SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended January 2, 1999.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number 1-10791
THERMOTREX CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 52-1711436
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10455 Pacific Center Court
San Diego, California 92121-4339
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
Class Outstanding at January 29, 1999
---------------------------- -------------------------------
Common Stock, $.01 par value 18,661,346
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
THERMOTREX CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
January 2, October 3,
(In thousands) 1999 1998
- --------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents (includes $98,392
and $146,534 under repurchase agreement
with parent company) $116,522 $157,107
Available-for-sale investments, at quoted
market value (amortized cost of $8,086
in 1998) - 8,076
Accounts receivable, less allowances of
$4,041 and $3,671 85,771 85,790
Unbilled contract costs and fees 15,016 7,409
Inventories:
Raw materials and supplies 45,053 38,788
Work in process 30,265 20,134
Finished goods 26,346 27,301
Prepaid expenses and other assets 5,241 5,890
Prepaid and refundable income taxes 18,098 13,988
-------- --------
342,312 364,483
-------- --------
Property, Plant, and Equipment, at Cost 85,580 82,506
Less: Accumulated depreciation and
amortization 24,576 21,995
-------- --------
61,004 60,511
-------- --------
Notes Receivable from Related Parties 6,667 6,667
-------- --------
Prepaid Income Taxes and Other Assets 8,552 9,200
-------- --------
Cost in Excess of Net Assets of Acquired
Companies (Note 3) 165,042 154,845
-------- --------
$583,577 $595,706
======== ========
2
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THERMOTREX CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
January 2, October 3,
(In thousands except share amounts) 1999 1998
- --------------------------------------------------------------------------
Current Liabilities:
Current maturities of long-term obligations $ 430 $ 435
Accounts payable 34,572 30,871
Accrued payroll and employee benefits 11,041 12,147
Accrued warranty costs 8,017 9,233
Customer deposits 9,117 5,476
Accrued commissions 7,442 7,629
Amount payable for acquired company (Note 3) 7,715 -
Other accrued expenses (Notes 3 and 5) 38,040 31,763
Due to parent company and affiliated
companies 2,622 5,252
-------- --------
118,996 102,806
-------- --------
Deferred Income Taxes 6,522 6,418
-------- --------
Deferred Lease Liability 1,519 1,172
-------- --------
Long-term Obligations:
Subordinated convertible debentures (includes
$14,500 of related-party debt) 203,948 203,948
Other 622 697
-------- --------
204,570 204,645
-------- --------
Common Stock of Subsidiary Subject to
Redemption 40,500 40,500
-------- --------
Minority Interest 79,169 90,578
-------- --------
Shareholders' Investment:
Common stock, $.01 par value, 50,000,000
shares authorized; 19,590,446 shares
issued 196 196
Capital in excess of par value 65,873 73,293
Retained earnings 84,780 94,984
Treasury stock at cost, 929,100 shares (20,944) (20,944)
Accumulated other comprehensive items
(Note 4) 2,396 2,058
-------- --------
132,301 149,587
-------- --------
$583,577 $595,706
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
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THERMOTREX CORPORATION
Consolidated Statement of Operations
(Unaudited)
Three Months Ended
----------------------
January 2, January 3,
(In thousands except per share amounts) 1999 1998
- --------------------------------------------------------------------------
Revenues
Product revenues $ 78,149 $ 71,674
Other revenues 8,995 13,881
-------- --------
87,144 85,555
-------- --------
Costs and Operating Expenses:
Cost of product revenues 53,677 41,334
Cost of other revenues 5,706 10,531
Selling, general, and administrative expenses 28,854 20,392
Research and development expenses 10,141 9,391
-------- --------
98,378 81,648
-------- --------
Operating Income (Loss) (11,234) 3,907
Interest Income 1,858 3,271
Interest Expense (includes $130 and $172 to
parent company) (2,112) (2,233)
Equity in Loss of Joint Ventures (200) (400)
Other Expense (52) -
-------- --------
Income (Loss) Before Income Taxes and Minority
Interest (11,740) 4,545
Income Tax (Provision) Benefit 1,096 (2,310)
Minority Interest (Expense) Income 440 (878)
-------- --------
Net Income (Loss) $(10,204) $ 1,357
======== ========
Basic and Diluted Earnings (Loss) per Share
(Note 2) $ (.55) $ .07
======== ========
Weighted Average Shares (Note 2):
Basic 18,661 19,017
======== ========
Diluted 18,661 19,313
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
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THERMOTREX CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
----------------------
January 2, January 3,
(In thousands) 1999 1998
