.24 License Agreement dated as of October 30, 1995, between ThermoLase
Corporation and Ronald G. Wheeland, M.D., Professional Corporation
(filed as Exhibit 10.4 to ThermoLase's Quarterly Report on Form 10-Q
for the quarter ended December 30, 1995 [File No. 1-13104] and
incorporated herein by reference).
10.25 Management Agreement dated as of October 30, 1995, between ThermoLase
Corporation and Ronald G. Wheeland, M.D., Professional Corporation
(filed as Exhibit 10.5 to ThermoLase's Quarterly Report on Form 10-Q
for the quarter ended December 30, 1995 [File No. 1-13104] and
incorporated herein by reference).
23
<PAGE>
Exhibit
Number Description of Exhibit
- ----------------------------------------------------------------------------
10.26 Sublease Agreement dated as of October 30, 1995, between ThermoLase
Corporation and Ronald G. Wheeland, M.D., Professional Corporation
(filed as Exhibit 10.6 to ThermoLase's Quarterly Report on Form 10-Q
for the quarter ended December 30, 1995 [File No. 1-13104] and
incorporated herein by reference).
10.27 Lease dated as of April 12, 1995, between ThermoLase Corporation and
The Goldberg Family Trust (filed as Exhibit 10.7 to ThermoLase's
Quarterly Report on Form 10-Q for the quarter ended December 30, 1995
[File No. 1-13104] and incorporated herein by reference).
10.28 Lease dated as of December 8, 1995, between ThermoLase Corporation
and Canon Properties (filed as Exhibit 10.8 to ThermoLase's Quarterly
Report on Form 10-Q for the quarter ended December 30, 1995 [File No.
1-13104] and incorporated herein by reference).
10.29 Lease dated as of January 17, 1996, between ThermoLase Corporation
and Trammell Crow Equity Partners (filed as Exhibit 10.9 to
ThermoLase's Quarterly Report on Form 10-Q for the quarter ended
December 30, 1995 [File No. 1-13104] and incorporated herein by
reference).
10.30 Lease dated as of December 20, 1995, between Melvyn J. Powers and
Mary P. Powers D/B/A M&M Realty and Trex Medical Corporation as
amended (filed as Exhibit 10.14 to Trex Medical's Registration
Statement on Form S-1 [Reg. No. 333-2926] and incorporated herein by
reference).
10.31 Lease dated May 29, 1996, between John K. Grady, Trustee of Concord
Associates Foster Street Trust and XRE Corporation (filed as Exhibit
10.89 to Trex Medical's Registration Statement on Form S-1 [Reg. No.
333-2926] and incorporated herein by reference).
10.32 Asset Purchase Agreement dated September 4, 1996, by and among CXR
Acquisition Corp., Trex Medical Corporation, Continental X-Ray
Corporation, Alphatek Corporation, Broadview Manufacturing
Corporation, Haymarket Square Associates, Advanced Medical Imaging,
Inc., Trans-Continental X-ray Corporation, and the Stockholders and
Partners thereof (filed as Exhibit 10.21 to Trex Medical's
Registration Statement on Form S-1 [Reg. No. 333-15381] and
incorporated herein by reference).
10.33 Master Joint Venture Agreement dated as of October 30, 1996, among
ThermoLase Corporation, Franklin Holdings, S.A., and Yves Micheli
(filed as Exhibit 10.26 to ThermoLase's Annual Report on Form 10-K
for the fiscal year ended September 28, 1996 [File No. 1-13104] and
incorporated herein by reference).
10.34 SoftLight and Spa Thira Franchise and License Agreement dated as of
November 8, 1996, between ThermoLase Corporation and Medical Supply &
Service Co. (filed as Exhibit 10.27 to ThermoLase's Annual Report on
Form 10-K for the fiscal year ended September 28, 1996 [File No.
1-13104] and incorporated
herein by reference).
10.35 Equipment License Agreement for SoftLight Lasers dated as of November
8, 1996, between ThermoLase Corporation and Medical Supply & Service
Co. (filed as Exhibit 10.28 to ThermoLase's Annual Report on Form
10-K for the fiscal year ended September 28, 1996 [File No. 1-13104]
and incorporated herein by reference).
24
<PAGE>
Exhibit
Number Description of Exhibit
- ----------------------------------------------------------------------------
10.36 Promissory Note due April 30, 1997, issued by the Registrant to
Thermo Electron Corporation (filed as Exhibit 10.35 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 28, 1996, and incorporated herein by reference).
10.37 Promissory Note due October 5, 1998, issued by the Registrant to
Thermo Electron Corporation (filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
28, 1997, and incorporated herein by reference).
10.38 Amended and Restated Stock Holding Assistance Plan and Form of
Promissory Note (filed as Exhibit 10.38 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 27, 1997 and
incorporated herein by reference).
10.39 Deferred Compensation Plan for Directors of the Registrant (filed as
Exhibit 10(j) to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-40972] and incorporated
herein by reference).
10.40 Amended and Restated Guarantee and Loan Agreement dated December 12,
1997, between the Company and Thermo Electron Corporation (filed as
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended January 3, 1998).
10.41 Amended and Restated Guarantee and Loan Agreement dated December 12,
1997, between ThermoLase Corporation and Thermo Electron Corporation
(incorporated by reference from Exhibit 10.2 to ThermoLase
Corporation's Quarterly Report on Form 10-Q for the quarter ended
January 3, 1998 [File No. 1-13104] filed as Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
January 3, 1998).
10.42 Amended and Restated Guarantee and Loan Agreement dated December 12,
1997, between Trex Medical Corporation and Thermo Electron
Corporation (incorporated by reference from Exhibit 10.1 to Trex
Medical Corporation's Quarterly Report on Form 10-Q for the quarter
ended January 3, 1998 [File No. 1-11827] filed as Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
January 3, 1998).
10.43 Promissory Note of SMK Group LLC, dated July 7, 1998, payable to the
order of the Company (filed as Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended July 4, 1998).
10.44 Pledge and Security Agreement, dated July 7, 1998, by and between
SMK Group LLC and the Company (filed as Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
July 4, 1998).
13 Annual Report to Shareholders for the fiscal year ended October 3,
1998 (only those portions incorporated herein by reference).
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
99.1 Form of ThermoLase Corporation Unit Certificate (filed as
Exhibit 4.1 to ThermoLase's Registration Statement on Form S-4
[Reg. No. 333-19633] and incorporated herein by reference).
Exhibit 13
ThermoTrex Corporation
Consolidated Financial Statements
Fiscal Year 1998
<PAGE>
<TABLE>
<CAPTION>
ThermoTrex Corporation 1998 Financial Statements
Consolidated Statement of Operations
<S> <C> <C> <C>
Year Ended
-----------------------------
(In thousands except per share amounts) Oct. 3, Sept. 27, Sept. 28,
1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Revenues (Notes 7 and 13)
Product revenues $ 294,310 $237,629 $ 169,669
Other revenues 47,548 44,492 12,360
--------- -------- ---------
341,858 282,121 182,029
--------- -------- ---------
Costs and Operating Expenses:
Cost of product revenues 165,688 141,556 100,211
Cost of other revenues 44,628 38,580 12,034
Selling, general, and administrative expenses (Note 7) 91,028 69,043 41,283
Research and development expenses 39,826 32,067 24,986
Restructuring and nonrecurring costs (Notes 3 and 11) 10,155 1,400 -
--------- -------- ---------
351,325 282,646 178,514
--------- -------- ---------
Operating Income (Loss) (9,467) (525) 3,515
Interest Income 12,942 4,752 5,977
Interest Expense (includes $511, $197, and $464 to parent company; (9,479) (835) (464)
Note 8)
Gain on Issuance of Stock by Subsidiaries (Note 10) 23,798 7,926 39,149
Gain on Sale of Investments - - 115
Equity in Loss of Joint Ventures (Note 3) (1,203) (700) -
--------- -------- ---------
Income Before Provision for Income Taxes, Minority Interest, and 16,591 10,618 48,292
Extraordinary Item
Provision for Income Taxes (Note 6) (17,463) (3,474) (5,341)
Minority Interest (Expense) Income (4,750) 1,297 (376)
--------- -------- ---------
Income (Loss) Before Extraordinary Item (5,622) 8,441 42,575
Extraordinary Item, Net of Income Taxes of $1,692 (Note 8) 3,009 - -
--------- -------- ---------
Net Income (Loss) $ (2,613) $ 8,441 $ 42,575
========= ======== =========
Earnings (Loss) per Share (Note 14)
Basic $ (.14) $ .44 $ 2.23
========= ======== =========
Diluted $ (.14) $ .43 $ 2.16
======== ======== =========
Weighted Average Shares (Note 14)
Basic 18,704 19,210 19,075
========= ======== =========
Diluted 18,704 19,599 19,669
========= ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
ThermoTrex Corporation 1998 Financial Statements
Consolidated Balance Sheet
(In thousands) Oct. 3, Sept. 27,
1998 1997
- -------------------------------------------------------------------------------------- ---------- ----------
Assets
Current Assets:
Cash and cash equivalents (includes $146,534 and $91,164 under $ 157,107 $ 135,720
repurchase agreement with parent company)
Available-for-sale investments, at quoted market value (amortized cost 8,076 17,499
of $8,086 and $17,520; Note 2)
Accounts receivable, less allowances of $3,671 and $1,969 85,790 58,632
Unbilled contract costs and fees 7,409 4,651
Inventories 86,223 48,204
Prepaid expenses and other assets (includes $1,300 due from related 5,890 3,422
party in fiscal 1998; Note 7)
Prepaid income taxes (Note 6) 13,988 11,877
--------- ---------
364,483 280,005
--------- ---------
Property, Plant, and Equipment, at Cost, Net 60,511 52,389
--------- ---------
Notes Receivable from Related Parties (Note 7) 6,667 3,300
--------- ---------
Prepaid Income Taxes and Other Assets (Note 6) 9,200 13,831
--------- ---------
Cost in Excess of Net Assets of Acquired Companies (Note 3) 154,845 100,592
--------- ---------
$ 595,706 $ 450,117
========= =========
3
<PAGE>
ThermoTrex Corporation 1998 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) Oct. 3, Sept. 27,
1998 1997
- -------------------------------------------------------------------------------------- ---------- ----------
Liabilities and Shareholders' Investment
Current Liabilities:
Current maturities of long-term obligations (Note 8) $ 435 $ 63
Note payable to parent company (Note 7) - 11,000
Accounts payable 30,871 21,373
Accrued payroll and employee benefits 12,147 8,863
Accrued warranty costs 9,233 6,299
Customer deposits 5,476 3,795
Accrued commissions 7,629 3,922
Other accrued expenses (Notes 3 and 11) 31,763 20,387
Due to parent company and affiliated companies 5,252 2,027
--------- ---------
102,806 77,729
--------- ---------
Deferred Income Taxes 6,418 -
--------- ---------
Deferred Lease Liability 1,172 1,379
--------- ---------
Long-term Obligations:
Subordinated Convertible Debentures (includes $14,500 of related-party 203,948 115,000
debt in fiscal 1998; Note 8)
Other 697 -
--------- ---------
204,645 115,000
--------- ---------
Common Stock of Subsidiary Subject to Redemption (Note 1) 40,500 40,500
--------- ---------
Minority Interest 90,578 39,374
--------- ---------
Commitments and Contingencies (Notes 3, 7, 9, and 11)
Shareholders' Investment (Notes 4 and 5):
Common stock, $.01 par value, 50,000,000 shares authorized; 19,590,446 196 193
and 19,251,769 shares issued
Capital in excess of par value 73,293 78,601
Retained earnings 94,984 97,597
Treasury stock at cost, 929,100 and 8,747 shares (20,944) (243)
Cumulative translation adjustment 2,064 -
Net unrealized loss on available-for-sale investments (Note 2) (6) (13)
--------- ---------
149,587 176,135
--------- ---------
$ 595,706 $ 450,117
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
ThermoTrex Corporation 1998 Financial Statements
Consolidated Statement of Cash Flows
Year Ended
------------------------------
(In thousands) Oct. 3, Sept. 27, Sept. 28,
1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Operating Activities
Net income (loss) $ (2,613) $ 8,441 $ 42,575
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 15,710 9,280 4,902
Provision for losses on accounts receivable 970 279 336
Gain on issuance of stock by subsidiaries (Note 10) (23,798) (7,926) (39,149)
Gain on repurchase of subordinated convertible debentures (Note 8) (4,701) - -
Minority interest (income) expense 4,750 (1,297) 376
Increase (decrease) in deferred income taxes 10,080 (4,308) -
Noncash restructuring costs (Note 11) 4,193 - -
Equity in loss of joint ventures (Note 3) 1,203 700 -
Other noncash items 1,224 2,324 379
Changes in current accounts, excluding the effects of acquisitions:
Accounts receivable (13,605) (19,694) (2,790)
Inventories and unbilled contract costs and fees (27,310) (11,290) (1,176)
Other current assets (2,334) (3,311) (2,734)
Accounts payable (4,777) 1,522 1,254
Other current liabilities (Note 11) 2,958 11,208 1,688
--------- -------- ---------
Net cash provided by (used in) operating activities (38,050) (14,072) 5,661
--------- -------- ---------
Investing Activities
Acquisitions, net of cash acquired (Note 3) (45,002) (10,712) (36,888)
Proceeds from sale and maturities of available-for-sale 13,400 44,000 65,230
investments
Purchases of available-for-sale investments (4,000) (10,400) (52,000)
Purchases of property, plant, and equipment (10,612) (26,853) (14,462)
Advances under notes receivable to related parties (Note 7) (4,667) - (1,300)
Investment in other assets 701 (1,200) (4,400)
Proceeds from sale of businesses to related parties (Note 7) - - 860
Other 756 - 301
--------- -------- ---------
Net cash used in investing activities (49,424) (5,165) (42,659)
--------- -------- ---------
Financing Activities
Net proceeds from issuance of subordinated convertible debentures 121,814 112,551 -
(Note 8)
Repurchase of subordinated convertible debentures (Note 8) (30,486) - -
Net proceeds from issuance of Company and subsidiaries' common 71,530 16,370 71,873
stock and sale of subsidiary put options (Note 10)
Net proceeds from subsidiary stock exchange offer (Note 10) - 502 -
Purchases of Company and subsidiary common stock (38,966) (26,072) -
Proceeds from issuance of notes payable to parent company (Note 7) - 11,000 2,000
Repayment of notes payable to parent company (Note 7) (11,000) (2,000) (8,000)
Payment of withholding taxes related to stock option exercises (3,415) (1,334) (6,447)
--------- -------- ---------
Net cash provided by financing activities $ 109,477 $111,017 $ 59,426
--------- -------- ---------
5
<PAGE>
ThermoTrex Corporation 1998 Financial Statements
Consolidated Statement of Cash Flows (continued)
Year Ended
------------------------------
(In thousands) Oct. 3, Sept. 27, Sept. 28,
1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Exchange Rate Effect on Cash $ (616) $ - $ -
--------- -------- ---------
Increase in Cash and Cash Equivalents 21,387 91,780 22,428
Cash and Cash Equivalents at Beginning of Year 135,720 43,940 21,512
--------- -------- ---------
Cash and Cash Equivalents at End of Year $ 157,107 $135,720 $ 43,940
========= ======== =========
Cash Paid For
Interest $ 8,255 $ 197 $ 464
Income taxes $ 16,858 $ 6,622 $ 3,106
Noncash Activities
Fair value of assets of acquired companies $ 96,509 $ 14,677 $ 53,519
Cash paid for acquired companies (47,757) (11,150) (38,178)
Issuance of subsidiaries' common stock for acquired companies (11,175) - -
--------- -------- ---------
Liabilities assumed of acquired companies $ 37,577 $ 3,527 $ 15,341
========= ======== =========
Exchange of subsidiary common stock for common stock of $ - $ 40,500 $ -
subsidiary subject to redemption (Note 1) ========= ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
ThermoTrex Corporation 1998 Financial Statements
Consolidated Statement of Shareholders' Investment
Year Ended
------------------------------
(In thousands) Oct. 3, Sept. 27, Sept. 28,
1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Common Stock, $.01 Par Value
Balance at beginning of year $ 193 $ 192 $ 191
Issuance of stock under employees' and directors' stock plans 3 1 1
--------- -------- ---------
Balance at end of year 196 193 192
--------- -------- ---------
Capital in Excess of Par Value
Balance at beginning of year 78,601 116,753 116,837
Activity under employees' and directors' stock plans 1,147 (103) (424)
Tax benefit related to employees' and directors' stock plans 670 3,017 2,494
Effect of majority-owned subsidiaries' equity transactions (7,125) (41,066) (2,154)
--------- -------- ---------
Balance at end of year 73,293 78,601 116,753
--------- -------- ---------
Retained Earnings
Balance at beginning of year 97,597 89,156 46,581
Net income (loss) (2,613) 8,441 42,575
--------- -------- ---------
Balance at end of year 94,984 97,597 89,156
--------- -------- ---------
Treasury Stock
Balance at beginning of year (243) (975) (1,206)
Purchases of Company common stock (20,164) - -
Activity under employees' and directors' stock plans (537) 732 231
--------- -------- ---------
Balance at end of year (20,944) (243) (975)
--------- -------- ---------
Cumulative Translation Adjustment
Balance at beginning of year - - -
Translation adjustment 2,064 - -
--------- -------- ---------
Balance at end of year 2,064 - -
--------- -------- ---------
Net Unrealized Loss on Available-for-sale Investments
Balance at beginning of year (13) (47) (15)
Change in net unrealized loss on available-for-sale investments 7 34 (32)
--------- -------- ---------
(Note 2)
Balance at end of year (6) (13) (47)
--------- -------- ---------
Total Shareholders' Investment $ 149,587 $176,135 $ 205,079
========= ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
7
<PAGE>
ThermoTrex Corporation 1998 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
ThermoTrex Corporation (the Company) develops and markets medical products
and personal-care products and services, and also performs advanced technology
research. The Company's 67%-owned Trex Medical Corporation subsidiary designs,
manufactures, and markets mammography equipment and minimally invasive digital
breast-biopsy systems; general-purpose and specialized medical X-ray equipment,
including imaging systems used during interventional vascular and cardiac
procedures such as balloon angioplasty; and dental X-ray systems. The Company's
71%-owned ThermoLase Corporation subsidiary has developed laser-based
hair-removal and skin-resurfacing systems called the SoftLight(R) and the
SoftLight Laser Peel, respectively, and also manufactures and markets skin-care
and bath and body products and markets dietary supplements through its wholly
owned Creative Beauty Innovations, Inc. (CBI) subsidiary. During fiscal 1998,
ThermoLase acquired The Greenhouse Spa, Inc. (Note 3), a luxury, destination spa
located in Arlington, Texas. In connection with this acquisition, ThermoLase is
converting its domestic Spa Thira locations into facilities that provide both
traditional day spa and hair-removal and skin-resurfacing services. The
converted spas will be operated under The Greenhouse Spa name. The Company's
73%-owned Trex Communications Corporation subsidiary designs and markets
interactive information, voice-response, and call-automation systems;
manufactures ground-based satellite communication systems; and develops and
integrates telemetry systems. In addition, the Company performs advanced
technology research primarily in the areas of 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.
