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 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
(State or other jurisdiction of 52-1711436
incorporation or organization) (I.R.S. Employer 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
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 29, 1999, was approximately $30,579,000.
As of October 29, 1999, the Registrant had 22,370,012 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended October 2, 1999, are incorporated by reference into Parts I and II.
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PART I
Item 1. Business
(a) General Development of Business
ThermoTrex Corporation, which we also refer to as "the company" or "the
registrant," is the parent company of two publicly traded, majority-owned
subsidiaries, Trex Medical Corporation and ThermoLase Corporation. In addition,
ThermoTrex performs advanced technology research and development (R&D) in the
areas of avionics, X-ray detection, signal processing, and lasers. Government
contracts are the primary source of funding for this work. ThermoTrex also has a
majority-owned privately held subsidiary, Trex Communications Corporation.
Proposed Merger
In fiscal 1999*, Thermo Electron Corporation announced a proposed
reorganization involving certain of Thermo Electron's subsidiaries, including
the company and its ThermoLase subsidiary. In December 1999, the boards of
directors of the company, ThermoLase, and Thermo Electron approved definitive
merger agreements under which Thermo Electron would acquire all of the
outstanding shares of our common stock and all of the outstanding shares of
ThermoLase (other than the shares held by Thermo Electron or the company) in
exchange for Thermo Electron common stock. As a result, the company and
ThermoLase would become wholly owned subsidiaries of Thermo Electron. The terms
of the exchanges, and certain conditions as to which the completion of the
mergers are subject to, are outlined in Note 16 to Consolidated Financial
Statements in our Fiscal 1999 Annual Report to Shareholders. This information is
incorporated into this document by reference. Trex Medical would remain a
publicly traded subsidiary of Thermo Electron.
Restructuring Actions
During fiscal 1999, ThermoTrex announced broad-scale restructuring
actions. In connection with these actions, the company recorded restructuring
and related charges of $100.2 million in fiscal 1999, which primarily relate to
restructuring at the company's ThermoLase and Trex Medical subsidiaries.
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. Other specialized medical X-ray systems include R/F
(radiographic/fluoroscopic) units, which are used to diagnose gastrointestinal
disorders and other problems; and cardiac catheterization laboratories (cath
labs), which are used during diagnostic and interventional vascular and cardiac
procedures, such as balloon angioplasty. Through Trophy Radiologie, which is
based just outside of Paris, Trex Medical manufactures digital and conventional
dental X-ray systems. Trex Medical undertook a consolidation of its domestic
facilities in fiscal 1999, reducing the number of domestic operating units from
four to two. Trex Medical's results in fiscal 1999 were adversely affected by
these actions, as well as the loss of a significant customer.
ThermoLase
Through our ThermoLase subsidiary, we developed two laser-based products:
the SoftLight(R) system for the removal of unwanted hair and the SoftLight Laser
Peel for skin resurfacing. Due to ThermoLase's continuing losses, in fiscal
1999, ThermoLase decided to exit these businesses. Through its Creative Beauty
Innovations, Inc. subsidiary, ThermoLase manufactures and markets skin-care and
bath and body products, and markets dietary supplements.
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* References to fiscal 1999, 1998, and 1997 in this document are for the years
ended October 2, 1999, October 3, 1998, and September 27, 1997, respectively.
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ThermoLase developed a network of 14 high-end day spas, originally called
Spa Thira. In June 1998, ThermoLase acquired The Greenhouse Spa, Inc., a
destination spa located in Arlington, Texas. During fiscal 1998, ThermoLase
announced the closure of three of the day spas and converted the other eleven
into full-service day spas that were operated under The Greenhouse Spa name.
During the third quarter of fiscal 1999, ThermoLase closed two additional spas
and sold the nine remaining day spas, as well as The Greenhouse Spa, Inc.
Beginning in June 1996, ThermoLase entered into a variety of joint
ventures and licensing agreements to bring SoftLight technology to international
markets. During fiscal 1998, it closed a spa in France, which operated under a
joint venture agreement, and during fiscal 1999, it terminated or renegotiated
the terms of the remaining international licensing arrangements to minimize
ongoing management, maintenance, and service obligations. In fiscal 1999,
ThermoLase offered licensees the opportunity to purchase or lease SoftLight
lasers in lieu of paying ongoing licensing fees.
Government-sponsored R&D
Government-sponsored contract revenues increased 35% in fiscal 1999. We
received incremental funding for several contracts. They include a 30-month,
$28.0 million U.S. Air Force contract awarded in May 1998 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. Under another 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 and was awarded in fiscal 1998. In fiscal 1999, we received $3.7
million in funding, bringing funding to date on this contract to $7.3 million.
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. And, the U.S. Army continues to fund development of a
passive millimeter-wave camera, which has potential for use in aviation and
security applications. In fiscal 1999, the U.S. Army Research Laboratory awarded
an additional $2.1 million to continue development of the camera. We continue to
follow our strategy of performing government R&D that we believe has the
potential to spawn commercial products.
Trex Communications
We created our Trex Communications subsidiary in fiscal 1997. Since then,
Trex Communications has acquired three companies. Through CCS TrexCom Inc.,
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. In November 1999, we agreed to acquire all of the shares of Trex
Communications in anticipation of selling all of the shares to a third party.
CCS TrexCom was sold to EPOS Corporation in December 1999 for approximately $8
million in cash and a $2 million note receivable due in December 2004. We have
also signed a letter of intent to sell Trex Communications for approximately $49
million dollars and hope to complete that sale in January 2000.