- --------------------------------------------------------------------------
Operating Activities:
Net income (loss) $(10,204) $ 1,357
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 4,476 3,355
Provision for losses on accounts receivable 272 134
Minority interest expense (income) (440) 878
Increase in deferred income taxes - (1,206)
Other 464 572
Changes in current accounts, excluding the
effects of acquisitions:
Accounts receivable 4,068 (10,829)
Inventories and unbilled contract costs
and fees (12,668) (575)
Other current assets (3,749) 253
Accounts payable 3,302 (2,549)
Other current liabilities (4,337) 1,926
-------- --------
Net cash used in operating activities (18,816) (6,684)
-------- --------
Investing Activities:
Acquisitions, net of cash acquired (Note 3) (11,101) (7,174)
Proceeds from sale and maturities of available-
for-sale investments 8,000 2,400
Purchases of available-for-sale investments - (4,000)
Purchases of property, plant, and equipment (2,066) (2,584)
Repayment (advance) pursuant to notes
receivable from related parties 1,300 (1,667)
Other 318 (25)
-------- --------
Net cash used in investing activities $ (3,549) $(13,050)
-------- --------
5
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THERMOTREX CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Three Months Ended
----------------------
January 2, January 3,
(In thousands) 1999 1998
- --------------------------------------------------------------------------
Financing Activities:
Purchases of Company and subsidiary common stock $(18,456) $(24,718)
Net proceeds from issuance of subordinated
convertible debentures - 121,814
Net proceeds from issuance of Company and
subsidiary common stock 82 724
Payment of withholding taxes related to stock
option exercises (14) (888)
Other 7 -
-------- --------
Net cash provided by (used in) financing
activities (18,381) 96,932
-------- --------
Exchange Rate Effect on Cash 161 -
-------- --------
Increase (Decrease) in Cash and Cash Equivalents (40,585) 77,198
Cash and Cash Equivalents at Beginning of Period 157,107 135,720
-------- --------
Cash and Cash Equivalents at End of Period $116,522 $212,918
======== ========
Noncash Activities (Note 3):
Fair value of assets of acquired companies $ 35,196 $ 7,787
Cash paid for acquired companies (19,615) (7,176)
Amount payable for acquired company (7,715) -
Issuance of subsidiary common stock for
acquired company (5,000) -
-------- --------
Liabilities assumed of acquired companies $ 2,866 $ 611
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
6
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THERMOTREX CORPORATION
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by ThermoTrex Corporation (the Company) without audit and, in the opinion of
management, reflect all adjustments of a normal recurring nature necessary for a
fair statement of the financial position at January 2, 1999, and the results of
operations and the cash flows for the three-month periods ended January 2, 1999,
and January 3, 1998. The Company's results of operations for the three-month
periods ended January 2, 1999, and January 3, 1998, include 13 weeks and 14
weeks, respectively. Interim results are not necessarily indicative of results
for a full year.
The consolidated balance sheet presented as of October 3, 1998, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K, as amended, for the fiscal year ended
October 3, 1998, filed with the Securities and Exchange Commission.
2. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
Three Months Ended
-------------------------
January 2, January 3,
(In thousands except per share amounts) 1999 1998
- --------------------------------------------------------------------------
Basic
Net Income (Loss) $(10,204) $ 1,357
-------- --------
Weighted Average Shares 18,661 19,017
-------- --------
Basic Earnings (Loss) per Share $ (.55) $ .07
======== ========
7
<PAGE>
2. Earnings (Loss) per Share (continued)
Three Months Ended
------------------------
January 2, January 3,
(In thousands except per share amounts) 1999 1998
- -------------------------------------------------------------------------
Diluted
Net Income (Loss) $(10,204) $ 1,357
Effect of Majority-owned Subsidiaries' Dilutive
Securities - (18)
-------- --------
Income (Loss) Available to Common Shareholders,
as Adjusted $(10,204) $ 1,339
-------- --------
Weighted Average Shares 18,661 19,017
Effect of Stock Options - 296
-------- --------
Weighted Average Shares, as Adjusted 18,661 19,313
-------- --------
Diluted Earnings (Loss) per Share $ (.55) $ .07
======== ========
The computation of diluted earnings per share for the three-month period
ended January 2, 1999, excludes the effect of assuming the conversion of the
Company's $88.9 million 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 January 2, 1999, there were
1,088,519 options outstanding, with exercise prices ranging from $0.30 to $43.88
per share.