Relationship with Thermo Electron Corporation
The Company was incorporated in January 1991 as a wholly owned subsidiary
of Thermo Electron Corporation. As of October 3, 1998, Thermo Electron owned
11,494,908 shares of the Company's common stock, representing 62% of such stock
outstanding.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company,
its wholly owned subsidiary, its majority-owned, privately held Trex
Communications subsidiary, and its publicly held ThermoLase and Trex Medical
subsidiaries. All material intercompany accounts and transactions have been
eliminated.
The Company accounts for investments in joint ventures in which it owns
between 20% and 50% using the equity method. Under the equity method, the
Company records its initial investment in each joint venture at cost, and
adjusts the carrying value of the investment to recognize its proportionate
share of the joint venture's earnings or losses. In instances where the Company
has no obligation to provide additional funding to a joint venture, the Company
discontinues applying the equity method when its investment has been reduced to
zero.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest
September 30. References to fiscal 1998, 1997, and 1996 are for the years ended
October 3, 1998, September 27, 1997, and September 28, 1996, respectively.
Fiscal 1998 included 53 weeks; fiscal 1997 and 1996 each included 52 weeks.
Revenue Recognition
The Company generally recognizes product revenues upon shipment of its
products. The Company provides a reserve for its estimate of warranty costs at
the time of shipment. ThermoLase offers a variety of treatment plans for its
spa-based services, which include one-time services and multiple treatment plans
that provide for varying numbers of treatments or treatment periods. ThermoLase
recognizes revenue from the one-time treatment plan upon performance of the
related service. Revenues from multiple treatment plans are recognized over the
anticipated treatment period, which was six months in each period based upon the
average service pattern for customers treated.
8
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
ThermoLase earns an initial technology licensing fee and ongoing royalties from
licensing its SoftLight technology to a network of independent physicians.
Initial nonrefundable technology licensing fees are recorded as revenue at the
time the technology is transferred to the practitioner. Royalties arising from
hair-removal and skin-resurfacing procedures performed by these physicians are
recognized when such procedures are performed. ThermoLase has initiated the
process of modifying the terms of its physician-licensing program, under which
per-procedure royalties have been reduced or eliminated and a minimum royalty
and/or flat periodic fee is required. Minimum royalties and flat fees are
recognized monthly. ThermoLase earns an initial technology licensing fee and
ongoing technology licensing royalties from its international arrangements.
Initial nonrefundable technology licensing fees are recorded as revenue at the
time the technology is transferred. Ongoing technology licensing royalties are
recorded when earned in accordance with contractual terms. The accompanying
statement of operations includes international licensing fees of $2,760,000,
$4,195,000, and $2,000,000 in fiscal 1998, 1997, and 1996, respectively.
The Company recognizes contract revenues and profits using the
percentage-of-completion method. Revenues recorded under the
percentage-of-completion method were $23,642,000, $16,174,000, and $12,360,000
in fiscal 1998, 1997, and 1996, respectively. The percentage of completion is
determined by relating the actual costs incurred to date to management's
estimate of total costs 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 are generally cost-plus-fixed-fee, and customers are
billed monthly as costs are incurred. Revenues earned on contracts in process in
excess of billings are classified as "Unbilled contract costs and fees" in the
accompanying balance sheet. There are no significant amounts included in the
accompanying balance sheet that are not expected to be recovered from existing
contracts at current contract values, or that are not expected to be collected
within one year.
Research and Development Expenses
Costs classified as research and development expenses in the accompanying
statement of operations are costs incurred in connection with internally funded
programs, including independent research and development as defined by U.S.
government procurement regulations. Included in other cost of revenues in the
accompanying statement of operations are research and development costs incurred
under U.S. government-funded contracts.
Gain on Issuance of Stock by Subsidiaries
At the time a subsidiary sells its stock to unrelated parties at a price
in excess of its book value, the Company's net investment in that subsidiary
increases. If at that time the subsidiary is an operating entity and not engaged
principally in research and development, the Company records the increase as a
gain. See Note 10 for a description of gains recorded.
If gains have been recognized on the issuance of a subsidiary's stock and
shares of the subsidiary are subsequently repurchased either 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.
Concentration of Credit Risk
Trex Medical sells its products primarily to customers in the healthcare
industry. Trex Medical does not normally require collateral or other security to
support its accounts receivable. Management does not believe that this
concentration of credit risk has, or will have, a significant negative impact on
the Company.
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 5). 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.
9
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Income Taxes
In accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," the Company recognizes deferred income taxes
based on the expected future tax consequences of differences between the
financial statement basis and the tax basis of assets and liabilities calculated
using enacted tax rates in effect for the year in which the differences are
expected to be reflected in the tax return, subject to determination of the need
for a valuation allowance for any deferred tax assets (Note 6).
Earnings (Loss) per Share
During the first quarter of fiscal 1998, the Company adopted SFAS No. 128,
"Earnings per Share" (Note 14). As a result, all previously reported earnings
per share have been restated; however, basic earnings per share equals the
Company's previously reported earnings per share for fiscal 1997. 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.
Cash and Cash Equivalents
At fiscal year-end 1998 and 1997, $146,534,000 and $91,164,000,
respectively, of the Company's cash equivalents were invested in a repurchase
agreement with Thermo Electron. Under this agreement, the Company in effect
lends excess cash to Thermo Electron, which Thermo Electron collateralizes with
investments principally consisting of corporate notes, U.S. government-agency
securities, commercial paper, money market funds, and other marketable
securities, in the amount of at least 103% of such obligation. The Company's
funds subject to the repurchase agreement are readily convertible into cash by
the Company. The repurchase agreement earns a rate based on the 90-day
Commercial Paper Composite Rate plus 25 basis points, set at the beginning of
each quarter. At October 3, 1998, the Company's cash and cash equivalents also
include cash held in accounts in the United States and foreign countries. Cash
equivalents at September 27, 1997, included government-agency securities
purchased with an original maturity of three months or less. These investments
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:
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------- -------- ---------
Raw Materials and Supplies $38,788 $ 27,860
Work in Process 20,134 13,474
Finished Goods 27,301 6,870
------- --------
$86,223 $ 48,204
======= ========
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 principally using the straight-line method over
the estimated useful lives of the property as follows: buildings, 29 to 40
years; machinery and equipment, 3 to 10 years; and leasehold improvements, the
shorter of the term of the lease or the life of the asset.
10
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Property, plant, and equipment consists of the following:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------- -------- ---------
Land $ 2,029 $ 1,299
Buildings 11,707 3,715
Machinery and Equipment 47,420 40,806
Leasehold Improvements 21,350 22,137
------- --------
82,506 67,957
Less: Accumulated Depreciation and Amortization 21,995 15,568
------- --------
$60,511 $ 52,389
======= ========
</TABLE>
Other Assets
In June 1996, ThermoLase purchased $4,400,000 of convertible preferred
stock of AntiCancer Inc., representing an approximate 10% equity interest in
AntiCancer on a diluted basis. AntiCancer is a San Diego-based company that is
developing a new chemotherapeutic drug for cancer patients, and is also
developing certain technologies that may be relevant to ThermoLase's SoftLight
hair-removal process and other personal-care applications. ThermoLase has the
option to purchase for $2,500,000 an additional 5% equity interest in AntiCancer
on a diluted basis, exercisable at any time before the earlier of June 19, 2011,
or AntiCancer's initial public offering of stock. This investment is being
accounted for under the cost method of accounting. In addition, ThermoLase has
licensed certain technology from AntiCancer (Note 9).
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 of 10 to 40 years.
Accumulated amortization was $12,484,000 and $8,167,000 at fiscal year-end 1998
and 1997, respectively. The Company assesses the future useful life of this
asset whenever events or changes in circumstances indicate that the current
useful life has diminished. The Company considers the future undiscounted cash
flows of the acquired businesses in assessing the recoverability of this asset.
If impairment has occurred, any excess of carrying value over fair value is
recorded as a loss.
Deferred Lease Liability
Deferred lease liability in the accompanying balance sheet represents
facilities rent that is being recognized ratably over the respective lease
terms.
Common Stock of Subsidiary Subject to Redemption
On April 2, 1997, ThermoLase completed an exchange offer whereby its
shareholders had the opportunity to exchange one share of existing ThermoLase
common stock and $3.00 (in cash or ThermoLase common stock) for a new unit
consisting of one share of ThermoLase common stock and one redemption right. The
redemption right entitles the holder to sell the related share of common stock
to ThermoLase for $20.25 during the period from April 3, 2001, through April 30,
2001. The redemption right will expire and become worthless if the closing price
of ThermoLase common stock is at least $26.00 for 20 of any 30 consecutive
trading days. The redemption rights are guaranteed on a subordinated basis by
Thermo Electron. The Company and Thermo Electron are parties to an Amended and
Restated Master Guarantee Reimbursement and Loan Agreement whereby the Company
would be required to reimburse Thermo Electron for any and all payments made by
Thermo Electron under the guarantee. In
11
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
connection with this offer, in April 1997, ThermoLase issued 2,000,000 units in
exchange for 2,261,706 shares of its common stock and $502,000 in cash, net of
expenses. As a result of these transactions, $40,500,000 was reclassified from
"Shareholders' investment" and "Minority interest" to "Common stock of
subsidiary subject to redemption," based on the issuance of 2,000,000 redemption
rights, each carrying a maximum liability to ThermoLase of $20.25.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Presentation
Certain amounts in fiscal 1997 and 1996 have been reclassified to conform
to the presentation in the fiscal 1998 financial statements.
2. Available-for-sale Investments
In accordance with SFAS No. 115 "Accounting for Certain Investments in
Debt and Equity Securities," 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 as a component of shareholders' investment titled
"Net unrealized loss on available-for-sale investments."
Available-for-sale investments in the accompanying balance sheet
represents investments in government-agency securities. The difference between
the market value and the cost basis of available-for-sale investments was
$10,000 and $21,000 at fiscal year-end 1998 and 1997, respectively, which
represent gross unrealized losses on those investments. Available-for-sale
investments in the accompanying fiscal 1998 balance sheet have contractual
maturities of one year or less.
The cost of available-for-sale investments that were sold was based on
specific identification in determining realized gains and losses recorded in the
accompanying statement of operations. Gain on sale of investments in the
accompanying fiscal 1996 statement of operations represents gross realized gains
relating to the sale of available-for-sale investments.
3. Acquisitions and Joint Ventures
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 $7,975,000 at the time of the transaction, and the repayment of
$4,180,000 of debt for all of the outstanding stock of Greenhouse.
Greenhouse operates a luxury destination spa in Arlington, Texas.
In May 1998, the Company's Trex Communications subsidiary acquired
Electro-Magnetic Processes, Inc. (EMP) for 800,000 shares of Trex Communications
common stock valued, at $3,200,000 at the time of the transaction, $2,500,000 in
cash, and the repayment of $675,000 of debt. EMP designs, develops, and
manufactures ground-based satellite communication systems and develops and
integrates telemetry systems used on military aircraft.
In April 1998, Trex Medical acquired the outstanding stock of Trophy
Radiologie S.A., a French manufacturer of dental and medical X-ray systems
specializing in digital dental technology. The purchase price consisted of
$23,979,000 in cash, the repayment of $8,707,000 of debt, and additional
consideration, not to exceed approximately $8,000,000, if Trophy achieves
certain future earnings targets through fiscal 1999.
12
<PAGE>
3. Acquisitions and Joint Ventures (continued)
In October 1997, Trex Medical's XRE division acquired substantially all of
the assets of Digitec Corporation for $7,176,000 in cash, subject to certain
liabilities. Digitec manufactures physiological-monitoring equipment and
digital-image archiving and networking systems used in cardiac catherization
procedures.
In July 1997, Trex Communications acquired all of the outstanding common
stock of Computer Communications Specialists, Inc. (CCS) for approximately
$10,100,000 in cash and repaid approximately $1,000,000 of pre-acquisition
liabilities immediately after closing. CCS develops and markets interactive
information and voice-response systems, as well as call-automation systems. The
acquired assets of CCS included certain technologies for which technological
feasibility had not been established at the acquisition date and that had no
alternative future use. In connection with the acquisition, Trex Communications
wrote off such technology in the amount of $1,400,000, which represents the
portion of the purchase price allocated to the fair value of technology in
development at the acquired business.
In September 1996, Trex Medical acquired substantially all of the assets
and liabilities of Continental X-Ray Corporation and affiliates for
approximately $18,400,000 in cash, net of cash acquired and including the
repayment of debt. Continental manufactures general-purpose and specialized
X-ray systems.
In May 1996, Trex Medical acquired substantially all of the assets and
liabilities of XRE Corporation for $18,500,000 in cash, net of cash acquired and
including the repayment of debt. XRE manufactures X-ray imaging systems used in
the diagnosis and treatment of coronary artery disease and other vascular
conditions.
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 $86,229,000, which is being amortized over periods of
10 to 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 made in fiscal 1998, is subject to adjustment upon finalization of
the purchase price allocation. To date, no information has been gathered that
would cause the Company to believe that the final allocations of purchase price
will be materially different from the preliminary estimates. Pro forma data is
not included as the effect of these acquisitions was not material to the
Company's results of operations.
In connection with the acquisition of Trophy, Trex Medical has undertaken
a restructuring of the acquired business. This restructuring is expected to
primarily include costs for the termination of certain joint venture
arrangements, a reduction in staffing levels, and abandoned-facility payments.