Stock Ownership
We were incorporated in January 1991 as a wholly owned subsidiary of
Thermo Electron. As of October 2, 1999, Thermo Electron owned 17,927,330 shares
of our common stock. This represented 80% of our outstanding shares on that
date. Thermo Electron is a world leader in many of the markets it serves. Thermo
Electron is a leading provider of analytical and monitoring instruments, used in
everything from life sciences research to food and beverage production, and a
recognized leader in heart-assist devices, respiratory-care equipment,
neurodiagnostics, and mammography systems. In addition, Thermo Electron develops
and operates power plants, offers a range of environmental consulting and
resource management services, is a major producer of paper-recycling equipment,
provides water-clarification and fiber-recovery products and services, and
conducts a broad range of advanced technology R&D.
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During fiscal 1999, Thermo Electron purchased 2,720,350 shares of
ThermoTrex common stock in the open market for a total price of $22.1 million
and purchased 3,712,072 shares of ThermoTrex common stock directly from
ThermoTrex for $41.8 million.
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 1999 Annual Report to Shareholders, which is incorporated in this
document by reference.
(b) Financial Information About Industry Segments
Financial information concerning the company's segments is summarized in
Note 13 to Consolidated Financial Statements in our Fiscal 1999 Annual Report to
Shareholders. This information 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.
Trex Medical sells its products through 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.
Mammography Systems. Trex Medical offers two high-end systems, the Lorad
M-IV and the Contour 2000, and two mid-tier systems, the Lorad Elite and the
Profile 2000.
Trex Medical has developed a full-field digital mammography system called
the TDMS(TM) Trex Digital Mammography System, and a 510(k) application seeking
clearance to market this system was submitted to the United States Food and Drug
Administration (FDA) in December 1997. In August 1999, we received a letter from
the FDA notifying us that, after considering additional information we had
provided, the agency determined that our full-field digital mammography system
is not substantially equivalent to analog (also called film screen) mammography.
Since we started the clinical trial that formed the basis of our 510(k)
application, the FDA has reassessed its original guidelines for evaluating this
new technology. In September 1999, Trex Medical and other companies developing
full-field digital mammography systems received a letter from the director of
the FDA's Office of Device Evaluation. In this communication, the agency
indicated that it now believes that a pre-market approval (PMA) application may
be the most viable option; however, the FDA has not mandated this approach. The
standard of review under a PMA is whether a device is safe and effective, and is
generally more burdensome than a 510(k), because it applies to devices
considered to be of higher risk. Due to the inherent limitations of the clinical
trials conducted under its previous guidelines, the FDA was unable to make a
substantial equivalence determination, but the FDA has indicated that it may be
able to approve digital mammography under a PMA application.
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Trex Medical plans to incorporate design and engineering changes into its
system, and it may be necessary to collect more clinical data. Trex Medical is
reevaluating its strategy based on this latest information from the FDA and may
initiate a new clinical trial as it continues to pursue clearance from the FDA
to market a full-field digital mammography system.
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. 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 that are used in conjunction with
its mammography systems. For physicians that perform a significant number of
biopsies, Trex Medical also sells a dedicated, prone biopsy system called the
Lorad MultiCare(TM) Breast Biopsy System (formerly called the StereoGuide(R)).
This system is used with Trex Medical's digital "spot" mammography system, which
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 Trex Medical.
Trex Medical's prone 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 through its Trex Heritage Series line of products. Previously, the
company had sold this equipment under the Continental and Bennett brand names.
The Heritage Series includes basic X-ray systems that are generally used in
outpatient facilities as well as more sophisticated and expensive X-ray systems
typically used in hospitals and clinics. The Heritage Series also includes the
Trex 2200i digital R/F system, which provides real-time image capture. R/F
systems are often used for diagnostic gastrointestinal procedures to image the
progress of a radiopaque solution (typically barium) as it travels through the
digestive tract.
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 believes digital imaging will have significant applications
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. Trex Medical
designs, manufactures, and markets cath labs and positioners for cardiovascular
imaging systems. The 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. These 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.
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Trex Medical's products include the Unicath SP(TM) cardiovascular imaging
system, with features such as Full Frame(TM) Zoom to further improve
visualization of interventional 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 labs, Trex Medical offers digital image-processing
systems, workstations, and archive alternatives.
In addition, Trex Medical 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.
Dental X-ray Systems. In April 1998, Trex Medical acquired Paris-based
Trophy Radiologie, one of the world's largest manufacturers of dental X-ray
systems. Through this division, 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. In fiscal 1999, Trophy
introduced the RVGui system. The ui stands for ultimate imaging, and a recent
study has demonstrated that the RVGui's solid state intraoral sensor produces
extremely sharp images that rival or exceed film in all respects. Other benefits
include a significant reduction in X-ray exposure compared to conventional
film-based systems and a detailed zoom mode.
Personal-care Products and Services
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
ThermoTrex is currently focusing its advanced technology research efforts
on the areas of 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. Through its two remaining operating units, our
Trex Communications subsidiary serves the satellite communications industry.
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 13 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 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.
Government-funded Projects. ThermoTrex is currently working on
government-funded projects in several areas, including:
(1) Passive Millimeter-Wave Imaging. 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
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Administration. The U.S. Army has provided approximately $15.0 million in
funding for PMC development over the last seven years. In fiscal 1999,
through a modification to an existing contract, the U.S. Army Research
Laboratory awarded an additional $2.1 million to continue development of the
PMC.
(2) 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 are 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
1999, we received $3.0 million in funding under this contract bringing total
funding to $10.5 million.
(3) Digital 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 1999, we received $3.8 million in
funding under this contract bringing total funding to $6.8 million.
(4) 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
1999, we have received $13.3 million under this contract.