3. Acquisition
In November 1998, the Company's Trex Communications Corporation subsidiary
acquired LNR Communications, Inc. (LNR) for approximately $18.8 million in cash
and 1,250,000 shares of Trex Communications common stock valued at approximately
$5.0 million, net of cash and short-term securities acquired. Of the cash
portion of the purchase price, $7.7 million had not been paid as of January 2,
1999, and was accrued in the accompanying fiscal 1999 balance sheet. The shares
issued to the former owners of LNR carry redemption rights that permit the
holders to put the shares to Trex Communications under certain conditions and at
certain prices up to a maximum of $4.00 per share. The redemption rights are
redeemable following the first anniversary of the acquisition and expire if not
redeemed within a prescribed period, which ends no later than August 2000.
Accordingly, the maximum potential obligation of $5.0 million associated with
the rights is included in other accrued expenses in the accompanying fiscal 1999
balance sheet. LNR is a Hauppauge, New York-based manufacturer of electronic
subsystems and turnkey earth stations for the satellite communication market.
This acquisition has been accounted for using the purchase method of
accounting and its results have been included in the accompanying financial
statements from the date of acquisition. The aggregate cost of this acquisition
exceeded the estimated fair value of the acquired net
8
<PAGE>
3. Acquisition (continued)
assets by $10.7 million, which is being amortized over 15 years. Allocation of
the purchase price was based on an estimate of the fair value of the net assets
acquired and is subject to adjustment upon finalization of the purchase price
allocation.
Based on unaudited data, the following table presents selected financial
information of the Company and LNR on a pro forma basis, assuming the companies
had been combined since the beginning of fiscal 1998.
Three Months Ended
------------------------
January 2, January 3,
(In thousands except per share amounts ) 1999 1998
- -------------------------------------------------------------------------
Revenues $ 89,928 $ 90,681
Net Income (Loss) (10,427) 1,150
Basic and Diluted Earnings (Loss) per Share (.56) .06
The pro forma results are not necessarily indicative of future operations or
the actual results that would have occurred had the acquisition of LNR been made
at the beginning of fiscal 1998.
In connection with the acquisition of LNR, Trex Communications has
undertaken a restructuring of the acquired business. This restructuring is
expected to primarily include a reduction in staffing levels. In accordance with
the requirements of Emerging Issues Task Force (EITF) Pronouncement No. 95-3, as
part of the cost of the acquisition, Trex Communications established a reserve
of approximately $1.1 million for restructuring LNR, none of which was expended
at January 2, 1999. Unresolved matters at January 2, 1999, included completion
of planned severances. In accordance with the requirements of EITF 95-3, Trex
Communications will finalize its restructuring plan for LNR no later than one
year from the date of acquisition.
4. Comprehensive Income
During the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This
pronouncement sets forth requirements for disclosure of the Company's
comprehensive income and accumulated other comprehensive items. In general,
comprehensive income combines net income and "other comprehensive items," which
represents certain amounts that are reported as components of shareholders'
investment in the accompanying balance sheet, including foreign currency
translation adjustments and unrealized net-of-tax gains and losses on
available-for-sale investments. During the first quarter of fiscal 1999 and
1998, the Company had a comprehensive loss of $9.9 million and comprehensive
income of $1.4 million, respectively.