In accordance with the requirements of Emerging Issues Task Force (EITF)
Pronouncement No. 95-3, as part of the cost of the acquisition, Trex Medical
established a reserve of approximately $2,156,000 for restructuring Trophy, of
which Trex Medical expended $232,000 in fiscal 1998, primarily for severance
payments. Unresolved matters at October 3, 1998, primarily included terminating
joint ventures, completing planned severances, and the abandonment of excess
facilities. In accordance with the requirements of EITF 95-3, Trex Medical will
finalize its restructuring plan for Trophy no later than one year from the date
of acquisition.
Trex Medical also established a reserve as part of the cost of the
acquisition of Lorad for legal fees and other costs associated with a patent
infringement suit that existed prior to the Company's 1992 acquisition of Lorad.
The balance of this reserve was $1,100,000 and $2,000,000 at fiscal year-end
1998 and 1997, respectively. Trex Medical expended $900,000 of such reserve
during fiscal 1998, primarily for legal fees in connection with the suit. This
suit was brought by Fischer Imaging Corporation, alleging that Lorad infringes a
Fischer patent on a precision mammographic needle-biopsy system. A second patent
infringement lawsuit with respect to Lorad's breast-biopsy system was filed by
Fischer in April 1998. These lawsuits have been consolidated into a single
lawsuit. An unsuccessful resolution could have a material adverse effect on the
Company's future results of operations and financial position.
Other accrued expenses in the accompanying balance sheet includes
$3,262,000 and $2,506,000 at fiscal year-end 1998 and 1997, respectively, for
estimated reserves associated with acquisitions, including Trophy (described
above), and the reserve for the patent infringement suit.
13
<PAGE>
3. Acquisitions and Joint Ventures (continued)
Joint Ventures
ThermoLase has entered into joint venture arrangements to market its
SoftLight system internationally. ThermoLase currently holds between a 35% and
50% stake in each joint venture, but may increase its ownership to above 50%
pursuant to fair-value purchase options included in each agreement. Certain of
the joint venture agreements provide that ThermoLase's joint venture partners
may, under certain conditions, elect to sell all or part of their ownership
interest back to ThermoLase at the fair value of such interest at the time the
election is made. Amounts advanced under such arrangements totaled $2,650,000 in
fiscal 1998, including funding pursuant to a $1,667,000 note receivable to
ThermoLase U.K. Limited (Note 7), and $1,144,000 in fiscal 1997. As of October
3, 1998, ThermoLase had no material obligation for further funding of such
arrangements. The accompanying fiscal 1998 and 1997 statement of operations
includes $1,203,000 and $700,000, respectively, of equity in loss of joint
ventures, reflecting the Company's share of losses from joint venture
operations. During fiscal 1998, ThermoLase closed its spa in France, liquidated
its French joint venture, and wrote off its remaining investment. The Company
recorded costs of $3,600,000 associated with terminating this arrangement, which
are included in restructuring costs in the accompanying statement of operations
(Note 11).
4. Common Stock
As of October 3, 1998, the Company had reserved 4,950,315 unissued shares
of its common stock for possible issuance under stock-based compensation plans
and possible issuance upon conversion of its subordinated convertible
debentures.
5. 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 1990, permit the grant of
nonqualified and incentive stock options. The option recipients and the terms of
options granted under these plans are determined by the human resources
committee of the Company's Board of Directors (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 lapse over various periods ranging from one
to ten years, depending on the term of the option, which may range from five 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, with the exception of options granted in connection with the 1992
acquisition of Lorad, all options have been granted at fair market value. The
Company also has a directors' stock option plan, which 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 to seven years after the date of
grant. In addition to the Company's stock-based compensation plans, certain
officers and key employees may also be granted options under the stock-based
compensation plans of Thermo Electron.
14
<PAGE>
5. Employee Benefit Plans (continued)
<TABLE>
<CAPTION>
A summary of the Company's stock option information is as follows:
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
------------------- ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Price Price
Number Number Number
of of of
(Shares in thousands) Shares Shares Shares
- ----------------------------------------------- --------- ---------- -------- ---------- --------- ---------
Options Outstanding, Beginning of Year 1,368 $15.93 1,412 $15.21 1,470 $12.37
Granted 367 21.35 81 26.83 114 41.60
Exercised (414) 6.91 (77) 5.98 (172) 8.41
Forfeited (337) 22.47 (48) 29.43 - -
----- ----- -----
Options Outstanding, End of Year 984 $19.51 1,368 $15.93 1,412 $15.21
===== ====== ===== ====== ===== ======
Options Exercisable 984 $19.51 1,368 $15.93 1,412 $15.21
===== ====== ===== ====== ===== ======
Options Available for Grant 604 485 518
===== ===== =====
</TABLE>
A summary of the status of the Company's stock options at October 3, 1998,
is as follows:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
---------------------------------------------
Range of Exercise Prices Number Weighted Weighted
of Average Average
Shares Remaining Exercise
(In thousands) Contractual Life Price
- ------------------------------------------------------------- --------------- ---------------- --------------
<S> <C> <C> <C>
$ 0.30 - $11.19 111 0.7 years $ 9.28
11.20 - 22.09 622 5.9 years 15.98
22.10 - 32.98 127 7.0 years 24.82
32.99 - 43.88 124 4.3 years 40.94
-----
$ 0.30 - $43.88 984 5.3 years $19.51
=====
</TABLE>
Employee Stock Purchase Program
Substantially all of the Company's full-time employees are eligible to
participate in an employee stock purchase program sponsored by the Company and
Thermo Electron. Under this program, shares of the Company's and Thermo
Electron's common stock can be purchased at the end of a 12-month period at 95%
of the fair market value at the beginning of the period, and the shares
purchased are subject to a six-month resale restriction. Beginning November 1,
1998, the applicable shares of common stock can be purchased at 85% of the lower
of the fair market value at the beginning or end of the period, and the shares
purchased are subject to a one year resale restriction. Shares are purchased
through payroll deductions of up to 10% of each participating employee's gross
wages. During fiscal 1998, 1997, and 1996, the Company issued 1,990 shares,
17,068 shares, and 25,792 shares of its common stock, respectively, under this
plan.
15
<PAGE>
5. Employee Benefit Plans (continued)
Pro Forma Stock-based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-based Compensation," which sets forth a fair-value
based method of recognizing stock-based compensation expense. As permitted by
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account
for its stock-based compensation plans. Had compensation cost for awards granted
after fiscal 1995 under the Company's stock-based compensation plans been
determined based on the fair value at the grant dates consistent with the method
set forth under SFAS No. 123, the effect on the Company's net income (loss) and
earnings (loss) per share would have been as follows:
<TABLE>
<CAPTION>
(In thousands except per share amounts) 1998 1997 1996
- -------------------------------------------------------------------------- ---------- ----------- ---------
<S> <C> <C> <C>
Net Income (Loss):
As reported $(2,613) $ 8,441 $42,575
Pro forma (4,229) 7,346 42,046
Basic Earnings (Loss) per Share:
As reported (.14) .44 2.23
Pro forma (.09) .38 2.20
Diluted Earnings (Loss) per Share:
As reported (.14) .43 2.16
Pro forma (.23) .37 2.13
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to October 1, 1995, the resulting pro forma compensation
expense may not be representative of the amount to be expected in future years.
Pro forma compensation expense for options granted is reflected over the vesting
period; therefore, future pro forma compensation expense may be greater as
additional options are granted.
The weighted average fair value per share of options granted was $9.42,
$12.17, and $16.59 in fiscal 1998, 1997, and 1996, respectively. The fair value
of each option grant was estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
1998 1997 1996
- -------------------------------------------------------------------------- ---------- ----------- ---------
Volatility 41% 37% 37%
Risk-free Interest Rate 5.6% 6.1% 6.1%
Expected Life of Options 4.9 years 5.8 years 4.7 years
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the input of highly
subjective assumptions including expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
401(k) Savings Plan
The majority of the Company's full-time employees are eligible to
participate in Thermo Electron's 401(k) savings plan. Contributions to the
401(k) savings plan are made by both the employee and the Company. Company
contributions are based upon the level of employee contributions. For this plan,
the Company contributed and charged to expense $1,954,000, $1,558,000, and
$1,166,000 in fiscal 1998, 1997, and 1996, respectively.
16
<PAGE>
6. Income Taxes
The components of income before provision for income taxes, minority
interest, and extraordinary item are as follows:
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------- ---------- ---------- -----------
Domestic $16,624 $10,618 $48,292
Foreign (33) - -
------- ------- -------
$16,591 $10,618 $48,292
======= ======= =======
The components of the provision for income taxes are as follows:
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------- ---------- ---------- -----------
Currently Payable:
Federal $(7,003) $(8,146) $ (4,535)
State (2,051) (2,861) (2,043)
Foreign (132) - -
------- ------- --------
(9,186) (11,007) (6,578)
------- ------- --------
(Deferred) Prepaid, Net:
Federal (7,797) 7,333 1,178
State (480) 200 59
------- ------- --------
(8,277) 7,533 1,237
------- ------- --------
$(17,463) $(3,474) $ (5,341)
======== ======= ========
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 underlying common stock on the date of exercise. The
provision for income taxes that is currently payable does not reflect
$1,000,000, $3,999,000, and $2,680,000 of such benefits of the Company and its
majority-owned subsidiaries from employee exercises of stock options that have
been allocated to capital in excess of par value, directly or through the effect
of majority-owned subsidiaries' equity transactions, in fiscal 1998, 1997, and
1996, respectively.
17
<PAGE>
6. Income Taxes (continued)
The provision for income taxes in the accompanying statement of operations
differs from the provision calculated by applying the statutory federal income
tax rate of 35% to income before provision for income taxes, minority interest,
and extraordinary item due to the following:
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Provision for Income Taxes at Statutory Rate $ (5,807) $ (3,716) $ (16,902)
(Increases) Decreases Resulting from:
Increase in valuation allowance for ThermoLase losses (17,764) - -
Gain on issuance of stock by subsidiaries 8,329 2,774 13,702
State income taxes, net of federal tax (1,645) (1,730) (1,288)
Amortization of cost in excess of net assets of acquired (1,024) (730) (680)
companies
Write-off of acquired technology (Note 3) - (490) -
Other 448 418 (173)
--------- -------- ---------
$ (17,463) $ (3,474) $ (5,341)
========= ======== =========
Prepaid and deferred income taxes in the accompanying balance sheet
consist of the following:
(In thousands) 1998 1997
- --------------------------------------------------------------------------- ---------- ----------
Prepaid (Deferred) Income Taxes:
Inventory basis differences $ 2,875 $ 4,841
Accruals and other reserves 7,308 4,863
Net operating loss carryforwards 22,462 8,232
Accrued compensation 827 1,920
Other, net (1,769) 31
-------- --------
31,703 19,887
Less: Valuation allowance 24,133 1,820
-------- --------
$ 7,570 $ 18,067
======== ========
</TABLE>
The valuation allowance relates primarily to net operating loss
carryforwards, the majority of which are attributable to previously benefited
loss carryforwards and the tax loss arising in fiscal 1998 at ThermoLase. The
increase in the valuation allowance in fiscal 1998 is a result of ThermoLase's
increased operating losses, uncertainty concerning ThermoLase's ability to
successfully convert its existing spas to Greenhouse spas (Note 1), and
resulting uncertainty concerning realization of the tax asset. As of October 3,
1998, the Company and its subsidiaries had federal tax net operating loss
carryforwards of approximately $67,000,000 that will begin to expire in fiscal
2005.
The Company has not recognized a deferred tax liability for the difference
between the book basis and tax basis of the common stock of its domestic
subsidiaries (such difference relates primarily to unremitted earnings and gains
on issuance of stock by subsidiaries) because the Company does not expect this
basis difference to become subject to tax at the parent level. The Company
believes it can implement certain tax strategies to recover its investment in
its domestic subsidiaries tax-free.
18
<PAGE>
7. Related-party Transactions
Corporate Services Agreement
The Company and Thermo Electron have a corporate services agreement under
which Thermo Electron's corporate staff provides certain administrative
services, including certain legal advice and services, risk management, certain
employee benefit administration, tax advice and preparation of tax returns,
centralized cash management, and certain financial and other services, for which
the Company currently pays Thermo Electron annually an amount equal to 0.8% of
the Company's revenues. In calendar 1997 and 1996, the Company paid an amount
equal to 1.0% of the Company's revenues. Prior to January 1, 1996, the Company
paid an annual fee equal to 1.2% of the Company's revenues. For these services,
the Company was charged $2,906,000, $2,821,000, and $1,906,000 in fiscal 1998,
1997, and 1996, respectively. The annual fee is reviewed and adjusted annually
by mutual agreement of the parties. Management believes that the service fee
charged by Thermo Electron is reasonable and that such fees are representative
of the expenses the Company would have incurred on a stand-alone basis. The
corporate services agreement is renewed annually but can be terminated upon 30
days' prior notice by the Company or upon the Company's withdrawal from the
Thermo Electron Corporate Charter (the Thermo Electron Corporate Charter defines
the relationships among Thermo Electron and its majority-owned subsidiaries).
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.
Other Related-party Services
The Company uses data processing and, from January 1995 through September
1996, contract administration services of a majority-owned subsidiary of Thermo
Electron, which are charged based on actual usage. For these services, the
Company was charged an immaterial amount in fiscal 1998 and 1997 and $90,000 in
fiscal 1996.
Operating Leases
Trex Medical leases an office and manufacturing facility from a realty
trust controlled by an employee under a noncancellable operating lease
arrangement expiring in fiscal 2012. In addition, until June 1996, the Company
leased two office and research facilities from Thermo Electron. In connection
with the Company's decision to close its Massachusetts division, the Company
agreed to vacate these facilities during fiscal 1996. The accompanying statement
of operations includes expenses from these operating leases of $982,000,
$982,000, and $375,000 in fiscal 1998, 1997, and 1996, respectively. Future
minimum payments due under the noncancellable operating lease as of October 3,
1998, are $982,000 per year from fiscal 1999 through fiscal 2003 and $8,513,000
in fiscal 2004 and thereafter. Total future minimum lease payments are
$13,423,000.
Repurchase Agreement
The Company invests excess cash in a repurchase agreement with Thermo
Electron as discussed in Note 1.
Notes Receivable from Related Party
In connection with the acquisition of The Greenhouse Spa (Note 3) in June
1998, the Company loaned $3.0 million to a corporation controlled by the
president of ThermoLase's spa division and former owner of Greenhouse. Of the
total principal amount, $1.5 million is due in July 2001 and $1.5 million is due
in July 2002. The note bears interest, payable quarterly, at the Applicable
Federal Rate, as defined in regulations under the Internal Revenue Code of 1986,
as amended. The note is secured by 806,800 shares of ThermoLase common stock.
In October 1997, ThermoLase advanced $1,667,000 to ThermoLase U.K. under a
note receivable, due December 31, 2003, and bearing interest at 8.0%, payable
annually. ThermoLase U.K., a subsidiary of a joint venture that is 50%-owned by
ThermoLase, is marketing ThermoLase's SoftLight system in England. The note
receivable is included in other assets in the accompanying fiscal 1998 balance
sheet.
19
<PAGE>
7. Related-party Transactions (continued)
During fiscal 1996 and fiscal 1995, the Company loaned $1,300,000 and
$2,000,000, respectively, to Dolphin Acquisition Corporation. Borrowings bear
interest at an annual rate of 8.0% and 6.0%, respectively. In December 1998, the
$1,300,000 note was repaid. In connection with such repayment, the Company
agreed to subordinate borrowings under the $2,000,000 note to up to $3,050,000
of other financing arranged by Dolphin. The $2,000,000 note is due in December
1999. Dolphin operates a retail chain of beauty product stores in California and
other states within the United States. The former president of ThermoLase is a
shareholder and officer of Dolphin.
Notes Payable to Parent Company
In September 1995, the Company borrowed $8,000,000 from Thermo Electron
pursuant to a promissory note due September 1996. In September 1996, the Company
repaid such amount and borrowed an additional $2,000,000 from Thermo Electron
pursuant to a separate promissory note, which was repaid in April 1997. In
addition, to finance the acquisition of CCS, Trex Communications borrowed
$11,000,000 from Thermo Electron in July 1997, which was repaid in January 1998.