(5) ROBS (rapid optical beam steering) laser radar system - We have developed
and extensively tested the ROBS system over the last 12 years, supported by
more than $30.6 million in government funding. Under a contract awarded in
fiscal 1996 by the U.S. Naval Air Warfare Center at China Lake, California,
ThermoTrex received funding of $3.1 million through the end of fiscal 1999.
In fiscal 1999, ThermoTrex received a new 3-year, $10.0 million contract
from the same agency to continue this work, and have been funded for $0.3
million through the end of fiscal 1999. 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 1999, the company received $5.8 million in funding under this
contract.
(ii) New Products
Our 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 related
patents, 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.
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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.
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
No single customer accounted for more than 10% of the revenues of the
Personal-care Products and Services segment or the Medical Products segment in
fiscal 1999. Approximately 30% of the Advanced Technology Research segment
revenues in fiscal 1999 were derived from government contracts. If certain of
these contracts were canceled or not fully funded, it would have a material
adverse effect on this segment of our business.
(viii)Backlog
The company's backlog of firm orders at fiscal year-end 1999 and 1998 was:
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ---------- ----------
Medical Products $45,630 $58,733
Personal-care Products and Services 4,537 4,116
Advanced Technology Research 36,264 27,845
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$86,431 $90,694
======= =======
</TABLE>
The backlog at the Medical Products segment decreased primarily due to a
decrease in orders for Trex Medical's medical imaging systems. As a result of
the decline in backlog, and based on the volume of bookings in October and
November 1999, Trex Medical expects to report lower comparative sales and
operating results in the first quarter of fiscal 2000. Trex Medical believes
that this decline in business is due in part to the consolidation of facilities
and a reorganization of its distribution system; however, there can be no
assurance that this trend will not continue.
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Certain of these orders are cancelable by the customer upon payment of a
cancellation charge. We believe that substantially all of the backlog as of
October 2, 1999, will be shipped or completed during fiscal 2000.
(ix) Government Contracts
Less than 10% of ThermoTrex's total revenues in fiscal 1999 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.
(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. In most diagnostic imaging modalities, including X-ray imaging,
Trex Medical's competitors include large companies such as GE Medical Systems,
the Philips Medical Systems subsidiary of Philips N.V., Siemens AG, Toshiba, and
Shimadzu Corporation. 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.
Outside the U.S., in the dental-imaging field, Trex Medical's competitors
include Planmeca OY, Sirona Dental Systems, and the Soredex division of Orion
Corporation. In the U.S., in the dental-imaging field, Trex Medical'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.
Trex Medical 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
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.
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.
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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 1999, 1998, and 1997, ThermoTrex expended $39,702,000,
$39,826,000, and $32,067,000, respectively, on internally sponsored research and
development programs, and $21,843,000, $16,223,000, and $11,667,000,
respectively, on research and development programs sponsored by others.
(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 2, 1999, ThermoTrex employed approximately 1,800 people.
(d) Financial Information about Exports by Domestic Operations
Financial information about geographic areas is summarized in Note 13 to
Consolidated Financial Statements in the Registrant's Fiscal 1999 Annual Report
to Shareholders, which is incorporated in this document by reference.
(e) Executive Officers of the Registrant
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name Age Present Title (Fiscal Year First Became
Executive Officer)
-------------------- ----- ---------------------------------------
Anne Pol 52 Interim President (1999)
Theo Melas-Kyriazi 40 Chief Financial Officer (1999)
Dr. Kenneth Y. Tang 52 Senior Vice President (1990)
Barry M. Lyons 41 Vice President, Finance (1998)
Paul F. Kelleher 57 Chief Accounting Officer (1990)
</TABLE>
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. Melas-Kyriazi and
Lyons, and Ms. Pol have held comparable positions for at least five years with
ThermoTrex or Thermo Electron. Ms. Pol has been interim president of ThermoTrex
since February 1999. She is also senior vice president, human resources, for
Thermo Electron, a position she has held since May 1998. From April 1996 when
she joined the company until then, she served as vice president, human
resources, for Thermo Electron. Prior to joining Thermo Electron, she was
president of the shipping and weighing systems division of Pitney Bowes, Inc.
Mr. Melas-Kyriazi was appointed chief financial officer of the company and
Thermo Electron on January 1, 1999. He 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, a position he held until becoming vice
president of corporate strategy for Thermo Electron in 1998. Mr. Lyons has been
vice president, finance 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. Ms. Pol, Mr.
Melas-Kyriazi, and Mr. Kelleher are full-time employees of Thermo Electron, but
devote as much time to the affairs of the company as is reasonably required.
10
<PAGE>
Item 2. Properties
The location and general character of ThermoTrex's principal properties as
of October 2, 1999, are as follows:
Medical Products
Trex Medical owns three office and manufacturing facilities: a
62,500-square-foot facility in Danbury, Connecticut, a 12,900-square-foot office
and manufacturing facility in Bolu, Turkey, and a 7,500-square-foot office and
manufacturing facility in Jakarta, Indonesia. Trex Medical 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 2005. This segment also leases facilities in Germany,
the United Kingdom, Italy, Spain, Japan, and Belgium.
Personal-care Products and Services
ThermoLase occupies approximately 201,000 square feet of office and
manufacturing space in Carrollton, Texas, under a lease expiring in 2004,
through its CBI subsidiary.
Advanced Technology Research
ThermoTrex currently leases a 90,000-square-foot office, engineering, and
laboratory facility in San Diego, California, under a lease expiring in 2006.
ThermoTrex also leases an 18,480-square-foot office and laboratory facility in
Soccoro, New Mexico, under a lease expiring in fiscal 2000. Trex Communications
owns a 42,000-square-foot office, engineering, and manufacturing facility in
Hauppauge, New York. Trex Communications currently leases office, engineering,
and manufacturing space of 42,000 square feet in Norcross, Georgia, under a
lease expiring in fiscal 2000 and 80,000 square feet in Simi Valley, California,
under a lease expiring in 2009. This segment also leases facilities in Hawaii
and Texas.