9
<PAGE>
5. Restructuring
During fiscal 1998, the Company's ThermoLase Corporation subsidiary
initiated certain restructuring activities, including the announced closure of
three domestic spas and termination of a joint venture that operated its spa in
France. Two of the domestic spas were closed during the first quarter of fiscal
1999 and ThermoLase expects to close the third spa in the third quarter of
fiscal 1999. As of October 3, 1998, ThermoLase had accrued $5.2 million
associated with these activities. During the quarter ended January 2, 1999,
ThermoLase expended $2.2 million for payments associated with terminating
certain contractual agreements of the French joint venture and closing the spa
in France. As of January 2, 1999, the remaining obligation for restructuring
activities totaled $2.9 million, which primarily represents $2.4 million of
lease payments on the facilities being closed, net of assumed sublease receipts,
and costs of ongoing severance.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed under the heading "Forward-looking
Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K, as
amended, for the fiscal year ended October 3, 1998, filed with the Securities
and Exchange Commission.
Overview
The Company operates in three business segments: Medical Products
manufactured by the Company's Trex Medical Corporation subsidiary, Personal-care
Products and Services offered by the Company's ThermoLase Corporation
subsidiary, and Advanced Technology Research, including the laser communications
research performed by the Company's Trex Communications Corporation subsidiary.
Trex Medical designs, manufactures, and markets mammography equipment and
minimally invasive digital breast-biopsy systems; general-purpose 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 products principally through dealers and direct
sales. In addition, Trex Medical manufactures systems and system components as
an original equipment manufacturer (OEM) for the General Electric Medical
Systems division of the General Electric Company. Trex Medical has five
operating units: Lorad, a manufacturer of mammography and digital breast-biopsy
systems; Bennett X-Ray Corporation, a manufacturer of general-purpose X-ray,
mammography, and breast-biopsy
10
<PAGE>
Overview (continued)
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 a manufacturer of physiological monitoring equipment and
digital-image archiving and networking systems used in cardiac catheterization
procedures; 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.
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 continue its physician-licensing program
and international licensing arrangements, discussed below. In connection with
its acquisition of The Greenhouse Spa, Inc. in June 1998, 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 noted above, as a result of this evaluation, ThermoLase
has closed two of its domestic spas and expects to close an additional domestic
spa during the third quarter of fiscal 1999. The remaining 11 domestic spas have
been converted into Greenhouse day spas which, in addition to hair-removal and
skin-resurfacing services, offer more traditional day-spa services, such as
massages and facials. ThermoLase's future results of operations will be
materially affected by the success of these conversions into Greenhouse day
spas. The period through the second quarter of fiscal 1999 will be critical in
determining the economic viability of these strategies. Key to the success of
these strategies will be whether the results of the Greenhouse day spas reflect
substantial progress toward profitable operations in this timeframe. Based upon
the outcome of these strategies, the Company may decide to close additional
spas.
11
<PAGE>
Overview (continued)
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 physician
licensees.
During the second quarter of fiscal 1998, ThermoLase began to experience a
decrease in revenues from its hair-removal services. In response to this trend
and in an attempt to establish price points and other conditions designed to
increase demand and revenues, in April 1998, ThermoLase significantly reduced
treatment prices at its spa 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, there has been a net reduction of 21% in the
number of physician licensees, compared to the number under agreement at the end
of fiscal 1998. 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. During the fourth
quarter of fiscal 1998, the Company decided to close the spa in Paris and
liquidate the joint venture. In October 1998, ThermoLase terminated its
licensing arrangements in Tunisia and Belgium. Beginning in fiscal 1999, the
Company's hair-removal business began reporting product revenues from the sale
of lasers in international markets.
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 and skin-resurfacing 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
12
<PAGE>
Overview (continued)
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
communication 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.
Results of Operations
First Quarter Fiscal 1999 Compared With First Quarter Fiscal 1998
Total revenues increased to $87.1 million in the first quarter of fiscal
1999 from $85.6 million in the first quarter of fiscal 1998. Medical Products
segment revenues, excluding intersegment sales, increased to $64.3 million in
fiscal 1999 from $63.8 million in fiscal 1998. Revenues increased $25.0 million
as a result of the acquisition of Trophy Radiologie in April 1998. Excluding
Trophy, Medical Products segment revenues decreased $24.5 million. Revenues
decreased at Lorad by $13.5 million primarily due to the loss of an OEM contract
with United States Surgical Corporation (U.S. Surgical), which accounted for
$11.5 million of revenues in the fiscal 1998 period. To a lesser extent,
revenues decreased at Lorad due to lower demand for breast-biopsy systems.