Each borrowing from Thermo Electron bore interest at the 90-day Commercial Paper
Composite Rate plus 25 basis points, set at the beginning of each quarter.
In addition, in fiscal 1998, Thermo Electron purchased $10,000,000 and
$4,500,000 principal amount of Company and ThermoLase debentures, respectively
(Note 8).
Related-party Revenues
Under an arrangement with Thermedics Detection Inc., a majority-owned
subsidiary of Thermo Electron, Trex Medical manufactures an X-ray source,
pursuant to written purchase orders, that is used as a component in a
fill-measuring device produced by Thermedics Detection. During fiscal 1998,
1997, and 1996, Trex Medical recorded $406,000, $37,000, and $361,000,
respectively, of revenues under this arrangement.
Related-party Purchases
During 1995, Trex Medical placed an order for $2,500,000 for the design
and production of high-transmission cellular grids from Thermo Electron's wholly
owned Tecomet division, which are expected to be received through fiscal 1999.
During fiscal 1998, 1997, and 1996, Trex Medical purchased high-transmission
cellular grids valued at $486,000, $678,000, and $397,000, respectively, from
Tecomet under this arrangement. During fiscal 1998, Trex Medical purchased
additional grids from Tecomet for $311,000, under separate arrangements.
During fiscal 1998, ThermoLase purchased products totaling $241,000 from
Bird Products Corporation, a wholly owned subsidiary of Thermo Electron.
Sale of Thermoelectrics and Thermionics Businesses
During fiscal 1996, the Company sold its thermoelectrics and thermionics
businesses to two subsidiaries of Thermo Electron. The selling price for these
companies of approximately $860,000 was based on the net book value of the net
assets transferred. These businesses were not material to the Company's results
of operations.
8. Long-term Obligations
In November 1997, the Company issued and sold at par value $124,500,000
principal amount of 3 1/4% subordinated convertible debentures due 2007,
including $10,000,000 principal amount of such debentures to Thermo Electron,
for net proceeds of $121,814,000. 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. In January 1998, the
Company used a portion of the proceeds to repay an $11,000,000 note payable to
Thermo Electron. In the fourth quarter of fiscal 1998, the Company repurchased
$35,552,000 principal amount of these debentures for $30,486,000 in cash,
resulting in an extraordinary gain of $3,009,000, net of taxes of $1,692,000. As
of October 3, 1998, $88,948,000 principal amount of these debentures remained
outstanding.
20
<PAGE>
8. Long-term Obligations (continued)
In August 1997, ThermoLase issued and sold at par value $115,000,000
principal amount of 4 3/8% subordinated convertible debentures due 2004. The
debentures are convertible into shares of ThermoLase's common stock at a
conversion price of $17.385 per share and 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 the guarantee. During
fiscal 1998, Thermo Electron purchased $4,500,000 principal amount of these
debentures in the open market.
Trex Medical's Trophy division has an interest-free loan of $796,000
issued by the French government for the funding of research and development
costs associated with developing the RVG(TM) Digital System, due in installments
through fiscal 2001. In addition, Trex Medical has certain borrowings relating
to equipment financing.
The annual requirements for long-term obligations as of October 3, 1998,
are $435,000 in fiscal 1999; $360,000 in fiscal 2000; $140,000 in fiscal 2001;
$39,000 in fiscal 2002; $27,000 in fiscal 2003; and $204,079,000 in fiscal 2004
and thereafter. Total requirements of long-term obligations are $205,080,000.
See Note 12 for fair value information pertaining to the Company's
long-term obligations.
9. Commitments and Contingencies
Operating Leases
In addition to the leases described in Note 7, the Company occupies
office, research, manufacturing, warehouse, and service facilities under various
operating lease arrangements. The accompanying statement of operations includes
expenses from these operating leases of $9,923,000, $6,288,000, and $2,253,000
in fiscal 1998, 1997, and 1996, respectively. Future minimum payments due under
noncancellable operating leases as of October 3, 1998, are $7,259,000 in fiscal
1999; $6,981,000 in fiscal 2000; $6,747,000 in fiscal 2001; $6,776,000 in fiscal
2002; $6,812,000 in fiscal 2003; and $21,543,000 in fiscal 2004 and thereafter.
Total future minimum lease payments are $56,118,000, of which $2,121,000 relates
to lease payments for the three Spa Thira facilities that have been closed, net
of assumed sublease receipts, and which amount is included in other accrued
expenses in the accompanying fiscal 1998 balance sheet (Note 11).
Technology License Agreement
In June 1996, ThermoLase purchased an approximate 10% equity interest in
AntiCancer (Note 1). In addition, ThermoLase has licensed from AntiCancer
certain technology related to hair removal, stimulation of hair growth,
suppression of hair growth, and hair coloring under an agreement that calls for
up to $1,500,000 in future payments by ThermoLase upon the attainment of certain
milestones by AntiCancer. In addition to such future payments, ThermoLase will
be substantially responsible for development costs incurred after the attainment
of such milestones. In the event that the funded development efforts result in
commercially viable products that ThermoLase elects to market, ThermoLase will
pay AntiCancer a royalty based on sales, subject to certain minimum payments.
In February 1993, the Company entered into an irrevocable exclusive
technology license agreement for the use of the laser-based hair-removal system
technology. Under the terms of the agreement, the Company will pay a royalty
equal to 0.25% of the revenues recorded from the sale or use of the laser-based
hair-removal system through February 10, 2010. No material amounts have been
incurred under this agreement.
Contingencies
ThermoLase has from time to time received allegations that its SoftLight
laser-based hair-removal system infringes the intellectual property rights of
others, and ThermoLase may continue to receive such allegations in the future.
In general, an owner of intellectual property can prevent others from using such
property and is entitled to damages for unauthorized past usage. The Company has
investigated the bases of the allegations ThermoLase has received to date and,
based on opinions of its counsel, believes that if ThermoLase were sued on these
bases it would have meritorious defenses. ThermoLase is contingently liable with
respect to lawsuits and other matters that arose in the ordinary course of
business.
21
<PAGE>
9. Commitments and Contingencies (continued)
In October 1998, a former employee of Trex Medical filed a lawsuit against
the Company and Trex Medical, alleging theft of trade secrets related to the
high-transmission cellular (HTC)(TM) grid, a component for some of Trex
Medical's mammography systems.
Trex Medical's Trophy division has filed a lawsuit against Schick
Technologies, Inc. alleging infringement of a Trophy patent relating to dental
X-ray apparatus. Schick has filed a counterclaim against Trophy alleging
infringement of a Schick patent which also relates to dental X-ray apparatus.
Each of the parties is seeking a declaration that the opposing party's patent is
invalid, a permanent injunction, treble damages, and attorneys' fees and
expenses.
See Note 3 for a discussion of certain other litigation.
The Company intends to vigorously defend itself against these lawsuits.
However, given the inherent uncertainties of dispute resolutions, management
cannot predict the outcome of these matters. An unfavorable outcome of one or
more of these matters could have a material adverse effect on the Company's
future results of operations and financial position.
10. Transactions in Stock of Subsidiaries
In February 1998, Trex Medical sold 5,175,000 shares of its common stock
in a public offering at $13.75 per share for net proceeds of $66,944,000,
resulting in a gain of $23,798,000.
In September 1997, Trex Communications sold 1,133,000 shares of its common
stock in a private placement at $10.00 per share for net proceeds of
$10,550,000, resulting in a gain of $5,929,000.
In April 1997, ThermoLase completed an exchange offer whereby ThermoLase
received 2,261,706 shares of its common stock and $502,000 in cash, net of
expenses, from its shareholders in exchange for 2,000,000 units of common stock
subject to redemption (Note 1).
In December 1996, Trex Medical sold 300,000 shares of its common stock in
a public offering at $14.50 per share for net proceeds of $4,119,000, resulting
in a gain of $1,997,000.
In July 1996, Trex Medical sold 2,875,000 shares of its common stock in an
initial public offering, and 871,832 shares of its common stock in a concurrent
rights offering, at $14.00 per share, for net proceeds of $49,068,000, resulting
in a gain of $25,645,000.
In January 1996, Trex Medical sold 100,000 shares of its common stock in a
private placement at $10.75 per share for net proceeds of $1,070,000, resulting
in a gain of $732,000.
In November 1995, Trex Medical sold 1,862,000 shares of its common stock
in a private placement at $10.25 per share for net proceeds of $17,619,000,
resulting in gain of $12,772,000.
The Company's percentage ownership of its majority-owned subsidiaries at
fiscal year-end was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------- ------ ------ -------
<S> <C> <C> <C>
ThermoLase 71% 67% 64%
Trex Medical 67% 79% 80%
Trex Communications 73% 78% 100%
</TABLE>
11. Restructuring Costs and Related Uncertainties
Restructuring costs recorded by ThermoLase totaled $10,155,000 in fiscal
1998. These costs consist of $4,638,000 related to the closure of three domestic
Spa Thira locations, including $2,429,000 for the write-off of leasehold
improvements and related spa assets and $2,209,000 primarily for
abandoned-facility payments, net of assumed sublease receipts. In addition, in
connection with the closure of its spa in France, operated under a joint venture
agreement, ThermoLase recorded costs of $3,600,000, primarily to liquidate the
joint venture and to write-off its remaining investment. Restructuring costs
also include $1,917,000 related to certain actions including the
22
<PAGE>
11. Restructuring Costs and Related Uncertainties (continued)
relocation of ThermoLase's corporate office to its CBI subsidiary in Carrollton,
Texas. This amount primarily represents severance of $1,080,000 for 40
terminated employees and the write-off of fixed assets no longer of use. During
fiscal 1998, ThermoLase expended $809,000 for restructuring activities and the
remaining obligation of $5,153,000 associated with these actions is included in
other accrued expenses in the accompanying fiscal 1998 balance sheet.
ThermoLase's investment in leasehold improvements and related equipment at
its remaining spas totaled $16,677,000 as of October 3, 1998. The realizability
of these assets is dependent on future cash flows from spa operations.
ThermoLase's future cash flows from operating its spas are dependent on the
degree of success it experiences following the transition of its existing spas
to Greenhouse spas as discussed in Note 1. It is reasonably possible that actual
cash flows from spa operations will vary significantly from ThermoLase's
estimates of such cash flows. As a result, the carrying amount of spa assets
could change significantly in the near term. Additionally, at October 3, 1998,
ThermoLase has operating lease commitments of $28,641,000 related to these spas.
Were any additional spas to close in the future, the amount of lease obligation
related to such spas in excess of income from subleasing the facilities would be
recorded as a loss.
12. Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, available-for-sale investments, accounts receivable, current
maturities of long-term obligations, note payable to parent company, accounts
payable, due to parent company and affiliated companies, long-term obligations,
and common stock of subsidiary subject to redemption. The carrying amounts of
these financial instruments, with the exception of available-for-sale
investments, long-term obligations, and common stock of subsidiary subject to
redemption, approximate 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 information pertaining to the fair value of
available-for-sale investments.
The fair value of the Company's and ThermoLase's subordinated convertible
debentures, based on quoted market prices, was $162,870,000 and $123,165,000 at
fiscal year-end 1998 and 1997, respectively, and in fiscal 1997 exceeded the
carrying amount primarily due to an increase in the market price of the common
stock relative to the conversion price of the debentures.
The fair value of common stock of subsidiary subject to redemption, based
on quoted market prices, was $30,750,000 and $37,000,000 at fiscal year-end 1998
and 1997, respectively.
13. Business Segments, Geographical Information, and Significant Customer
The Company's business segments include the following:
- Medical Products: mammography equipment, minimally invasive digital
breast-biopsy equipment, general-purpose and specialized-medical X-ray
equipment, and dental X-ray systems.
- Personal-care Products and Services: high-quality skin-care and other
personal-care products, hair-removal services, skin-resurfacing
services, and the licensing of the SoftLight hair-removal system to
physicians in the U.S. and to international licensees.
- Advanced Technology Research: communications, avionics, X-ray
detection, signal processing, lasers, interactive information,
voice-response systems, call-automation systems, ground-based
satellite communications systems, and telemetry systems.
23
<PAGE>
13. Business Segments, Geographical Information, and Significant Customer
(continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Business Segment Information
Revenues:
Medical Products $ 266,964 $229,294 $ 150,195
Personal-care Products and Services 40,091 45,233 27,812
Advanced Technology Research 41,351 21,250 14,401
Intersegment sales elimination (a) (6,548) (13,656) (10,379)
--------- -------- ---------
$ 341,858 $282,121 $ 182,029
========= ======== =========
Income Before Provision for Income Taxes, Minority Interest, and
Extraordinary Item:
Medical Products $ 29,153 $ 24,147 $ 15,342
Personal-care Products and Services (b) (31,840) (18,402) (4,979)
Advanced Technology Research (c) (1,826) (1,345) (3,053)
Corporate (d) (4,954) (4,925) (3,795)
--------- -------- ---------
Total operating income (loss) (9,467) (525) 3,515
Interest and other income, net 26,058 11,143 44,777
--------- -------- ---------
$ 16,591 $ 10,618 $ 48,292
========= ======== =========
Identifiable Assets:
Medical Products $ 342,521 $229,437 $ 200,850
Personal-care Products and Services 127,460 167,339 91,713
Advanced Technology Research 47,712 34,168 12,004
Corporate and eliminations (e) 78,013 19,173 15,655
--------- -------- ---------
$ 595,706 $450,117 $ 320,222
========= ======== =========
Depreciation and Amortization:
Medical Products $ 7,381 $ 4,996 $ 3,195
Personal-care Products and Services 6,070 3,628 1,362
Advanced Technology Research 1,964 656 345
Corporate 295 - -
--------- -------- ---------
$ 15,710 $ 9,280 $ 4,902
========= ======== =========
Capital Expenditures:
Medical Products $ 4,503 $ 5,461 $ 3,071
Personal-care Products and Services 4,033 20,285 9,423
Advanced Technology Research 2,076 1,107 1,968
--------- -------- ---------
$ 10,612 $ 26,853 $ 14,462
========= ======== =========
24
<PAGE>
13. Business Segments, Geographical Information, and Significant Customer (continued)
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Geographical Information
Revenues:
United States $ 319,684 $ 282,121 $182,029
France 19,163 - -
Other 3,011 - -
--------- --------- --------
$ 341,858 $ 282,121 $182,029
========= ========= ========
Income Before Provision for Income Taxes, Minority Interest, and
Extraordinary Item:
United States (b, c, d) $ (9,472) $ (525) $ 3,515
France 416 - -
Other (411) - -
--------- --------- --------
Total operating income (loss) (9,467) (525) 3,515
Interest and other income, net 26,058 11,143 44,777
--------- --------- --------
$ 16,591 $ 10,618 $ 48,292
========= ========= ========
Identifiable Assets:
United States $ 452,353 $ 430,944 $304,567
France 54,346 - -
Other 10,995 - -
Corporate and eliminations (e) 78,012 19,173 15,655
--------- --------- --------
$ 595,706 $ 450,117 $320,222
========= ========= ========
Export Revenues Included in United States Revenues Above (f) $ 52,678 $ 43,208 $ 35,908
========= ========= ========
(a) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(b) Reflects restructuring costs of $10.2 million at ThermoLase in fiscal 1998
(Note 11).
(c) Reflects the write-off in fiscal 1997 of $1.4 million of acquired
technology related to the acquisition of CCS (Note 3).
(d) Includes corporate general and administrative expenses.
(e) Primarily cash, cash equivalents, and available-for-sale investments at
the Company's headquarters. (f) In general, export sales are denominated in
U.S. dollars. Includes revenues from ThermoLase's international licensing
agreements.
In the Medical Products segment, sales to one customer in fiscal 1998 and
1997 accounted for 11% and 14%, respectively, of the Company's total revenues.
This customer was acquired by another corporation in September 1998 and, in the
fourth quarter of fiscal 1998, agreed to pay Trex Medical a fee of $4,700,000 in
lieu of purchasing products for which it was contractually obligated, which was
recorded as product revenue in the accompanying fiscal 1998 statement of
operations. As a result of the acquisition of this customer, the Company does
not expect there will be any future sales to this customer. No single customer
accounted for 10% or more of the Company's total revenues in fiscal 1996.