We believe these facilities are in good condition and are suitable and
adequate to meet our current needs.
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 2, 1999,
Trex Medical had recorded revenues of approximately $157.5 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 Trex Medical 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 Trex Medical will be able to obtain one on commercially
reasonable terms, or on any terms. In addition, Trex Medical may be subject to
damages for past infringement. As of October 2, 1999, Trex Medical had accrued
approximately $1.1 million for costs associated with this litigation.
11
<PAGE>
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.
On May 26, 1999, a shareholder seeking to act on behalf of the public
shareholders of the company filed a complaint in California Superior Court in
San Diego County which alleges, among other things, that the proposed merger of
the company into Thermo Electron would violate fiduciary duties to the public
shareholders of the company and would deprive them of the fair value of their
company shares. A shareholder filed a substantially similar complaint in the
same court on June 4, 1999, and a shareholder filed a substantially similar
complaint in the Delaware Court of Chancery in New Castle County on December 17,
1999, following the announcement of the terms of the proposed merger of the
company with Thermo Electron. The plaintiffs are seeking injunctive and other
relief. The complaints also name Thermo Electron and the directors of the
company as defendants.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
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 1999 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 1999 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 1999 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 heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Registrant's Fiscal 1999 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 1999 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.
12
<PAGE>
Item 10. Directors and Executive Officers of the Registrant
Directors
Set forth below are the names of the directors; their ages; their offices
in the company, if any, their principal occupation or employment for the past
five years; the length of their tenure as directors; and the names of other
public companies in which such persons hold directorships.
<TABLE>
<CAPTION>
<S> <C>
- ----------------------------------------------------------------------------------------------------------
Morton Collins Mr. Collins, 63, has been a director of the company since 1991. He has been a
general partner of DSV Partners III, a venture capital limited partnership,
since 1981 and a general partner of DSV Management, Ltd. since 1982. Since
1985, DSV Management, Ltd. has been a general partner of DSV Partners IV, a
venture capital limited partnership. He is also a director of Kopin
Corporation and The Liposome Company.
- ----------------------------------------------------------------------------------------------------------
Peter O. Crisp Mr. Crisp, 67, has been a director of the company since 1991. He was a general
partner of Venrock Associates, a venture capital investment firm, for over five
years until his retirement in September 1997. He is also a director of
American Superconductor Corporation, Evans & Sutherland Computer Corporation,
Thermedics Inc., Thermo Electron Corporation, and United States Trust
Corporation.
- ----------------------------------------------------------------------------------------------------------
Paul F. Ferrari Mr. Ferrari, 69, has been a director of the company since 1990. Since 1991, he
has been a consultant to various companies including Thermo Electron, a
provider of products and services in measurement instrumentation, biomedical
devices, energy, resource recovery, and emerging technologies, and its
subsidiaries. He was at Thermo Electron as a vice president from 1988 until
his retirement at the end of 1990; secretary from 1981 to 1990; and treasurer
from 1967 to 1988. He is also a director of General Scanning Inc. and
Thermedics Inc.
- ----------------------------------------------------------------------------------------------------------
George N. Hatsopoulos Dr. Hatsopoulos, 72, has been a director of the company since 1988. He was the
chairman of the board and chief executive officer of Thermo Electron from 1956
until June 1999, and its president from 1956 until January 1997. He is serving
as non-executive chairman of the board of Thermo Electron until January 1, 2000.
He is also a director of Photoelectron Corporation, Thermedics, Thermo Ecotek
Corporation, Thermo Electron, Thermo Fibertek Inc., and Thermo Instrument
Systems Inc.
- ----------------------------------------------------------------------------------------------------------
Robert C. Howard Mr. Howard, 68, has been a director of the company since 1988, and was chairman
of the board from 1988 to February 1996. He was an executive vice president of
Thermo Electron from 1986 until his retirement in January 1997. He currently
serves as a consultant to Thermo Electron.
- ----------------------------------------------------------------------------------------------------------
John T. Keiser Mr. Keiser, 63, has been a director of the company since September 1998. He
has been the chief operating officer, biomedical, of Thermo Electron since
September 1998 and was a vice president from April 1997 until his promotion.
He has been the president and chief executive officer of Thermedics since March
1998 and December 1998, respectively, and was a senior vice president of
Thermedics from 1994 until his promotion to president. He has also been the
president of Thermo Electron's wholly owned biomedical group, a manufacturer of
medical equipment and instruments, since 1994. He was president of the
Eberline Instrument, division of Thermo Instrument Systems from 1985 to July 1994.
The Eberline Instrument division manufactures radiation detection and counting
instrumentation and radiation monitoring systems. He is a director of Metrika
Systems Corporation, Thermedics, Thermedics Detection Inc., Thermo Cardiosystems
Inc., ThermoLase Corporation, Thermo Sentron Inc., and Trex Medical Corporation.
- ----------------------------------------------------------------------------------------------------------
13
<PAGE>
John F. Magee Mr. Magee, 73, has been a director of the company since June 1999. He was
chairman of the board of Arthur D. Little, Inc. from 1986 until his retirement
in June 1998. He also served as the president of Arthur D. Little from 1972
until 1986 and as its chief executive officer from 1974 until 1988.
- ----------------------------------------------------------------------------------------------------------
Nicholas T. Zervas Dr. Zervas, 70, has been a director of the company since 1992. He has been
Chief of Neurological Service at Massachusetts General Hospital since 1977. He
is also a director of Thermedics, Thermo Cardiosystems, and ThermoLase.