Revenues decreased at XRE by $4.7 million primarily due to the delayed shipment
of several cardiac catheterization systems and, to a lesser extent, lower
demand. Revenues at Continental decreased due to a decrease in demand for
radiographic/fluoroscopic systems and general-purpose X-ray systems. Revenues
decreased at Bennett primarily due to lower demand for its general-purpose X-ray
systems and, to a lesser extent, a decrease in sales of its mammography
equipment.
Personal-care Products and Services segment revenues decreased to $9.5
million in the first quarter of fiscal 1999 from $13.4 million in the first
quarter of fiscal 1998. ThermoLase earned revenues from hair-removal services
and related activities of $2.8 million in fiscal 1999, compared with $7.1
million in fiscal 1998. International revenues
13
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First Quarter Fiscal 1999 Compared With First Quarter Fiscal 1998
(continued)
decreased due to a decline of $2.6 million of minimum guaranteed payments
recorded upon granting technology rights under ThermoLase's international
licensing arrangements. Spa revenues decreased due to reduced demand and price
reductions at ThermoLase's spas in fiscal 1999 compared with fiscal 1998, as
well as the closure of the LaJolla and Miami spas during the first quarter of
fiscal 1999. Fiscal 1999 revenues exclude receipts of $1.9 million relating to
gift certificate sales, which will be recognized when services are performed or
when products are purchased. Revenues from ThermoLase's physician-licensing
program decreased in fiscal 1999 compared with fiscal 1998, due to a reduction
in the number of participating physicians, a decrease in one-time fees from new
physician licensees, and a reduction in royalty rates and other changes to the
financial terms of the licenses. These decreases in revenues were offset in part
by the inclusion of $0.8 million in revenues from The Greenhouse Spa, Inc.,
acquired in June 1998. Product revenues at ThermoLase include sales by CBI, and
in the fiscal 1999 period, also include beauty product sales at ThermoLase's
spas and lasers sold in international markets. Revenues at CBI decreased to $6.1
million in the first quarter of fiscal 1999 from $6.4 million in the first
quarter of fiscal 1998, primarily due to a decrease in private label sales,
offset in part by sales of its new branded product lines, introduced in the
fourth quarter of fiscal 1998. This decrease in CBI revenues was more than
offset by revenues from the sale of lasers, as well as sales of beauty products
at the spas.
Advanced Technology Research segment revenues, excluding intersegment sales,
increased to $13.3 million in the first quarter of fiscal 1999 from $8.4 million
in the first quarter of fiscal 1998. Revenues increased $5.0 million due to the
inclusion of product revenues from EMP, acquired in May 1998 and LNR, acquired
in November 1998.
The gross profit margin was 32% in the first quarter of fiscal 1999,
compared with 39% in the first quarter of fiscal 1998. The Medical Products
segment gross profit margin, excluding intersegment sales, decreased to 40% in
the first quarter of fiscal 1999 from 42% in the first quarter of fiscal 1998,
primarily due to decreased sales of higher-margin products at a majority of Trex
Medical's operating units, offset in part by the inclusion of higher-margin
revenues at Trophy. The Personal-care Products and Services segment gross profit
margin, excluding intersegment sales, decreased to negative 16% in the first
quarter of fiscal 1999 from 27% in the first quarter of fiscal 1998.
ThermoLase's hair-removal business reported negative gross profit of $3.5
million in fiscal 1999, compared with gross profit of $1.4 million in fiscal
1998. This decrease was primarily due to a decrease in spa revenues and, to a
lesser extent, a decrease in minimum guaranteed payments relating to
international licensing arrangements and initial sign-up fees relating to the
physician-licensing program, which have a relatively high gross profit margin.