25
<PAGE>
14. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
(In thousands except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------ -------- --------- --------
Basic
Net Income (Loss) $(2,613) $ 8,441 $42,575
------- -------- -------
Weighted Average Shares 18,704 19,210 19,075
------- -------- -------
Basic Earnings (Loss) per Share $ (.14) $ .44 $ 2.23
======= ======== =======
Diluted
Net Income (Loss) $(2,613) $ 8,441 $42,575
Effect of Majority-owned Subsidiaries' Dilutive Securities (96) (73) (97)
------- -------- -------
Income (Loss) Available to Common Shareholders, as Adjusted $(2,709) $ 8,368 $42,478
------- -------- -------
Weighted Average Shares 18,704 19,210 19,075
Effect of Stock Options - 389 594
------- -------- -------
Weighted Average Shares, as Adjusted 18,704 19,599 19,669
------- -------- -------
Diluted Earnings (Loss) per Share $ (.14) $ .43 $ 2.16
======= ======== =======
</TABLE>
The computation of diluted earnings (loss) per share for fiscal 1998
excludes the effect of assuming the conversion of the Company's $88,948,000
principal amount 3 1/4% subordinated convertible debentures, convertible at
$27.00 per share, and the exercise of stock options, because the effect would be
antidilutive. As of October 3, 1998, there were 983,669 of such options
outstanding with exercise prices ranging from $0.30 to $43.88 per share.
An extraordinary gain recorded by the Company reduced basic and diluted
loss per share by $.16 in fiscal 1998 (Note 8).
26
<PAGE>
15. Unaudited Quarterly Information
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(In thousands except per share amounts)
1998 First Second(a) Third(b) Fourth(c)
- --------------------------------------------------------------- ---------- ---------- ---------- ----------
Revenues $85,555 $82,563 $88,889 $84,851
Gross Profit 33,690 29,656 34,790 33,406
Income (Loss) Before Extraordinary Item 1,357 18,859 (4,843) (20,995)
Net Income (Loss) 1,357 18,859 (4,843) (17,986)
Earnings (Loss) per Share:
Basic .07 1.02 (.26) (.96)
Diluted .07 .83 (.26) (.96)
1997(d) First Second Third Fourth
- --------------------------------------------------------------- ---------- ---------- ---------- ----------
Revenues $62,826 $70,079 $72,931 $76,285
Gross Profit 22,773 23,301 26,694 29,217
Net Income 2,763 188 285 5,205
Earnings per Share:
Basic .14 .01 .01 .27
Diluted .14 .01 .01 .26
</TABLE>
- -------------------
(a) Results include a nontaxable gain of $23,798,000 from the issuance of
stock by a subsidiary.
(b) Reflects the April 1998 acquisition of Trophy.
(c) Results include restructuring costs of $10,155,000 at ThermoLase (Note
11), the establishment of a tax valuation allowance (Note 6), and the
effect of an extraordinary gain of $3,009,000, which reduced basic and
diluted loss per share by $.16 (Note 8).
(d) Results include nontaxable gains of $1,997,000 and $5,929,000 in the
first and fourth quarters, respectively, from the issuance of stock by
subsidiaries.
16. Subsequent Events
Option Repricing
In November 1998, the Company's employees, excluding its officers and
directors, were offered the opportunity to exchange previously granted options
to purchase shares of Company common stock for an amount of options equal to
half of the number of options previously held, exercisable at a price equal to
the fair market value at the time of the exchange offer. Holders of options to
acquire 222,600 shares at a weighted average exercise price of $23.00 elected to
participate in this exchange and, as a result, received options to purchase
111,300 shares of Company common stock at $11.39 per share. The other terms of
the new options are the same as the exchanged options except that the holders
may not sell shares purchased pursuant to such new options for six months from
the exchange date.
Acquisition
In November 1998, Trex Communications acquired LNR Communications, Inc.
(LNR) for approximately $18,400,000 in cash and Trex Communications common stock
valued at approximately $5,000,000, net of cash and short-term securities
acquired, subject to a post-closing adjustment. LNR is a Hauppauge, New
York-based manufacturer of electronic subsystems and turnkey earth stations for
the satellite communication market.
27
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Board of Directors of ThermoTrex Corporation:
We have audited the accompanying consolidated balance sheet of ThermoTrex
Corporation (a Delaware corporation and 62%-owned subsidiary of Thermo Electron
Corporation) and subsidiaries as of October 3, 1998, and September 27, 1997, and
the related consolidated statements of operations, shareholders' investment, and
cash flows for each of the three years in the period ended October 3, 1998.
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 ThermoTrex
Corporation and its subsidiaries as of October 3, 1998, and September 27, 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended October 3, 1998, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
December 21, 1998
28
<PAGE>
ThermoTrex Corporation 1998 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 heading "Forward-looking Statements."
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 and
specialized medical X-ray equipment, including imaging systems used during
interventional cardiac procedures such as balloon angioplasty; and dental X-ray
systems. Trex Medical sells its systems worldwide principally through a network
of independent dealers and also acts as an original equipment manufacturer (OEM)
for other medical equipment companies. Trex Medical has five operating units:
Lorad Corporation, a manufacturer of mammography and digital breast-biopsy
systems; Bennett X-Ray Corporation, a manufacturer of general-purpose X-ray,
mammography, and breast-biopsy equipment; XRE Corporation, a manufacturer of
X-ray imaging systems used in the diagnosis and treatment of coronary artery
disease and other vascular conditions, and which includes the operations of
Digitec Corporation, a manufacturer of physiological-monitoring equipment and
digital-image archiving and networking systems used in cardiac catherization
procedures, acquired in October 1997; Continental X-Ray Corporation, a
manufacturer of general-purpose and specialized X-ray systems; and Trophy
Radiologie S.A., a French manufacturer of dental and medical X-ray systems
specializing in digital dental technology, acquired in April 1998.
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. 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 its physician licensees.
Rather than continuing to open additional Spa Thira locations, ThermoLase
is concentrating its resources on attempting both to increase the capacity
utilization of its existing spas, and to expand its physician-licensing program
and international licensing arrangements, discussed below. In connection with
its acquisition of The Greenhouse Spa, Inc. in June 1998 (Note 3), a
full-service, luxury, destination spa, ThermoLase evaluated which of its
locations would be converted to Greenhouse spas and whether any of its Spa Thira
locations should be closed or sold. As a result of this evaluation, ThermoLase
decided to close three of its domestic Spa Thira locations and convert its
remaining eleven domestic spas into Greenhouse spas which, in addition to
hair-removal and skin resurfacing services, will offer more traditional day-spa
services, such as massages and facials. ThermoLase's future results of
operations will be affected by its ability to successfully convert its existing
spas into Greenhouse spas (Note 11). The period through
29
<PAGE>
Overview (continued)
June 1999 will be critical in determining the economic viability of this
strategy. Key to the success of this strategy will be whether the results of the
Greenhouse spas reflect substantial progress toward breakeven operations in this
timeframe.
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. ThermoLase also provides the licensees with the lasers and lotion
that are necessary to perform the service. In June 1998, ThermoLase began to
offer the SoftLight Laser Peel procedure through its spas and existing physician
licensees.
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 and in an attempt to establish price points and other conditions designed
to increase demand and revenues, ThermoLase significantly reduced treatment
prices at its Spa Thira locations and is in the process of modifying the terms
and conditions of its physician-licensing program. Under the terms of the
modified licenses, per-procedure royalties have been reduced or eliminated and a
minimum royalty and/or flat periodic fee requirement has been introduced. In
addition, ThermoLase has begun offering licensees the opportunity to purchase or
lease SoftLight lasers in lieu of paying ongoing license fees. 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 8% 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 approximately 4%
of ThermoLase's total hair-removal revenues in fiscal 1997 were terminated.
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. 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, ThermoLase 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. ThermoLase has decided
to close the spa in Paris and liquidate the joint venture (Note 11).
ThermoLase also manufactures and markets skin-care and bath and body
products and markets dietary supplements 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. In July 1997, Trex Communications acquired Computer
Communications Specialists, Inc. (CCS), which designs and markets interactive
information and voice-response systems, as well as call-automation systems. In
May 1998, Trex Communications acquired Electro-Magnetic Processes, Inc. (EMP),
which designs, develops, and manufactures ground-based satellite communications
systems and develops and integrates telemetry systems used on military aircraft.
In November 1998, Trex Communications acquired LNR Communications, Inc. (LNR),
which manufactures electronic subsystems and turnkey earth stations for the
satellite communication market.
The Company conducts all of its manufacturing operations (other than
those of Trophy) in the United States, and sells its products worldwide. The
Company anticipates that an increasing amount 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 contacts to reduce its exposure to
currency fluctuations.
30
<PAGE>
Results of Operations
Fiscal 1998 Compared With Fiscal 1997
Total revenues increased 21% to $341.9 million in fiscal 1998 from $282.1
million in fiscal 1997. Medical Products segment revenues, excluding
intersegment sales, increased 21% to $264.1 million in fiscal 1998 from $217.9
million in fiscal 1997. Revenues increased $28.3 million as a result of the
acquisitions of Trophy in April 1998 and Digitec in October 1997 (Note 3).
Excluding the impact of revenues from acquisitions, Medical Products segment
revenues increased 8% in fiscal 1998, primarily due to a $9.0 million shipment
at XRE to a customer in Russia and, to a lesser extent, an increase in direct
and dealer sales at XRE of cardiac catheterization laboratories due to higher
demand, offset in part by a decrease in international sales of cardiac
catherization laboratories to OEM customers due to XRE shifting from OEM to
direct and dealer sales. In addition, increased sales occurred at Lorad and at
Bennett primarily due to higher demand for mammography systems and upgrade
components and an agreement to receive a onetime payment of $4.7 million from an
OEM customer in lieu of purchasing products for which it had been contractually
obligated (Note 13). The increases at Bennett were offset in part by a decline
in sales of general-purpose X-ray systems to international customers, due in
part to the strengthening of the U.S. dollar relative to foreign currencies in
countries in which Trex Medical operates and the economic crisis in the Far
East. The increase in revenues at each of Trex Medical's divisions discussed
above, was offset in part by a decrease in revenues at Continental, primarily
due to a decrease in sales of electrophysiology equipment. Revenue growth at
Trex Medical is expected to significantly decrease in the first half of fiscal
1999 primarily as a result of a slowing of sales of breast-biopsy systems and
the effect in fiscal 1998 of the large Russian sale. As discussed in Note 13 to
the Consolidated Financial Statements, Trex Medical does not expect that there
will be any future sales to a major customer.
Personal-care Products and Services segment revenues decreased to $40.1
million in fiscal 1998 from $45.2 million in fiscal 1997. ThermoLase earned
revenues from hair-removal services and related activities of $17.3 million in
fiscal 1998, compared with $21.0 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 13
spas open during fiscal 1997. As discussed in the preceding Overview, ThermoLase
will close three of its domestic spas (Note 11). Revenues from ThermoLase's
physician-licensing program decreased in fiscal 1998 compared with fiscal 1997,
due to a reduction in royalty rates and other changes to the financial terms of
the licenses and the termination of two significant licensing contracts,
described in the preceding Overview, as well as a decrease in one-time fees due
to a decline in the number of new physician licensees. Revenues from
hair-removal services and related activities included $2.8 million in fiscal
1998 and $4.2 million in fiscal 1997 for minimum guaranteed payments recorded
upon granting technology rights under ThermoLase's international licensing
arrangements. The amount of minimum guaranteed payments recorded by ThermoLase
will vary depending on its ability to enter into additional international
licensing arrangements, the availability of additional territories, and the
terms of any such arrangements. Revenues at CBI decreased to $22.8 million in
fiscal 1998 from $24.2 million in fiscal 1997, primarily due to a shift by
certain of its retail customers away from health- and beauty-aid sales. These
decreases were offset in part by the inclusion of $0.8 million of revenues from
Greenhouse, acquired in June 1998 (Note 3).
Advanced Technology Research segment revenues, excluding intersegment
sales, increased to $37.7 million in fiscal 1998 from $19.0 million in fiscal
1997. Revenues increased $14.3 million due to the inclusion of revenues for the
full period from CCS, acquired in July 1997, and revenues from 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 fiscal 1998, compared with 36% in
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, as well as the effect on gross profit of $4.7 million
due from an OEM described above. To a lesser extent, the gross profit margin
31
<PAGE>
Fiscal 1998 Compared With Fiscal 1997 (continued)
at Trex Medical increased due to manufacturing efficiencies, primarily at
Bennett. The Personal-care Products and Services segment gross profit margin,
excluding intersegment eliminations, was 9% in fiscal 1998, compared with 20% in
fiscal 1997. ThermoLase's hair-removal business reported gross profit of
negative $5.0 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 operating
procedures. This negative impact was offset in part by the effect of
physician-licensing fees and 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. The gross profit decreased in
fiscal 1998, primarily due to the decrease in revenues at ThermoLase's Spa Thira
locations and the physician-licensing program, as well as increased fixed costs
associated with operating more spas in fiscal 1998. ThermoLase believes that
increasing spa utilization by broadening the array of spa-related services and
products offered, through conversion of the remaining Spa Thiras into Greenhouse
spas, is critical to 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 ThermoLase's gross profit margin. The gross profit margin at
CBI was 32% in both periods. The gross profit margin from the Advanced
Technology Research segment, excluding intersegment eliminations, was 37% in
fiscal 1998, compared with 32% in fiscal 1997. This increase was primarily due
to the inclusion of higher-margin revenues at CCS.
Selling, general, and administrative expenses as a percentage of revenues
increased to 27% in fiscal 1998 from 24% in fiscal 1997. The increase was
primarily in the Medical Products segment, as a result of the acquisition of
Trophy, as well as the effect of the acquisition of CCS in the Advanced
Technology Research segment, both of which have higher costs as a percentage of
revenues.
Research and development expenses increased to $39.8 million in fiscal
1998 from $32.1 million in fiscal 1997, primarily due to increased spending at
Trex Medical, offset in part by a decrease in spending at ThermoLase. Trex
Medical's increases reflect spending at XRE and Lorad to develop and
commercialize new products, including the full-field digital mammography system
and direct-detection X-ray sensor, and enhancing existing systems and, to a
lesser extent, the inclusion of expenses at acquired businesses. 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 11). In addition, research and development expenses at the Company's other
businesses increased due to the inclusion of expenses of acquired businesses.
During fiscal 1998, ThermoLase recorded restructuring costs of $10.2
million, primarily related to closing three of its domestic spas, closing its
spa in France, and liquidating the related French joint venture, and relocating
its corporate office to its CBI subsidiary in Carrollton, Texas. The degree to
which ThermoLase is successful in improving its profitability will affect the
future of its remaining spas and the realizability of its related assets (Note
11).
During fiscal 1997, Trex Communication wrote off $1.4 million of acquired
technology in development in connection with the acquisition of CCS (Note 3).
Interest income increased to $12.9 million in fiscal 1998 from $4.8
million in 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 and ThermoLase's August
1997 issuance of $115.0 million principal amount of 4 3/8% subordinated
convertible debentures (Note 8), offset in part by cash used to fund the loss at
ThermoLase. Interest expense increased to $9.5 million in fiscal 1998 from $0.8
million in fiscal 1997, primarily due to the issuance 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 a
minority interest to outside investors. The Company believes that this strategy
provides additional motivation and incentives for the management of the
subsidiaries through the establishment of subsidiary-level stock option
incentive programs, as well as capital to support the subsidiaries' growth. As a
result of the sale of stock by subsidiaries, the Company recorded gains on
issuance of stock by subsidiaries of $23.8 million and $7.9
32
<PAGE>
Fiscal 1998 Compared With Fiscal 1997 (continued)
million in fiscal 1998 and fiscal 1997, respectively (Note 10). 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 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 loss of joint ventures in the accompanying statement of
operations represents ThermoLase's proportionate share of losses from its
international joint ventures, beginning in the third quarter of fiscal 1997
(Note 3).