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Executive Officers
Reference is made to Item 1(e) - Executive Officers of the Registrant for
information regarding the Executive Officers of Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, (the
Exchange Act) requires the company's directors and executive officers, and
beneficial owners of more than 10% of the company's common stock (Common Stock),
such as Thermo Electron, to file with the Securities and Exchange Commission
initial reports of ownership and periodic reports of changes in ownership of the
company's securities. Based upon a review of such filings, all Section 16(a)
filing requirements applicable to such persons were complied with during fiscal
1999, except in the following instances: Mr. Collins, Mr. Crisp, Mr. Ferrari,
Mr. Howard, and Dr. Zervas, all directors of the company, each filed one late
transaction, reporting the exempt grant of stock options. Thermo Electron filed
one Form 4 late reporting a total of 15 transactions, including one open market
purchase of shares of Common Stock and 14 transactions associated with the
cancellation and grant of options to purchase Common Stock granted to employees
under its stock option program.
Item 11. Executive Compensation
Compensation of Directors
Cash Compensation
Outside directors receive an annual retainer of $4,000 and a fee of $1,000
per day for attending regular meetings of the board of directors, and $500 per
day for participating in meetings of the board of directors held by means of
conference telephone and for participating in certain meetings of committees of
the board of directors. Payment of directors' fees is made quarterly. Dr.
Hatsopoulos and Mr. Keiser are both employees of Thermo Electron or its
subsidiaries and do not receive any cash compensation from the company for their
services as directors. Directors are also reimbursed for out-of-pocket expenses
incurred in attending such meetings.
The board of directors established a special committee (the Special
Committee) consisting solely of outside directors for the purpose of evaluating
the merits and negotiating the terms of the proposed transaction with Thermo
Electron pursuant to which the company would be taken private. Mr. Collins and
Mr. Magee were appointed as the members of the Special Committee.
The members of the Special Committee receive a one-time retainer of
$20,000, a fee of $1,000 per day for attending regular meetings of the Special
Committee, and $500 per day for participating in meetings of the Special
Committee held by means of conference telephone.
14
<PAGE>
Deferred Compensation Plan for Directors
Under the company's deferred compensation plan for directors (the Deferred
Compensation Plan), a director has the right to defer receipt of his cash fees
until he ceases to serve as a director, dies, or retires from his principal
occupation. In the event of a change in control or proposed change in control of
the company that is not approved by the board of directors, deferred amounts
become payable immediately. Any of the following is deemed to be a change of
control: (i) the acquisition by any person of 40% or more of the outstanding
common stock or voting securities of Thermo Electron; (ii) the failure of the
Thermo Electron board of directors to include a majority of directors who are
"continuing directors," which term is defined to include directors who were
members of Thermo Electron's board on July 1, 1999, or who subsequent to that
date were nominated or elected by a majority of directors who were "continuing
directors" at the time of such nomination or election; (iii) the consummation of
a merger, consolidation, reorganization, recapitalization, or statutory share
exchange involving Thermo Electron or the sale or other disposition of all or
substantially all of the assets of Thermo Electron unless immediately after such
transaction all holders of Thermo Electron common stock immediately prior to
such transaction own more than 60% of the outstanding voting securities of the
resulting or acquiring corporation in substantially the same proportions as
their ownership immediately prior to such transaction and no person after the
transaction owns 40% or more of the outstanding voting securities of the
resulting or acquiring corporation; or (iv) approval by stockholders of a
complete liquidation or dissolution of Thermo Electron. Amounts deferred
pursuant to the Deferred Compensation Plan are valued at the end of each quarter
as units of Common Stock. When payable, amounts deferred may be disbursed solely
in shares of Common Stock accumulated under the Deferred Compensation Plan. A
total of 22,500 shares of Common Stock have been reserved for issuance under the
Deferred Compensation Plan. As of October 2, 1999, deferred units equal to
approximately 12,678 full shares of Common Stock were accumulated for current
directors under the Deferred Compensation Plan.
Directors Stock Option Plan
The company's directors stock option plan (the Directors Plan) provides
for the grant of stock options to purchase shares of Common Stock of the company
and its majority-owned subsidiaries to outside directors as additional
compensation for their service as directors. Under the Directors Plan, outside
directors are automatically granted options to purchase 1,000 shares of Common
Stock annually. The annual grant is made at the close of business on the date of
each Annual Meeting of the Stockholders of the company to each outside director
then holding office. Options evidencing annual grants are immediately
exercisable at any time from and after the grant date of the option and prior to
the earliest to occur of (i) the expiration of the option on the third
anniversary of the grant date; (ii) two years after the director ceases to serve
as a director of the company; or (iii) the date of dissolution or liquidation of
the company. Shares acquired upon exercise of the options are subject to
repurchase by the company at the exercise price if the recipient ceases to serve
as a director of the company or another Thermo Electron company prior to the
first anniversary of the grant date.
The exercise price for options granted under the Directors Plan is the
average of the closing prices of the common stock as reported on the American
Stock Exchange (or other principal market on which the common stock is then
traded) for the five trading days immediately preceding and including the date
of grant, or, if the shares are not then traded, at the last price paid per
share by third parties in an arms-length transaction prior to the option grant.
As of October 2, 1999, options to purchase 125,650 shares of Common Stock had
been granted and were outstanding under the Directors Plan, 29,500 options had
lapsed, options to purchase 66,450 shares of Common Stock had been exercised,
and options to purchase 128,850 shares of Common Stock were reserved and
available for grant.
15
<PAGE>
Stock Ownership Policies for Directors
The human resources committee of the board of directors (the Committee)
has established a stock holding policy for directors. The stock holding policy
requires each director to hold a minimum of 1,000 shares of Common Stock.