ThermoLase believes that increasing spa utilization by broadening the array of
spa-related services and products offered, through the recently completed
conversion of the spas into Greenhouse day spas, is critical to its ability to
improve the
14
<PAGE>
First Quarter Fiscal 1999 Compared With First Quarter Fiscal 1998
(continued)
profitability of its spas. The degree to which ThermoLase's changes in pricing
structure are successful will also affect ThermoLase's gross profit margin. The
gross profit margin at CBI decreased to 26% in the first quarter of fiscal 1999
from 32% in the first quarter of fiscal 1998, due to a decrease in revenues, as
well as changes in product mix. The gross profit margin from the Advanced
Technology Research segment, excluding intersegment sales, decreased to 28% in
the first quarter of 1999 from 38% in the first quarter of fiscal 1998. The
decrease was primarily due to the inclusion of lower-margin revenues at EMP and
LNR.
Selling, general, and administrative expenses as a percentage of revenues
increased to 33% in the first quarter of fiscal 1999 from 24% in the first
quarter of fiscal 1998. The Medical Products segment selling, general, and
administrative expenses as a percentage of revenues, excluding intersegment
sales, increased to 32% in the first quarter of fiscal 1999 from 19% in the
first quarter of fiscal 1998. The increase was primarily due to a decrease in
revenues at Trex Medical, excluding Trophy. To a lesser extent, selling,
general, and administrative expenses as a percentage of revenues increased due
to the inclusion of Trophy, which has higher costs as a percentage of revenues.
During the second quarter of fiscal 1999, Trex Medical initiated certain actions
to reduce costs in response to lower revenues. These actions include personnel
reductions and closer monitoring of discretionary expenses such as travel,
consultants, and similar costs. Trex Medical does not expect to incur material
obligations for severance as a result of these actions. The Personal-care
Products and Services segment selling, general, and administrative expenses as a
percentage of revenues increased to 51% in the first quarter of fiscal 1999 from
38% in the first quarter of fiscal 1998, primarily due to a decrease in revenues
and, to a lesser extent, increased marketing costs relating to the conversion of
the spas to Greenhouse day spas and the introduction of new branded product
lines at CBI. These increases were offset in part by cost reduction efforts
implemented by ThermoLase during the second half of fiscal 1998.
Research and development expenses increased to $10.1 million in the first
quarter of fiscal 1999 from $9.4 million in the first quarter of fiscal 1998. An
increase in research and development spending, primarily at Trex Medical due to
the inclusion of $2.0 million of expenses at Trophy, was offset in part by
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.
Interest income decreased to $1.9 million in the first quarter of fiscal
1999 from $3.3 million in the first quarter of fiscal 1998, primarily due to
lower average invested cash balances.
Equity in losses of joint ventures in the accompanying statement of
operations represents ThermoLase's proportionate share of losses from its
international joint ventures.
The effective tax rate in the first quarter of fiscal 1999 reflects
the establishment of a valuation allowance for the tax benefit associated
with losses arising at ThermoLase during the quarter. The Company
15
<PAGE>
First Quarter Fiscal 1999 Compared With First Quarter Fiscal 1998
(continued)
establishes valuation allowances in accordance with the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The
Company believes that it is more likely than not that tax benefits that arose
during the quarter will not be used by ThermoLase prior to their expiration. The
effective tax rate in the first quarter of fiscal 1998 exceeded the statutory
federal income tax rate primarily due to the impact of state income taxes and
certain nondeductible expenses, including amortization of cost in excess of net
assets of acquired companies.
The Company recorded minority interest income of $0.4 million in the first
quarter of fiscal 1999, compared with minority interest expense of $0.9 million
in the first quarter of fiscal 1998, primarily due to a loss at Trex Medical in
the first quarter of fiscal 1999. The Company is unable 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.
Liquidity and Capital Resources
Consolidated working capital was $223.3 million at January 2, 1999, compared
with $261.7 million at October 3, 1998. Included in working capital are cash,
cash equivalents, and available-for-sale investments of $116.5 million at
January 2, 1999, compared with $165.2 million at October 3, 1998. Of the $116.5
million balance at January 2, 1999, $78.2 million was held by the Company's
majority-owned subsidiaries, and the remainder was held by the Company and its
wholly owned subsidiary.
Net cash used in operating activities during the first quarter of fiscal
1999 was $18.8 million. An increase in inventories and unbilled contract costs
and fees, primarily at Trex Medical, used $12.7 million of cash, primarily due
to lower than expected sales. In connection with the acquisition of U.S.