Minority interest expense was $4.8 million in fiscal 1998, compared with
minority interest income of $1.3 million in 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
fiscal 1998 primarily due to losses at ThermoLase, which may not be used to
offset taxable income at Trex Medical. In addition, the effective tax rate was
affected by 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 in fiscal 1998 reflects the establishment of a
valuation allowance for the tax asset associated with previously benefited
losses arising at ThermoLase. The increase in the valuation allowance in fiscal
1998 is a result of ThermoLase's increased operating losses, uncertainty
concerning ThermoLase's ability to successfully convert its existing spas to
Greenhouse spas (Note 1), and resulting uncertainty concerning realization of
the tax asset (Note 6). The effective tax rate in fiscal 1997 was below the
statutory federal income tax rate primarily due to nontaxable gains on issuances
of subsidiary stock, offset in part by the impact of a nondeductible write-off
of acquired technology at CCS (Note 3) and the impact of state income taxes and
nondeductible amortization of cost in excess of net assets of acquired
companies.
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 ThermoLase's
SoftLight laser hair-removal process were misleading. The Company has settled
this lawsuit for a nominal amount, subject to court approval.
The Company is a defendant in two patent infringement lawsuits (Note 3)
and a lawsuit alleging the Company misappropriated certain other technology
owned by a third party (Note 9). An unsuccessful resolution of one or more of
these matters could have a material adverse effect on the Company's future
results of operations and financial position.
Fiscal 1997 Compared With Fiscal 1996
Total revenues increased 55% to $282.1 million in fiscal 1997 from $182.0
million in fiscal 1996. Medical Products segment revenues, excluding
intersegment sales, increased 54% to $217.9 million in fiscal 1997 from $141.8
million in fiscal 1996. Revenues increased $56.2 million as a result of the
acquisitions of XRE in May 1996 and Continental in September 1996. In addition,
revenues at Lorad, excluding intersegment sales, increased 18% as a result of
increased sales of higher-priced mammography systems and increased demand for
biopsy systems, offset in part by a decline in demand for nondestructive testing
systems.
33
<PAGE>
Fiscal 1997 Compared With Fiscal 1996 (continued)
Personal-care Products and Services segment revenues increased 63% to
$45.2 million in fiscal 1997 from $27.8 million in fiscal 1996. ThermoLase
earned revenues from hair-removal services and related activities of $21.0
million in fiscal 1997, compared with $4.6 million in fiscal 1996. The increase
in revenues resulted primarily from an increase in the number of U.S. spas to
13, nine of which opened in fiscal 1997, compared with four spas open during
fiscal 1996. Revenues also increased as a result of fees from ThermoLase's
physician-licensing program, which was started in the third quarter of fiscal
1996 and did not produce significant revenues during fiscal 1996. In addition,
revenues from hair-removal services and related activities in fiscal 1997
included $4.2 million of minimum guaranteed payments recorded upon granting
technology rights under ThermoLase's international licensing arrangements,
compared with $2.0 million in fiscal 1996. Revenues at CBI increased slightly to
$24.2 million in fiscal 1997 from $23.2 million in fiscal 1996. A portion of
CBI's revenues are derived from sales to large retailers, which have a
relatively long buying cycle that results in periodic variations in revenues.
Advanced Technology Research segment revenues, excluding intersegment
sales, increased to $19.0 million in fiscal 1997 from $12.4 million in fiscal
1996. Revenues increased $2.8 million due to the inclusion of product revenues
from CCS, acquired in July 1997, and due to higher revenues earned from research
performed under government contracts, primarily in the areas of laser radar
systems and laser communications.
The gross profit margin was 36% in fiscal 1997, compared with 38% in
fiscal 1996. The Medical Products segment gross profit margin, excluding
intersegment sales, declined to 40% in fiscal 1997 from 42% in fiscal 1996,
primarily due to sales of certain recently introduced products that incurred
high start-up production costs, the inclusion of lower-margin revenues at
Continental, and the mix of products sold at Bennett. The Personal-care Products
and Services segment gross profit margin was 20% in fiscal 1997, compared with
28% in fiscal 1996. ThermoLase's hair-removal business reported gross profit of
$1.4 million in fiscal 1997, compared with gross profit of negative $0.3 million
in fiscal 1996. Each period was impacted by the early operations of the Spa
Thira business, which has been operating below maximum capacity as discussed in
the results of operations for fiscal 1998, and pre-opening costs incurred in
connection with new spa openings, offset in part by the effect of
physician-licensing fees and minimum guaranteed payments relating to
international licensing arrangements, which have a relatively high gross profit
margin. The decline in the Personal-care Products and Services segment gross
profit margin in fiscal 1997 also resulted from lower margins at CBI due to a
continued shift to lower-margin products.
Selling, general, and administrative expenses as a percentage of revenues
increased to 24% in fiscal 1997 from 23% in fiscal 1996. Spending in the
Personal-care Products and Services segment increased primarily due to costs
related to expanding ThermoLase's administrative and management efforts for its
Spa Thira business and domestic and international licensing programs; increased
marketing efforts, including national advertising costs for the
physician-licensing program; and legal costs associated with obtaining and
protecting ThermoLase's patent rights. These increases were offset in part by
the impact of the significant increase in revenues in the Medical Products
segment, which has lower expenses as a percentage of revenues.
Research and development expenses increased to $32.1 million in fiscal
1997 from $25.0 million in fiscal 1996, primarily due to increased spending at
Trex Medical and, to a lesser extent, increased spending at ThermoLase for
pre-clinical and clinical research related to improving the effectiveness of its
hair-removal process and developing its SoftLight Laser Peel skin-resurfacing
process, and the investigation of other health and beauty applications for its
proprietary laser technology. Research and development expenses at Trex Medical
increased $5.6 million due to the acquisitions of XRE and Continental and Trex
Medical's continued efforts to develop and commercialize new products, including
the full-field digital mammography system and direct-detection X-ray sensor, as
well as enhancements of existing systems.
During fiscal 1997, Trex Communications wrote off $1.4 million of acquired
technology in development in connection with the acquisition of CCS (Note 3).
34
<PAGE>
Fiscal 1997 Compared With Fiscal 1996 (continued)
Interest income decreased to $4.8 million in fiscal 1997 from $6.0 million
in fiscal 1996, primarily due to lower average invested balances, which resulted
primarily from property and equipment expenditures for ThermoLase's Spa Thira
locations and licensing programs and from cash used to fund ThermoLase's
operating loss. Interest expense increased to $0.8 million in fiscal 1997 from
$0.5 million in fiscal 1996, primarily due to ThermoLase's August 1997 issuance
of $115.0 million principal amount of 4 3/8% subordinated convertible debentures
(Note 8).
As a result of the sale of stock by Trex Medical and Trex Communications,
the Company recorded gains on the issuance of stock by subsidiaries of $7.9
million in fiscal 1997 and $39.1 million in fiscal 1996 (Note 10).
Equity in loss of joint ventures in the accompanying fiscal 1997 statement
of operations represents ThermoLase's proportionate share of losses from its
international joint ventures, beginning in the third quarter of fiscal 1997
(Note 3).
Minority interest income was $1.3 million in fiscal 1997, compared with
minority interest expense of $0.4 million in fiscal 1996, as a result of an
increase in ThermoLase's net loss, offset in part by an increase in Trex
Medical's net income.
The effective tax rate in both periods was below the statutory federal
income tax rate primarily due to nontaxable gains on issuance of stock by
subsidiaries, offset in part by the impact of state income taxes, nondeductible
amortization of cost in excess of net assets of acquired companies and, in
fiscal 1997, the nondeductible write-off of acquired technology associated with
the acquisition of CCS (Note 3).
Liquidity and Capital Resources
Consolidated working capital was $261.7 million at October 3, 1998,
compared with $202.3 million at September 27, 1997. Included in working capital
are cash, cash equivalents, and available-for-sale investments of $165.2 million
at October 3, 1998, compared with $153.2 million at September 27, 1997. Of the
$165.2 million balance at October 3, 1998, $105.4 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 fiscal 1998 was $38.1
million. An increase in inventories and unbilled contract costs and fees,
primarily at Trex Medical, used $27.3 million of cash due to lower than expected
sales in the fourth quarter of fiscal 1998 and, to a lesser extent, higher
inventories in anticipation of new product releases. In addition, an increase in
accounts receivable in fiscal 1998, primarily at Trex Medical, used $13.6
million of cash, primarily due to slower customer payment patterns as a result
of increased export and direct sales at the majority of its operations and
trends in the healthcare industry, extended payment terms to a significant
customer (Note 13), and a shift from OEM sales to direct and dealer sales at
XRE.
The Company's investing activities used $49.4 million of cash during
fiscal 1998. Excluding available-for-sale investments activity, the Company's
primary investing activities during fiscal 1998 included acquisitions and
capital expenditures. The Company expended $45.0 million, net of cash acquired,
for acquisitions (Note 3) and $10.6 million for purchases of property, plant,
and equipment. In October 1997, in connection with certain of ThermoLase's joint
venture arrangements, ThermoLase advanced $1.7 million under a note receivable
(Note 7). In July 1998, in connection with the acquisition of Greenhouse, the
Company loaned $3.0 million to a corporation controlled by the president of
ThermoLase's spa division and former owner of Greenhouse (Note 7).
In November 1998, Trex Communications acquired LNR for approximately $18.4
million in cash, and Trex Communications common stock valued at approximately
$5.0 million, net of cash and short-term investments acquired, subject to a
post-closing adjustment (Note 16).
The Company's financing activities provided $109.5 million of cash during
fiscal 1998. In November 1997, the Company sold at par value $124.5 million
principal amount of 3 1/4% subordinated convertible debentures for net proceeds
of $121.8 million (Note 8). The Company used a portion of such proceeds to repay
in January 1998 an $11.0 million note payable to Thermo Electron Corporation.
During fiscal 1998, the Company repurchased $35.6 million principal amount of
these debentures for $30.5 million in cash (Note 8). In February 1998, Trex
Medical sold shares of its common stock in a public offering, for net proceeds
of $66.9 million (Note 10).
35
<PAGE>
Liquidity and Capital Resources (continued)
During fiscal 1998, the Company and certain of its majority-owned
subsidiaries expended $30.2 million and $8.8 million, respectively, to purchase
securities of the Company and certain of its majority-owned subsidiaries. These
purchases were made pursuant to authorizations by the Company's and the
applicable majority-owned subsidiaries' Boards of Directors. As of October 3,
1998, $19.8 million remained under these authorizations. In addition, subsequent
to year end, the Board of Directors of one of the Company's majority-owned
subsidiaries authorized the repurchase of up to an additional $25.0 million of
its own securities of which $15.0 million was expended through December 22,
1998.
ThermoLase's capital expenditures during fiscal 1999 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 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 $0.9 million to renovate the original Greenhouse Spa located in
Arlington, Texas. In addition to expenditures by ThermoLase, the Company plans
to make capital additions of approximately $21 million for its other businesses
during fiscal 1999.
Although the Company generally expects to have positive cash flow from its
existing operations, the Company may require significant amounts of cash for any
acquisition of a business or technology. 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.
Market Risk
The Company is exposed to market risk from changes in equity prices,
interest rates, and foreign currency exchange rates, which could affect its
future results of operations and financial condition. The Company manages its
exposure to these risks through its regular operating and financing activities.
Equity Prices
The Company's convertible obligations are sensitive to fluctuations in the
price of Company or subsidiary common stock into which the obligations are
convertible. In addition, common stock of subsidiary subject to redemption is
sensitive to fluctuations in the price of ThermoLase units. Changes in equity
prices would result in changes in the fair value of the Company's convertible
obligations and common stock of subsidiary subject to redemption due to the
difference between the current market price and the market price at the date of
issuance of the financial instrument. A 10% increase in the fiscal year-end 1998
market equity prices would result in a negative impact of $24.4 million on the
net fair value of the Company's price-sensitive equity financial instruments.
Interest Rates
The Company's available-for-sale investments and long-term obligations are
sensitive to changes in interest rates. Interest rate changes would result in a
change in the fair value of these financial instruments due to the difference
between the market interest rate and the rate at the date of purchase or
issuance of the financial instrument. A 10% decrease in fiscal year-end 1998
market interest rates would result in a negative impact of $1.7 million on the
net fair value of the Company's interest sensitive financial instruments.
36
<PAGE>
Market Risk (continued)
Foreign Currency Exchange Rates
The Company views its investment in its foreign subsidiaries as long-term.
The Company's investment in foreign subsidiaries is sensitive to fluctuations in
foreign currency exchange rates. The functional currencies of the Company's
foreign subsidiaries are principally denominated in French francs. The effect of
a change in foreign exchange rates on the Company's net investment in its
foreign subsidiaries is recorded as a separate component of shareholders'
investment. A 10% depreciation in fiscal year-end 1998 functional currencies,
relative to the U.S. dollar, would result in a $0.6 million reduction of the
Company's shareholders' investment.
Year 2000
The Company continues to assess the potential impact of the year 2000 on
the Company's internal business systems, products, and operations. The Company's
year 2000 initiatives include (i) testing and upgrading internal business
systems and facilities; (ii) testing and developing necessary upgrades for the
Company's current products and certain discontinued products; (iii) contacting
key suppliers, vendors, and customers to determine their year 2000 compliance
status; and (iv) developing a contingency plan.
The Company's State of Readiness
The Company has tested and evaluated its critical information-technology
systems for year 2000 compliance, including its significant computer systems,
software applications, and related equipment. The Company is currently in the
process of upgrading or replacing its noncompliant systems. In most cases, such
upgrades or replacements are being made in the ordinary course of business. The
Company expects that all of its material information-technology systems will be
year 2000 compliant by the end of calendar 1999. The Company is also evaluating
the potential year 2000 impact on its facilities, including its buildings and
utility systems. Any problems that are identified will be prioritized and
remediated based on their assigned priority. The Company will continue periodic
testing of its critical internal business systems and facilities in an effort to
minimize operating disruptions due to year 2000 issues.
The Company believes that all of the material products that it currently
sells are year 2000 compliant. However, as many of the Company's products are
complex, interact with third-party products, and operate on computer systems
that are not under the Company's control, there can be no assurance that the
Company has identified all of the year 2000 issues with its current products.
The Company believes that certain of its older products, which it no longer
manufactures or sells, may not be year 2000 compliant. The Company is continuing
to test and evaluate such products and may offer upgrades or alternative
products where reasonably practicable.
The Company is in the process of identifying and contacting suppliers,
vendors, and customers that are believed to be significant to the Company's
business operations in order to assess their year 2000 readiness. As part of
this effort, the Company has developed and is distributing questionnaires
relating to year 2000 compliance to its significant suppliers, vendors, and
customers. The Company intends to follow-up and monitor the year 2000 compliance
progress of significant suppliers, vendors, and customers that indicate that
they are not year 2000 compliant or that do not respond to the Company's
questionnaires.
Contingency Plan
The Company intends to develop a contingency plan that will allow its
primary business operations to continue despite disruptions due to year 2000
issues. This plan may include identifying and securing other suppliers,
increasing inventories, and modifying production facilities and schedules. As
the Company continues to evaluate the year 2000 readiness of its business
systems and facilities, products and significant suppliers, vendors, and
customers, it will modify and adjust its contingency plan as may be required.
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Year 2000 (continued)
Estimated Costs to Address the Company's Year 2000 Issues
To date, costs incurred in connection with the year 2000 issue have not
been material. The Company does not expect total year 2000 remediation costs to
be material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance. The Company does
not track internal costs incurred for its year 2000 compliance project. Such
costs are principally the related payroll costs for its information systems
employees.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
issues will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate using,
third-party software or hardware. In addition, certain of the Company's older
products, which it no longer manufactures or sells, may not be year 2000
compliant, which may expose the Company to claims. If any of the Company's
significant suppliers, vendors, or customers experience business disruptions due
to year 2000 issues, the Company might also be materially adversely affected.
The Company's research and development, production, distribution, financial,
administrative, and communications operations might be disrupted. There is
expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. Any unexpected costs or delays arising
from year 2000 issues could have a significant adverse impact on the Company's
business, operations, and financial condition.
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Forward-looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause its actual
results in fiscal 1998 and beyond to differ materially from those expressed in
any forward-looking statements made by, or on behalf of, the Company.
Need for Continued Product Development; No Assurance of Commercialization
of Products Under Development. Many of the industries the Company competes in
are subject to rapid and substantial technological change and evolving industry
standards necessitating ongoing product development. The development and
commercialization of new technologies and the introduction of new products and
services can render existing products and services obsolete or unmarketable.
There can be no assurance that the Company will be successful in selecting,
developing, manufacturing, and marketing new products or enhancing its existing
products or that developments by other companies will not render its existing
products or technologies obsolete or noncompetitive.