Directors are requested to achieve this ownership level within a three-year
period. The chief executive officer of the company is required to comply with a
separate stock holding policy established by the Committee, which is described
below.
In addition, the Committee has adopted a policy requiring directors to
hold shares of Common Stock equal to one-half of their net option exercises over
a period of five years. The net option exercise is determined by calculating the
number of shares acquired upon exercise of a stock option, after deducting the
number of shares that could have been traded to exercise the option and the
number of shares that could have been surrendered to satisfy tax withholding
obligations attributable to the exercise of the option. This policy is also
applicable to executive officers and is described below.
Summary Compensation Table
The following table summarizes compensation during the last three fiscal
years for services to the company in all capacities awarded to, earned by, or
paid to (i) the company's former chief executive officer and (ii) its other
executive officers, whose total annual salary and bonus, as determined in
accordance with the rules of the Securities and Exchange Commission, was greater
than $100,000, and who were employed by the company as of the end of fiscal
1999. These executive officers are together referred to as the "named executive
officers."
The company is required to appoint certain executive officers and
full-time employees of Thermo Electron as executive officers of the company, in
accordance with the Thermo Electron Corporate Charter (the Charter). The
compensation for these executive officers is determined and paid entirely by
Thermo Electron. The time and effort devoted by these individuals to the
company's affairs is provided to the company under the Corporate Services
Agreement (the Services Agreement) between the company and Thermo Electron. See
Item 13 - Certain Relationships and Related Transactions. Accordingly, the
compensation for these individuals is not reported in the following table.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Summary Compensation Table
- ----------------------------------------------------------------------------------------------------------
Long Term
Compensation
Restricted Securities
Name and Principal Fiscal Annual Compensation (1) Stock Underlying All Other
Position Year Salary Bonus (2) Award (3) Options (4) Compensation (5)
- ----------------------------------------------------------------------------------------------------------
Gary S. Weinstein (6) 1999 $ 58,500 $ 0 - - - $569,327(7)
former Chief Executive
Officer 1998 $137,375 $150,000 - 42,000 (TRCC) $ 24,146(7)
1997 $117,604 $150,000 - 30,000 (TLZ) $163,329(7)
- ----------------------------------------------------------------------------------------------------------
Kenneth Y. Tang 1999 $182,302 N/A $199,543 40,000 (TKN) $ 7,200
Senior Vice President
1998 $172,750 $ 54,000 20,000 (TKN) $ 7,200
20,000 (TRCC)
1997 $164,000 $ 53,000 - - - $ 7,125
- ----------------------------------------------------------------------------------------------------------
Barry M. Lyons (8) 1999 $135,850 N/A - 40,000 (TKN) $ 1,550
Vice President, Finance
1998 $ 54,167 $ 33,000 - 15,000 (TKN) -
5,000 (TMO)
10,000 (TLZ)
10,000 (TRCC)
10,000 (TXM)
</TABLE>
(1) Annual compensation for executive officers is reviewed and determined on a
calendar year basis, even though the company's fiscal year ends in
September.
16
<PAGE>
(2) The bonus amount represents the bonus paid for performance during the
calendar year in which the company's fiscal year-end occurred. As of the
date hereof, bonuses have not yet been determined for calendar 1999. The
Committee expects to determine bonuses in March 2000, when the audited
financial statements of the company's parent company will be available.
(3) In fiscal 1999, Dr. Tang was awarded 10,200 shares of restricted stock of
Thermo Electron with a value of $199,543, on the grant date. The restricted
stock awards vest in their entirety on May 20, 2002. Any dividends paid on
restricted stock are entitled to be retained by the registrant without
regard to vesting. At the end of fiscal 1999, Dr. Tang held 10,200 shares
of restricted stock with an aggregate value of $ 138,338.
(4) Options granted by the company are designated in the table as "TKN." In
addition, the named executive officers have also been granted options to
purchase common stock of Thermo Electron and its majority-owned
subsidiaries from time to time as part of Thermo Electron's stock option
program. Options have been granted during the last three fiscal years in
the following Thermo Electron companies: Thermo Electron (designated in the
table as TMO), ThermoLase (designated in the table as TLZ), Trex Medical
(designated in the table as TXM) and Trex Communications Corporation
(designated in the table as TRCC). Mr. Weinstein has been granted certain
options to purchase common stock of Thermo Electron and certain of its
subsidiaries, other than the company and its subsidiaries, from time to
time as compensation for service to other Thermo Electron companies in
capacities other than in his capacity as the chief executive officer of the
company. These options are not reported in the table.
(5) Represents the amount of matching contributions made by the individual's
employer on behalf of executive officers participating in the Thermo
Electron 401(k) plan, except as noted.
(6) Mr. Weinstein was appointed the company's chief executive officer effective
as of February 26, 1996. He was also appointed a vice president of Thermo
Electron effective as of February 26, 1996. Mr. Weinstein resigned as Chief
Executive Officer of the company effective February 24, 1999. See Item 11 -
Executive Compensation - Severance Agreement. A portion of Mr. Weinstein's
annual cash compensation (salary and bonus) has been allocated to and paid
by Thermo Electron since the commencement of his employment for the time he
devoted to his responsibilities in that capacity. The annual cash
compensation (salary and bonus) reported in the table for Mr. Weinstein
represents the amount paid by the company for Mr. Weinstein's services as
its chief executive officer. For each of fiscal 1999, 1998, and 1997,
approximately 50% of Mr. Weinstein's aggregate salary and bonus earned in
all capacities throughout the Thermo Electron organization was paid by the
company for his services as chief executive officer.