Surgical by Tyco Ltd., and U.S. Surgical's decision to focus on other areas of
its business in January 1999, Trex Medical committed to purchase inventories
that had been sold to U.S. Surgical in prior periods totaling approximately $3.6
million, generally payable over six quarters, and an additional $4.5 million,
which is contingent and payable on a pro-rata basis upon Trex Medical's resale
of the product.
Net cash used in investing activities during the first quarter of fiscal
1999 was $3.5 million. Excluding available-for-sale investments activity, the
Company's primary investing activities during the first quarter of fiscal 1999
included an acquisition and capital expenditures. The Company expended $11.1
million, net of cash and short-term investments acquired, and $5.0 million of
Trex Communications common stock, for the acquisition of LNR. At January 2,
1999, an additional $7.7 million was accrued for the purchase of LNR, $6.6
million of which was paid in January 1999. The shares of Trex Communications
common stock issued for the acquisition of LNR carry certain redemption rights
(Note 3). The Company also expended $2.1 million for property, plant, and
equipment during the first quarter of fiscal 1999.
16
<PAGE>
Liquidity and Capital Resources (continued)
The Company's financing activities used $18.4 million of cash during the
first quarter of fiscal 1999. During the first quarter of fiscal 1999, a
majority-owned subsidiary expended $17.0 million to purchase its own securities,
which was funded from working capital. These purchases were made pursuant to
authorizations by the subsidiary's Board of Directors, pursuant to which an
additional $8.0 million may be purchased through December 1999.
ThermoLase's capital expenditures during the remainder of fiscal 1999 will
primarily be affected by the number of physicians and other domestic and
international licensees engaged in its licensing programs. ThermoLase plans to
expend approximately $0.9 million to renovate the original Greenhouse spa. In
addition to expenditures by ThermoLase, the Company plans to make capital
additions of approximately $19.5 million for its other businesses during the
remainder of fiscal 1999. 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.
Year 2000
The Company continues to assess the potential impact of the year 2000 on the
Company's internal business systems, products, and operations. The Company's
year 2000 initiatives include (i) testing and upgrading significant
information-technology systems and facilities; (ii) testing and developing
upgrades, if necessary, for the Company's current products and certain
discontinued products; (iii) contacting key suppliers and vendors to determine
their year 2000 compliance status; and (iv) developing a contingency plan.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its critical
information-technology systems and facilities will be ready for the year 2000.
The first phase of the program, testing and evaluating the Company's critical
information-technology systems and facilities for year 2000 compliance, is
substantially underway. During phase one, the Company will be testing and
evaluating its significant computer systems, software applications, and related
equipment for year 2000 compliance. The Company is also evaluating the potential
year 2000 impact on its critical facilities. The Company has begun phase two of
its program, during which any noncompliant systems or facilities identified
during phase one are prioritized and remediated. The Company is currently
upgrading or replacing such noncompliant information-technology systems. In many
cases, such upgrades or replacements are being made in the ordinary course of
business, without accelerating previously scheduled upgrades or replacements.
The Company expects that all of its material information-
17
<PAGE>
Year 2000 (continued)
technology systems and critical facilities will be year 2000 compliant by the
end of September 1999. There can be no assurance that the Company will be able
to identify all of the year 2000 problems with its critical
information-technology systems and facilities.
The Company has also implemented a compliance program to test and evaluate
the year 2000 readiness of the material products that it currently manufactures
and sells. The Company believes that all such material products are year 2000
compliant. However, as many of the Company's products are complex, interact with
or incorporate third-party products, and operate on computer systems that are
not under the Company's control, there can be no assurance that the Company will
be able to identify all of the year 2000 problems with its current products. The
Company believes that certain of its older products, which it no longer
manufactures or sells, may not be year 2000 compliant nor upgradable to make
them year 2000 compliant. The Company is continuing to test and evaluate such
products. The Company is focusing its efforts on products that are still under
warranty, early in their expected life, and/or subject to FDA considerations
related to the year 2000. The Company is offering upgrades and/or identifying
potential solutions where reasonably practicable.