A number of the Company's potential products are currently under
development. There are a number of technological challenges that the Company
must successfully address to complete any of its development efforts on these
products. Some of these products will require significant additional research
and development, as well as successful efforts to commercialize such products.
There can be no assurance that any of the products currently being developed by
the Company, or those to be developed in the future by the Company, will be
technologically feasible or accepted by the marketplace, or that any such
development will be completed in any particular time frame.
The Company has developed several of its core technologies in connection
with government-sponsored research and development. The Company is seeking
government funding for further applications of these core technologies, but
there can be no assurance that such funding can be obtained on favorable terms,
if at all. In addition, the Company does not expect that government funding will
be sufficient to complete the development of the Company's proposed commercial
products based on these core technologies.
Moreover, a number of the commercial markets for Trex Communications'
technology have only recently begun to develop. If these markets fail to grow,
or grow more slowly than anticipated, the Company's business and operating
results could be materially adversely affected.
Market Acceptance. The success of the Company's products depends on
obtaining favorable perceptions of the Company's products by markets and opinion
leaders. Market acceptance of the SoftLight laser hair-removal process has been
disappointing to date. The Company continues to study the SoftLight laser
hair-removal process to better understand the effects of the process. Failure to
improve the process, including extending the duration of time for which hair is
removed using the SoftLight process, will continue to limit the Company's
ability to successfully commercialize the SoftLight laser hair-removal process.
The Company continues to have difficulty demonstrating to consumers that the
SoftLight laser hair-removal process offers advantages over traditional methods
of hair removal and alternative laser and other types of hair-removal systems.
There can be no assurance that the Company will be successful in its efforts to
improve the SoftLight laser hair-removal process or the market acceptance
thereof.
Trex Medical's full-field digital imaging system is also significantly
different from current technologies and, if granted market clearance by the U.S.
Food and Drug Administration (FDA), will be subject to similar market acceptance
risks.
Certain of Trex Communications' products are also representative of new
technologies and as a result may be slow to achieve, or may not achieve, market
acceptance, as customers may seek further validation of this technology. This is
particularly true where the purchase of the product requires a material capital
commitment. There can be no assurance that the Company will be successful in
obtaining broad acceptance of its satellite communications products and
services.
Trex Medical President and Chief Executive Officer Vacancy; Difficulty in
Retaining Qualified Management and Personnel. The president and chief executive
officer of Trex Medical resigned in December 1998. Trex Medical's future success
depends in part on whether Trex Medical can attract and retain a highly
qualified permanent replacement. Trex Medical faces significant competition for
the services of such a person. There can be no assurance
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that Trex Medical will be able to find a new president and chief executive
officer with the background and expertise necessary to support the development
of Trex Medical's businesses. The failure to find such a replacement could have
a material adverse effect on the financial position and results of operations of
Trex Medical. ThermoLase has experienced difficulty in attracting and retaining
qualified management, technical, marketing, and sales personnel. ThermoLase's
future success depends in part on whether the Company can attract and retain
highly qualified management, technical, marketing, and sales personnel.
ThermoLase faces significant competition for the services of such personnel.
There can be no assurance that ThermoLase will attract and retain personnel with
the background and expertise necessary to support the development of
ThermoLase's businesses. The failure to hire and retain such personnel could
materially adversely affect the financial position and results of operations of
ThermoLase. ThermoLase continues to employ The Greenhouse Spa, Inc. management
and other personnel and will rely on such management and personnel to operate
The Greenhouse Spa and assist in the conversion of the Spa Thira locations to
Greenhouse spas. There can be no assurance that ThermoLase will be able to
continue to retain the services of the Greenhouse management and other personnel
on terms acceptable to ThermoLase.
Trex Communications is also actively recruiting qualified sales and
marketing personnel to help commercialize its products and services, and the
recruitment of such personnel is subject to similar risks.
Dependence on Capital Spending Policies. Trex Medical's customers include
large institutions such as hospitals and medical research centers. The capital
spending policies of these customers can have a significant effect on the demand
for Trex Medical's products and the timing of Trex Medical's sales. Such
policies are based on a wide variety of factors, including the resources
available to make such purchases, the spending priorities assigned to various
types of medical equipment or techniques, and policies regarding capital
expenditures. Any decrease in capital spending by these customers could have a
material adverse effect on Trex Medical's business and results of operations. In
addition, sales are dependent in part on completion of construction and upgrade
projects undertaken at healthcare facilities in preparation for delivery of Trex
Medical's products. A delay in construction could cause a delay in delivery and
the timing of sales, which can lead to volatility in Trex Medical's earnings.
Risks Associated with Government Contracts. Funding for the Company's
federal contracts is appropriated by Congress annually, and there can be no
assurance that the Company's existing contracts will be renewed or that funding
for programs under which the Company's contracts are funded will continue at
present levels or at all. Decreases in appropriations may result in delay,
reduction, or termination of the Company's government contracts. Decreases or
uncertainties in appropriations for programs under which the Company's
government contracts are funded could have a material adverse effect on the
results of operations, financial condition, and business of the Company. The
Company's federal government contracts may be terminated, in whole or in part,
at the discretion of the government. In addition, the Company's federal
government contract costs and fees are subject to adjustment based on audits by
the Defense Contract Audit Agency. Furthermore, the Company's eligibility to
perform under its federal government contracts requires the Company to maintain
adequate security measures. The termination of a federal government contract or
the reduction of fees under such a contract could have a material adverse effect
on the results of operations, financial condition, and business of the Company.
The Company sometimes participates in government contracting programs as a
subcontractor. The Company's subcontracts are conditioned on the continuation of
the prime contract. The Company assumes the risk that the prime contractor will
default and that the federal government will terminate the prime contract.
Risk of Decreases in Military Weapons Spending. The U.S. government's
expenditures on military weapons have decreased over the past decade.
Historically, a portion of the Company's revenues have been generated from
contracts relating to military weapons, including ballistic missile defense.
Further reductions in military weapons spending could have a material adverse
effect on the results of operations, financial condition, and business of the
Company.
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Government Regulation; No Assurance of Regulatory Approvals. Certain of
the Company's products are subject to premarketing clearance or approval by the
FDA and similar agencies in foreign countries. The use or sale of certain of the
Company's commercial products under development will require approvals by other
government agencies, such as the Federal Aviation Administration. The process of
obtaining FDA and other government clearances is time consuming and expensive.
In December 1997, Trex Medical submitted a 510(k) application for FDA clearance
for its full-field digital mammography system. In December 1998, Trex Medical
received a letter from the FDA notifying Trex Medical that based on the data
provided, the FDA was unable to determine substantial equivalence with analog,
or "film screen," mammography. As a result, the FDA considers Trex Medical's
510(k) application seeking clearance to market a full-field digital mammography
system to be withdrawn. In its letter, the FDA outlines additional data analysis
that will be required for clearance. There can be no assurance that Trex Medical
will be able to provide the FDA with the data it is seeking or that such data
will be sufficient to permit the FDA to conclude Trex Medical's full-field
digital mammography system is substantially equivalent to analog, or "film
screen," mammography.
In addition, although current indications are that full-field digital
mammography systems will be classified as Class II medical devices, there can be
no assurance that full-field digital mammography systems will not in the future
be classified by the FDA as Class III medical devices, which are subject to the
more involved premarket approval (PMA) process. If such systems are classified
as Class III medical devices, Trex Medical would be required to file for FDA
marketing approval for its full-field digital mammography system under the PMA
process or the Product Development Protocol (PDP), which would likely require
substantial additional clinical trials before being accepted by the FDA, if at
all. Regardless of whether a 510(k), a PMA, or PDP is finally accepted by the
FDA, there can be no assurance that the full-field digital mammography product
will receive FDA marketing clearance or approval. Further, there can be no
assurance that the necessary regulatory clearances for any of the Company's
other products currently under development or developed in the future will be
obtained on a timely basis, if at all.
The extent to which a physician must be involved in the performance of
SoftLight laser hair-removal and skin-resurfacing procedures, including a
physician's ability to delegate to nonphysicians responsibility for performing
particular services, depends upon applicable laws and regulations. Many
jurisdictions have taken the position that the use of lasers for hair removal
constitutes the practice of medicine. In those jurisdictions, responsibility for
performing laser hair-removal procedures must be in accordance with applicable
laws and regulations relating to the performance and/or delegation of medical
acts. Some jurisdictions have also imposed limitations on the classes of persons
to whom laser hair-removal procedures can be delegated and the conditions under
which such delegation is permissible. Regulatory authorities in some
jurisdictions have taken, and other regulatory agencies may take, some or all of
the following positions: (i) that a physician must evaluate each person for whom
laser hair-removal procedures are performed, (ii) that a supervising physician
must be present at all times at the site where such procedures are being
performed, (iii) that only a physician may use a laser for hair-removal, or (iv)
that persons performing laser hair-removal procedures must have particular
licenses or qualifications and may perform laser hair-removal procedures only
under particular conditions. The adoption of these or similar regulatory
requirements may have a material adverse impact on the Company's operations and
ability to conduct operations in jurisdictions in which such requirements are
imposed. For example, a requirement in a particular jurisdiction that a
physician must personally perform laser hair-removal procedures would
significantly limit the potential providers of SoftLight laser hair-removal
procedures in that jurisdiction and may materially affect the costs associated
with the performance of SoftLight laser hair-removal procedures in that
jurisdiction. The use of lasers for hair removal is a new use for lasers, and
there can be no assurance that review by regulatory authorities on matters such
as the practice of medicine, the licensure of facilities, equipment or
personnel, and franchising, will not result in decisions that could adversely
affect the operations of the Company. Furthermore, interpretations of current
laws and regulations or changes in current laws and regulations could make
compliance by the Company more difficult or expensive. The SoftLight Laser Peel
skin-resurfacing procedure may be subject to similar regulatory risks. The
SoftLight laser hair-removal and skin-resurfacing procedures have been
performed, under varying degrees of physician supervision, by registered nurses,
licensed practical nurses, cosmetologists, aestheticians, and electrologists.
The Company believes that the exercise of judgment by the Company and
supervising physicians with respect to delegation of responsibility for
performing SoftLight laser hair-removal and skin-resurfacing procedures complies
with applicable requirements. However, there can be no assurance that regulatory
agencies or courts will agree with such judgments.
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FDA regulations also require continuing compliance with specific standards
in conjunction with the maintenance and marketing of products and services that
have been approved or cleared by the FDA. Failure to comply with applicable
regulatory requirements can result in, among other things, civil and criminal
penalties, suspension of approvals, recalls, or seizures of products,
injunctions, and criminal prosecutions.
Although the optical frequencies used by the Company's lasercom technology
are not currently regulated by the Federal Communications Commission, there can
be no assurance that such frequencies will not be regulated in the future nor
can there be any assurance that, if regulated, that the Company's products and
services would conform to such regulations or that future products will not be
regulated.
Healthcare Reform; Uncertainty of Patient Reimbursement. The federal
government has in the past and may in the future consider, and certain state and
local as well as a number of foreign governments are considering or have
adopted, healthcare policies intended to curb rising healthcare costs. Such
policies include rationing of government-funded reimbursement for healthcare
services and imposing price controls upon providers of medical products and
services. The Company cannot predict what healthcare reform legislation or
regulation, if any, will be enacted in the United States or elsewhere.
Significant changes in the healthcare systems in the United States or elsewhere
are likely to have a significant impact over time on the manner in which the
Company conducts its business. In addition, the federal government regulates
reimbursement of fees for certain diagnostic examinations and capital equipment
acquisition costs connected with services to Medicare beneficiaries. Cost
containment policies may have the effect of reducing reimbursement for certain
procedures, and as a result may inhibit or reduce demand by healthcare providers
for products in the markets in which the Company competes. While the Company
cannot predict what effect the policies of government entities and other
third-party payors will have on future sales of the Company's products, there
can be no assurance that such policies would not have an adverse impact on the
operations of the Company.
Intense Competition. ThermoLase faces intense competition in the market
for personal-care products and services. The SoftLight hair-removal process
competes with electrolysis and other traditional methods of hair removal as well
as other lasers which have been cleared by the FDA for hair removal. Competition
limits the prices ThermoLase is able to charge for its services. In addition,
ThermoLase's services could become obsolete or uneconomical if a competitor
introduces a new product or process accomplishing the same objective.
Trex Medical encounters and expects to continue to encounter intense
competition. The Company believes that the principal competitive factors
affecting the market for its products include product features, product
performance and reputation, price, and service. Trex Medical's competitors may
have greater financial, marketing, and other resources than 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 the products than the Company. Moreover, the products sold
by the Company's original equipment manufacturer (OEM) and value-added reseller
(VAR) customers compete with products offered by the Company directly and
through its independent dealers. Competition could increase if new companies
enter the market or if existing competitors expand their product lines or
intensify efforts within existing product lines. There can be no assurance that
the Company's current products, products under development, or ability to
discover new technologies will be sufficient to enable it to compete effectively
with its competitors.
Trex Communications is engaged in segments of the telecommunications
industry that are extremely competitive. The Company expects that its lasercom
technology will compete with large telecommunication service providers such as
the regional Bell operating companies, microwave, and satellite communications
companies. Both the Company's lasercom division and CCS subsidiary will compete
directly with telecommunications hardware and software providers. There can be
no assurance that Trex Communications will be able to compete successfully with
existing or new competitors.
Intellectual Property Rights, Uncertainties, and Litigation. The Company
places considerable importance on obtaining patent and trade secret protection
for significant new technologies, products, and processes because of the length
of time and expense associated with bringing new products through development
and the regulatory approval
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process to the marketplace. Proprietary rights relating to the Company's
products will be protected from unauthorized use by third parties only to the
extent that they are covered by enforceable patents or are maintained in
confidence as trade secrets. Certain technology that may be used in the
Company's products is not covered by any patent or patent application and,
therefore, may be the subject of ownership disputes. The Company generally
relies on trade secrecy agreements to protect such technology, but there can be
no assurance that such agreements will provide meaningful protection or that
others will not independently develop substantially equivalent technology. There
can be no assurance that patent applications covering the Company's products
will be successfully filed or that patents will ultimately issue. Further, even
if patents are issued, the protection afforded by such patents and the Company's
existing patents will depend upon their scope and validity. In addition, there
can be no assurance that the Company's patents will not be challenged. There may
be patents or other intellectual property rights owned by others, which if
infringed by the Company would permit the owner to prevent the Company from
making, selling, or using the affected product or process and to be entitled to
damages for past infringement. ThermoLase has from time to time received
allegations that the SoftLight process infringes the intellectual property
rights of others and may continue to receive such allegations in the future.
Protection and defense of intellectual property rights may involve the
commitment of large amounts of time and financial resources. Furthermore, the
government retains a non-exclusive, royalty-free license to use technology
developed under government contracts, for government purposes. If the Company
decides not to pursue further development of government-sponsored technology,
the government could, in certain circumstances, transfer that technology to a
third party.
Fischer Imaging Corporation sued Trex Medical's Lorad division in April
1992, alleging that Lorad's prone breast-biopsy systems infringe a Fischer
patent on a precision mammographic needle-biopsy system. In April 1998, Fischer
filed a second lawsuit, alleging Lorad's breast-biopsy systems infringe a second
Fischer patent on a motorized mammographic biopsy apparatus, which issued April
7, 1998. As of October 3, 1998, the Company had recognized aggregate revenues of
approximately $145.7 million from sales of such systems, of which $34.4 million
represents sales prior to October 16, 1995. Each of these suits requests a
permanent injunction, treble damages, and attorneys' fees and expenses. These
two lawsuits have been consolidated into a single lawsuit. As of October 3,
1998, Trex Medical had accrued a reserve of approximately $1.1 million for legal
fees in connection with this matter, although given the inherent uncertainty of
patent litigation and disputes, no assurance can be given as to the amount which
the Company may eventually be required to pay in expenses, or in damages, if the
Company is unsuccessful in defending this matter.
On October 20, 1998, a former employee of Trex Medical's Lorad division
filed a lawsuit against the Company and Trex Medical alleging theft of trade
secrets related to the high-transmission cellular (HTC)(TM) grid, a component
for some of Trex Medical's mammography systems.