(7) In addition to a $7,200, $7,200, and $5,344 matching contribution referred
to in footnote (5) in fiscal 1999, 1998, and 1997, respectively, this
amount includes $6,310 for fiscal 1999, $16,946 for fiscal 1998, and
$18,533 for fiscal 1997 attributable to an interest-free loan provided to
Mr. Weinstein pursuant to the company's Stock Holding Assistance Plan (see
"Relationship with Affiliates - Stock Holding Assistance Plan"). Fiscal
1999 also includes a payment of $240,000, $239,253 loan forgiveness,
$45,482 paid by the company as an adjustment to such loan forgiveness to
account for taxes, $13,702 in accrued vacation, and $17,380 paid in
connection with the purchase of Mr. Weinstein's automobile as part of a
severance agreement. See Item 11 - Certain Relationships and Related
Transactions. Fiscal 1997 also includes the reimbursement by the company of
$96,407 in expenses associated with Mr. Weinstein's relocation to Waltham,
Massachusetts, and an additional $43,045 paid by the company to Mr.
Weinstein as an adjustment to such reimbursement to account for taxes.
(8) Mr. Lyons was appointed a vice president of the company on April 21, 1998.
The salary reported for fiscal 1998 represents the amount paid for the
fiscal year from the commencement of his employment through October 3,
1998.
17
<PAGE>
Stock Options Granted During Fiscal 1999
The following table sets forth information concerning individual grants of
stock options made during fiscal 1999 to the company's named executive officers.
It has not been the company's policy in the past to grant stock appreciation
rights, and no such rights were granted during fiscal 1999.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Option Grants in Fiscal 1999
- ----------------------------------------------------------------------------------------------------------
Potential Realizable
Number of Securities Percent of Value at Assumed
Underlying Options Total Options Exercise nnual Rates of Stock
Granted and Company (1) Granted to Price Per Expiration Price Appreciation for
Employees in Share Date Option Term (2)
Name Fiscal Year 5% 10%
- ----------------------------------------------------------------------------------------------------------
Gary S. Weinstein - - - - - -
- ----------------------------------------------------------------------------------------------------------
Kenneth Y. Tang 40,000 (TKN) 10.10% $8.79 12/17/05 $143,140 $333,568
- ----------------------------------------------------------------------------------------------------------
Barry M. Lyons 40,000 (TKN) 10.10% $8.79 12/17/05 $143,140 $333,568
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) All of the options granted during the fiscal year are immediately
exercisable at the date of grant. In all cases, the shares acquired upon
exercise are subject to repurchase by the granting company at the exercise
price if the optionee ceases to be employed by such company or any other
Thermo Electron company. The granting company may exercise its repurchase
rights within six months after the termination of the optionee's
employment. The repurchase rights lapse ratably over five-year period,
depending on the option term, which in the present case is seven years,
provided the optionee continues to be employed by the granting company or
any other Thermo Electron company. The granting company may permit the
holder of options to exercise options and to satisfy tax withholding
obligations by surrendering shares equal in fair market value to the
exercise price or withholding obligation. See footnote (4) under Summary
Compensation Table above for the company abbreviations used in this table.
(2) The amounts shown on this table represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. These gains are based on assumed rates of stock appreciation of 5%
and 10% compounded annually from the date the respective options were
granted to their expiration date. The gains shown are net of the option
exercise price, but do not include deductions for taxes or other expenses
associated with the exercise. Actual gains, if any, on stock option
exercises will depend on the future performance of the common stock of the
applicable corporation, the optionee's continued employment through the
option period, and the date on which the options are exercised.
18
<PAGE>
Stock Options Exercised During Fiscal 1999 and Fiscal Year-End Option Values
The following table reports certain information regarding stock option
exercises during fiscal 1999 and outstanding stock options held at the end of
fiscal 1999 by the company's named executive officers. No stock appreciation
rights were exercised or were outstanding during fiscal 1999.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Aggregated Option Exercises In Fiscal 1999 And Fiscal 1999 Year-End Option Values
- -----------------------------------------------------------------------------------------------------------
Number of Value of
Unexercised Unexercised
Shares Options at Fiscal In-the-Money
Acquired on Year-End Options at Fiscal
Exercise Value (Exercisable/ Year-End
Name Realized (2) Unexercisable) (1) (Exercisable/
Company (1) Unexercisable)
- -----------------------------------------------------------------------------------------------------------
Gary S. Weinstein - - - - -
- -----------------------------------------------------------------------------------------------------------
Kenneth Y. Tang TKN - - 75,000 /0 $ 0 /-
TMO - - 9,000 /0 $ 0 /-
TLZ - - 304,000 /0 $24,000 /-
TRCC - - 0 /20,000 - /$0 (3)
TXM - - 40,000/0 $ 0 /-
- -----------------------------------------------------------------------------------------------------------
Barry M. Lyons TKN - - 55,000 /0 $ 0 /-
TMO - - 5,000 /0 $ 0 /-
TLZ - - 10,000 /0 $ 0 /-
TRCC - - 0 /10,000 - /$0 (3)
TXM - - 10,000 /0 $ 0 /-
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) All of the options reported outstanding at the end of the fiscal year are
immediately exercisable as of fiscal year-end, except options to purchase
the common stock of Trex Communications, which were not exercisable until
the earlier of (i) 90 days after the effective date of the registration of
that company's common stock under Section 12 of the Exchange Act or (ii)
nine years from the grant date. As a result of the repurchases by the
company of the minority shareholders' common stock of Trex Communications,
the company assumed stock options maintained by Trex Communications, which
became exercisable for Common Stock. These options, as well as, options
under stock option plans maintained by the company relating to options to
purchase shares of Trex Communications common stock became exercisable at
the time of the purchase by the company of the minority shareholders'
common stock. In all cases, the shares acquired upon exercise of the
options reported in the table are subject to repurchase by the granting
company at the exercise price if the optionee ceases to be employed by such
company or any other Thermo Electron company. The granting company may
exercise its repurchase rights within six months after the termination of
the optionee's employment. For publicly-traded companies, the repurchase
rights generally lapse ratably over a one- to ten-year period, depending on
the option term, which may vary from five to twelve years, provided that
the optionee continues to be employed by the granting company or another
Thermo Electron company. For companies that are not publicly-traded, the
repurchase rights lapse in their entirety on the ninth anniversary of the
grant date. The granting company may permit the holder of options to
exercise options and to satisfy tax withholding obligations by surrendering
shares equal in fair market value to the exercise price or withholding
obligation. See footnote (4) under Summary Compensation Table above for the
company abbreviations used in this table.