The Company is in the process of identifying and assessing the year 2000
readiness of key suppliers and vendors that are believed to be significant to
the Company's business operations. As part of this effort, the Company has
developed and is distributing questionnaires relating to year 2000 compliance to
its significant suppliers and vendors. The Company has started to follow-up and
monitor the year 2000 compliance progress of significant suppliers and vendors
that indicate that they are not year 2000 compliant or that do not respond to
the Company's questionnaires. The Company has not completed the majority of its
assessment of third-party risk, but expects to be substantially completed by
September 1999.
Contingency Plan
The Company is developing a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
This plan may include identifying and securing other suppliers, increasing
inventories, and modifying production facilities and schedules. As the Company
continues to evaluate the year 2000 readiness of its business systems and
facilities, products and significant suppliers, and vendors, it will modify and
adjust its contingency plan as may be required.
18
<PAGE>
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. Year 2000 costs
relating to products and facilities were funded from working capital. All
internal costs and related external costs, other than capital additions, related
to year 2000 remediation have been and will continue to be expensed as incurred.
The Company does not track internal costs incurred for its year 2000 compliance
project. Such costs are principally the related payroll costs for its
information systems group.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate using,
third-party software or hardware. In addition, certain of the Company's older
products, which it no longer manufactures or sells, may not be year 2000
compliant, which may expose the Company to claims. If any of the Company's
material suppliers or vendors experience business disruptions due to year 2000
issues, the Company might also be materially adversely affected. There is
expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. In addition, if any year 2000 issues
are identified, there can be no assurance that the Company will be able to
retain qualified personnel to remedy such issues. Any unexpected costs or delays
arising from the year 2000 issue could have a significant adverse impact on the
Company's business, operations, and financial condition in amounts that cannot
be reasonably estimated at this time.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk from changes in foreign currency
exchange rates, interest rates, and equity prices has not changed materially
from its exposure at fiscal year-end 1998.
PART II - OTHER INFORMATION
Item 6 - Exhibits
See Exhibit Index on the page immediately preceding exhibits.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 9th day of February 1999.
THERMOTREX CORPORATION
/s/ Paul F. Kelleher
-------------------------
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
-------------------------
Theo Melas-Kyriazi
Chief Financial Officer
20
<PAGE>
THERMOTREX CORPORATION
EXHIBIT INDEX
Exhibit
Number Description of Exhibits
10.1 Agreement by and between Trex Medical Corporation and William J. Webb
dated as of January 4, 1999 (filed as Exhibit 10.2 to Trex Medical's
Quarterly Report on Form 10-Q for the quarter ended January 2, 1999
[File No. 1-11827] and incorporated herein by reference).
10.2 Agreement by and between Trex Medical Corporation and Hal Kirshner
dated as of February 2, 1999 (filed as Exhibit 10.3 to Trex Medical's
Quarterly Report on Form 10-Q for the quarter ended January 2, 1999
[File No. 1-11827] and incorporated herein by reference).
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMOTREX
CORPORATION REPORT ON FORM 10-Q FOR THE QUARTER ENDED JANUARY 2, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-02-1999
<PERIOD-END> JAN-02-1999
<CASH> 116,522
<SECURITIES> 0
<RECEIVABLES> 89,812
<ALLOWANCES> 4,041
<INVENTORY> 101,664
<CURRENT-ASSETS> 342,312
<PP&E> 85,580
<DEPRECIATION> 24,576
<TOTAL-ASSETS> 583,577
<CURRENT-LIABILITIES> 118,996
<BONDS> 190,070
0
0
<COMMON> 196
<OTHER-SE> 132,105
<TOTAL-LIABILITY-AND-EQUITY> 583,577
<SALES> 78,149
<TOTAL-REVENUES> 87,144
<CGS> 53,677
<TOTAL-COSTS> 59,383
<OTHER-EXPENSES> 10,141
<LOSS-PROVISION> 272
<INTEREST-EXPENSE> 2,112
<INCOME-PRETAX> (11,740)
<INCOME-TAX> (1,096)
<INCOME-CONTINUING> (10,204)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,204)
<EPS-PRIMARY> (0.55)
<EPS-DILUTED> (0.55)
</TABLE>