Trex Medical's Trophy division is party to a lawsuit against Schick
Technologies, Inc., alleging infringement of a Trophy patent relating to dental
X-ray apparatus. Schick has filed a counterclaim against Trophy alleging
infringement of a Schick patent that also relates to dental X-ray apparatus.
Each of the parties is seeking a declaration that the opposing party's patent is
invalid, a permanent injunction, treble damages, and attorneys' fees and
expenses.
The unfavorable outcome of any one or more of the above described matters
could have a material adverse effect on the Company's business, results of
operations, and financial position. The Company's competitors and other parties
hold other various patents and patent applications in the fields in which the
Company operates. There can be no assurance that the Company will not be found
to have infringed third-party patents and, in the event of such infringement,
the Company may be required to alter its products or processes, pay licensing
fees, or cease making and selling any infringing products and pay damages for
past infringement.
Operating Losses at ThermoLase; Need to Refocus Business and Develop New
Marketing Strategy. ThermoLase incurred losses of approximately $41.2 million,
$12.4 million, $1.4 million, and $1.7 million in fiscal 1998, 1997, 1996, and
1995, respectively. At October 3, 1998, ThermoLase's accumulated deficit was
$57.1 million. There can be no assurance that ThermoLase will achieve profitable
operations in any future period. ThermoLase is in the process of converting its
domestic Spa Thira locations to Greenhouse luxury day spas. The Company has
minimal experience relating to the ownership, operation, or marketing of spas
providing traditional day spa services or, with the
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exception of the Greenhouse management, relating to the ownership, operation, or
marketing, of a destination spa. In connection with the conversions, the Company
is refocusing its laser hair-removal spa business to include a broader range of
day-spa services such as skin resurfacing (including ThermoLase's SoftLight
Laser Peel), traditional day-spa services, and an expanded line of beauty- and
personal-care products. The Company will try to identify a mix of spa services
and products and prices that will lead to profitable operations at ThermoLase.
There can be no assurance that these efforts will be successful. The initial
marketing and commercialization strategy for ThermoLase's SoftLight hair-removal
process was centered around a belief that the service would command a premium
price in the marketplace. Based on feedback from customers, ThermoLase has
shifted away from premium pricing. ThermoLase is currently revising its
marketing and commercialization strategy, including refocusing its spa
operations to include more traditional spa services and expanding beauty- and
personal-care product offerings. As part of these efforts, ThermoLase will be
converting its remaining Spa Thira spas into Greenhouse luxury day spas.
ThermoLase is restructuring its U.S. licensing program to, among other things,
require licensees to pay a fixed monthly fee (rather than an initial fee and
per-treatment fee) and to charge licensees for various other products and
services. ThermoLase now seeks to establish relationships with distributors who
would sell SoftLight lasers and ThermoLase's other products and services in new
markets outside of the United States. ThermoLase would derive one-time sale
revenues from such relationships rather than initial and per-procedure royalty
fees. No assurance can be given that this revised marketing and
commercialization strategy will be successful.
Potential for Customer Claims; Product Liability. ThermoLase has received
complaints from several of its physician licensees, joint venture partners, and
consumers stating that that the SoftLight hair-removal process has not met their
expectations. Some of these parties have filed lawsuits with respect to such
complaints. ThermoLase may receive similar allegations and/or become subject to
similar lawsuits in the future. There can be no assurance that additional
litigation relating to such claims will not be brought against ThermoLase, or
that ThermoLase would prevail in any or all such cases, if brought. Neither the
Company nor ThermoLase has insurance coverage for such claims.
In addition, the administration of medical treatments using Trex Medical
medical equipment is subject to various risks of physical injury to the patient.
The laser hair-removal and skin-resurfacing market involves the treatment of
persons who could be harmed by, or have an adverse reaction to, the SoftLight
laser resulting in liability claims against the Company. The Company and its
subsidiaries currently carry general liability, product liability, and other
insurance coverage to insure against such claims; however, there can be no
assurance that such coverage will be adequate to cover all losses arising from
such claims or that in the future such insurance will be available to the
Company at a reasonable cost or at all.
Dependence Upon Significant Relationships. A portion of Trex Medical sales
depend on OEM arrangements and a portion of Trex Communications sales depend on
VAR arrangements. These sales depend, in part, on the continuation of these
arrangements and the level of end-user sales by such OEMs and VARs. During
fiscal 1998, U.S. Surgical Corporation, a significant OEM customer of Trex
Medical, was acquired by Tyco International Ltd. As a result of such
acquisition, Trex Medical does not expect there will be any future OEM sales to
U.S. Surgical. There can be no assurance that Trex Medical and Trex
Communications will be able to maintain existing, or establish new, OEM and/or
VAR relationships.
Trex Communications' lasercom division plans to develop strategic
relationships with telecommunications product and service providers to provide
components for the network systems Trex Communications is developing and to
market and sell lasercom technology and services. There can be no assurance that
Trex Communications will be able to develop such strategic relationships in the
future or that it will benefit from any of such arrangements. A significant
portion of Trex Communications' call-automation revenues is derived from large
call-automation system installations and customization projects at customer
sites. There can be no assurance that the Company will sell additional systems
to these customers or have the ability to replace these revenues with comparably
sized projects in the future.
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Risks Associated with Acquisition Strategy. The Company's strategy
includes the acquisition of businesses that complement or augment the Company's
existing products and services. Promising acquisitions are difficult to identify
and complete for a number of reasons, including competition among prospective
buyers and the need for regulatory approvals, including antitrust approvals. Any
acquisitions completed by the Company may be made at substantial premiums over
the fair value of the net assets of the acquired companies. There can be no
assurance that the Company will be able to complete future acquisitions or that
the Company will be able to successfully integrate any acquired businesses.
Potential Impact of Year 2000 on Processing of Date-sensitive Information.
While the Company is attempting to minimize any negative consequences arising
from the year 2000 issue, there can be no assurance that year 2000 issues will
not have a material adverse impact on the Company's business, operations, or
financial condition. While the Company expects that upgrades to its internal
business systems will be completed in a timely fashion, there can be no
assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate using,
third-party software or hardware. In addition, certain of the Company's older
products, which it no longer manufactures or sells, may not be year 2000
compliant, which may expose the Company to claims. If any of the Company's
significant suppliers, vendors, or customers experience business disruptions due
to year 2000 issues, the Company might also be materially adversely affected.
The Company's research and development, production, distribution, financial,
administrative, and communications operations might be disrupted. There is
expected to be a significant amount of litigation relating to the year 2000
issue, and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. Any unexpected costs or delays arising
from the year 2000 issue could have a significant adverse impact on the
Company's business, operations, and financial condition.
Risks Associated with Spinout 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 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" (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 equity of the consolidated entity
with no gain or loss being recorded. The exposure draft addresses the
consolidation issues in two parts, consolidation procedures, which includes
proposed rule changes affecting the Company's ability to recognize gains on
issuance of subsidiary stock, and consolidation policy, which does not address
accounting for such gains. During fiscal 1997, the FASB decided to focus its
efforts on the consolidation policy part of the exposure draft and to consider
resuming discussion on consolidation procedures after completion of the efforts
on consolidation policy. The timing and contents of any final statement is
uncertain.
45
<PAGE>
<TABLE>
<CAPTION>
Selected Financial Information
<S> <C> <C> <C> <C> <C> <C>
Nine
Months Year
Year Ended Ended (a) Ended
----------------------------------------- --------------------
(In thousands except per share amounts) Oct. 3, Sept. 27,Sept. 28, Sept. 30, Sept. 30, Dec. 31,
1998 (b) 1997 (c) 1996 (d) 1995 1995 (e) 1994
- ------------------------------------------- ---------- --------- ---------- ---------- ---------- ----------
(Unaudited)
Statement of Operations Data
Revenues $ 341,858 $282,121 $ 182,029 $ 111,610 $ 86,531 $ 91,052
Income Before Provision for Income 16,591 10,618 48,292 38,895 37,891 11,542
Taxes, Minority Interest, and
Extraordinary Item
Net Income (Loss) (2,613) 8,441 42,575 36,658 36,341 9,602
Earnings (Loss) per Share:
Basic (.14) .44 2.23 2.66 1.92 .52
Diluted (.14) .43 2.16 2.60 1.87 .50
Balance Sheet Data
Working Capital $ 261,677 $202,276 $ 127,863 $ 103,297 $ 82,798
Total Assets 595,706 450,117 320,222 230,781 154,984
Long-term Obligations 204,645 115,000 - - -
Common Stock of Subsidiary Subject to 40,500 40,500 - - -
Redemption
Shareholders' Investment 149,587 176,135 205,079 162,388 123,271
(a) In September 1995, the Company changed its fiscal year end from the Saturday
nearest December 31 to the Saturday nearest September 30. Accordingly, the
Company's 39-week transition period ended September 30, 1995, is presented.
(b) Reflects the April 1998 acquisition of Trophy, issuance of stock by
subsidiaries, which resulted in nontaxable gains of $23.8 million, and
restructuring costs and establishment of a tax valuation allowance at
ThermoLase. Also reflects the Company's issuance of $124.5 million principal
amount of 3 1/4% subordinated convertible debentures and an extraordinary
gain of $3.0 million, net of taxes.
(c) Reflects the July 1997 acquisition of CCS and the issuance of stock by a
subsidiary, which resulted in nontaxable gains of $7.9 million. Also
reflects the issuance by ThermoLase of $115.0 million principal amount of 4
3/8% subordinated convertible debentures, the issuance of an $11.0 million
promissory note to Thermo Electron, and the reclassification of $40.5
million to "Common stock of subsidiary subject to redemption" from
"Shareholders' investment" and "Minority interest" due to ThermoLase's stock
exchange transaction.
(d) Reflects the May 1996 and September 1996 acquisitions of XRE and
Continental, respectively, and the issuance of stock by subsidiaries, which
resulted in nontaxable gains of $39.1 million.
(e) Reflects issuance of stock by subsidiaries, which resulted in nontaxable
gains of $34.7 million, and the September 1995 acquisition of Bennett.
46
<PAGE>
Common Stock Market Information
The Company's common stock is traded on the American Stock Exchange under
the symbol TKN. The following table sets forth the high and low sales prices of
the Company's common stock for fiscal 1998 and 1997, as reported in the
consolidated transaction reporting system.
Fiscal 1998 Fiscal 1997
-------------------- ------------------
Quarter High Low High Low
- --------------------------------------------------------------- ---------- ---------- ---------- -----------
First $28 1/8 $21 3/4 $42 1/4 $28 1/4
Second 23 1/4 17 31 1/4 22 1/2
Third 21 7/8 17 1/8 28 7/8 17 7/8
Fourth 18 15/16 12 1/2 28 21 3/4
</TABLE>
As of October 30, 1998, the Company had 613 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 October 30, 1998, was $13 1/16 per share.
Common stock of the Company's majority-owned public subsidiaries is traded
on the American Stock Exchange: ThermoLase Corporation (TLZ) and Trex Medical
Corporation (TXM).
Stock Transfer Agent
American Stock Transfer & Trust Company 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:
American Stock Transfer & Trust Company
Shareholder Services Department
40 Wall Street, 46th Floor
New York, New York 10005
(718) 921-8200
Shareholder Services
Shareholders of ThermoTrex Corporation who desire information about the
Company are invited to contact the Investor Relations Department, ThermoTrex
Corporation, 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046,
(781) 622-1111. A mailing list is maintained to enable shareholders whose stock
is held in street name, and other interested individuals, to receive quarterly
reports, annual reports, and press releases as quickly as possible. Distribution
of printed quarterly reports is limited to the second quarter only. All material
is available from Thermo Electron's Internet site
(http://www.thermo.com/subsid/tkn1.html).
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 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 October
3, 1998, as filed with the Securities and Exchange Commission, may be obtained
at no charge by writing to the Investor Relations Department, ThermoTrex
Corporation, 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046.
Annual Meeting
The annual meeting of shareholders will be held on Thursday, March 11,
1999, at 10 a.m., at the Westin Hotel, 70 Third Avenue, Waltham, Massachusetts.
Exhibit 21
THERMOTREX CORPORATION SUBSIDIARIES As of
November 19, 1998, the Registrant owned the following subsidiaries:
<TABLE>
<CAPTION>
<S> <C> <C>
STATE OR
JURISDICTION PERCENT OF
NAME OF OWNERSHIP
INCORPORATION
ThermoLase Corporation Delaware 71
(additionally, 7.74% of the shares are owned directly by The
Thermo Electron Companies Inc.)
Creative Beauty Innovations, Inc. Texas 100
The Greenhouse Spa, Inc. Pennsylvania 100
ThermoLase England L.L.C. Delaware 50*
ThermoLase UK Limited United Kingdom 100
ThermoLase France L.L.C. Delaware 71*
ThermoDess S.A.S. France 71*
ThermoLase International L.L.C. Delaware 35*
ThermoLase Japan L.L.C. Wyoming 50*
Thira Japan, Inc. Japan 100
ThermoTrex East Inc. Massachusetts 100
Trex Medical Corporation Delaware 70
(additionally, 2.0% of the shares are owned directly by The
Thermo Electron Companies Inc.)
Bennett X-Ray Corporation New York 100
Bennett International Corporation U.S. Virgin 100
Islands
Eagle X-Ray, Inc. New York 100
Island X-Ray Incorporated New York 100
Continental X-Ray Corporation Delaware 100
Trex Medical France S.A. France 100
Societe Financiere Trophy S.A. France 100
Trophy Radiologie S.A. France 100
Stephan'X S.A. France 100
Trophy Benelux S.A. Belgium 100
Trophy Radiologie Italia S.R.L. Italy 100
Trophy Radiologie Japan Kabushiki Kaisha Japan 100
Trophy Radiologie GmbH (FRG) Germany 100
P.T. Trophy Rajawali Indonesia Indonesia 100
Trophy Radiologia Espana SL Spain 100
Trophy Ronlgen Sanayi Anonim Sirketi Turkey 100
Trophy Radiologie U.K. Ltd. United Kingdom 100
Trophy Radiology, Inc. Virginia 100
Ardet Italia S.R.L. Italy 100
SCI Boucher Debard Baudry Guillot France 100
XRE Corporation Delaware 100
Trex Communications Corporation Delaware 77
Computer Communications Specialists, Inc. Georgia 100
Computer Communication Specialists UK Ltd United Kingdom 100
EMP TrexCom Inc. Delaware 100
LNR Communications, Inc. Delaware 100
* Joint Venture/Partnership
</TABLE>
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the
incorporation by reference of our reports dated December 21, 1998,
included in or incorporated by reference into ThermoTrex Corporation's
Annual Report on Form 10-K for the year ended October 3, 1998, into the
Company's previously filed Registration Statement No. 33-47846 on Form
S-3, Registration Statement No. 33-45282 on Form S-8, Registration
Statement No. 33-45284 on Form S-8, Registration Statement No. 33-52818 on
Form S-8, Registration Statement No. 33-68654 on Form S-3, Registration
Statement No. 33-69426 on Form S-3, Registration Statement No. 33-70512 on
Form S-8, Registration Statement No. 33-80891 on Form S-8, and
Registration Statement No. 333-34909 on Form S-3.
Arthur Andersen LLP
Boston, Massachusetts
December 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMOTREX
CORPORATION'S REPORT ON FORM 10-K FOR THE YEAR ENDED OCTOBER 3, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-END> OCT-03-1998
<CASH> 157,107
<SECURITIES> 8,076
<RECEIVABLES> 89,461
<ALLOWANCES> 3,671
<INVENTORY> 86,223
<CURRENT-ASSETS> 364,483
<PP&E> 60,511
<DEPRECIATION> 21,995
<TOTAL-ASSETS> 595,706
<CURRENT-LIABILITIES> 102,806
<BONDS> 190,145
0
0
<COMMON> 196
<OTHER-SE> 149,391
<TOTAL-LIABILITY-AND-EQUITY> 595,706
<SALES> 294,310
<TOTAL-REVENUES> 341,858
<CGS> 165,688
<TOTAL-COSTS> 210,316
<OTHER-EXPENSES> 39,826
<LOSS-PROVISION> 970
<INTEREST-EXPENSE> 9,479
<INCOME-PRETAX> 16,591
<INCOME-TAX> 17,463
<INCOME-CONTINUING> (5,622)
<DISCONTINUED> 0
<EXTRAORDINARY> 3,009
<CHANGES> 0
<NET-INCOME> (2,613)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