(2) Amounts shown in this column do not necessarily represent actual value
realized from the sale of the shares acquired upon exercise of the option
because in many cases the shares are not sold on exercise but continue to
be held by the named executive officer exercising the option. The amounts
shown represent the difference between the option exercise price and the
market price on the date of exercise, which is the amount that would have
been realized if the shares had been sold immediately upon exercise.
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<PAGE>
(3) No public market existed for the shares underlying these options as of
October 2, 1999. Accordingly, no value in excess of exercise price has been
attributed to these options.
Severance Agreement (Gary Weinstein)
Gary Weinstein, former Chairman and CEO of the company, resigned in March
1999. In connection with his resignation, Thermo Electron entered into a
separation agreement dated March 12, 1999, pursuant to which Thermo Electron
agreed to make certain payments and provide certain benefits to Mr. Weinstein.
The amounts payable to Mr. Weinstein under the separation agreement consist of
the following: $300,000 as a bonus for the 1998 calendar year, $240,000 as a
severance payment payable within ten days of the date of the agreement and an
additional $240,000 on the first anniversary of the date of the agreement, and
$27,404 for accrued but unused vacation. Fifty percent of these payments was
allocated to Thermo Electron and fifty percent was allocated to the company. In
addition, Mr. Weinstein agreed to sell to the company, at current market price,
the 10,000 shares of company common stock he had acquired, with the proceeds
used to reduce the outstanding balance of a loan previously made to Mr.
Weinstein under the company's Stock Holding Assistance Plan. The balance of the
outstanding loan to Mr. Weinstein, after reduction by the amount of the sale
proceeds, was $239,253. This balance was forgiven and the company paid Mr.
Weinstein $45,482 to offset the tax liability resulting from the loan
forgiveness. Mr. Weinstein was permitted to retain his company car, and one half
of the cost of purchasing such car from the leasing company was allocated to the
company. The separation agreement includes an agreement by Mr. Weinstein not to
compete with Thermo Electron and its subsidiaries for the period through
February 2001.
Stock Ownership Policies
The Committee established a stock holding policy for executive officers of
the company that required executive officers to own a multiple of their
compensation in shares of Common Stock. For the chief executive officer, the
multiple is one times his base salary and reference incentive compensation for
the fiscal year. For all other officers, the multiple was one times the
officer's base salary. The Committee deemed it appropriate to permit officers to
achieve these ownership levels over a three-year period. The policy has been
amended to apply only to the chief executive officer.
In order to assist executive officers in complying with the policy, the
Committee also adopted a stock holding assistance plan under which the company
is authorized to make interest-free loans to executive officers to enable them
to purchase shares of Common Stock in the open market. This plan was also
amended to apply only to the chief executive officer. The loans are required to
be repaid upon the earlier of demand or the tenth anniversary of the date of the
loan, unless otherwise determined by the Committee.
The Committee also has a policy requiring its executive officers to hold
shares of Common Stock equal to one-half of their net option exercises over a
period of five years. The net option exercise is determined by calculating the
number of shares acquired upon exercise of a stock option, after deducting the
number of shares that could have been traded to exercise the option and the
number of shares that could have been surrendered to satisfy tax withholding
obligations attributable to the exercise of the option.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the beneficial ownership of Common Stock,
as well as the common stock of Thermo Electron and each majority-owned
subsidiary of the company, as of October 2, 1999, with respect to (i) each
director, (ii) each executive officer named in the summary compensation table
set forth in Item 11 - Executive Compensation (the named executive officers) and
(iii) all directors and current executive officers as a group. In addition, the
following table sets forth the beneficial ownership of Common Stock, as of
October 2, 1999, with respect to each person who was known by the company to own
beneficially more than 5% of the outstanding shares of Common Stock.
20
<PAGE>
While certain directors or executive officers of the company are also
directors and executive officers of Thermo Electron or its subsidiaries other
than the company, all such persons disclaim beneficial ownership of the shares
of Common Stock beneficially owned by Thermo Electron.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Name (1) ThermoTrex Thermo ThermoLase Trex Trex Communications
Corporation (2) Electron Corporation (4) Medical Corporation (6)
Corporation (3) Corporation (5)
- ----------------------------------------------------------------------------------------------------------
Thermo Electron Corporation (7) 18,297,700 N/A N/A N/A N/A
Nicholas Company, Inc. (8) 1,061,800 N/A N/A N/A N/A
Morton Collins 29,404 0 13,754 2,164 0
Peter O. Crisp 40,499 105,064 22,758 4,500 0
Paul F. Ferrari 28,150 16,495 22,758 3,075 5,000
George N. Hatsopoulos 44,889 3,889,697 31,125 41,188 0
Robert C. Howard 44,543 149,753 250 40,000 0
John T. Keiser 90,000 290,487 0 20,000 0
Barry M. Lyons 55,000 5,000 10,000 10,000 0
John F. Magee 0 5,850 0 0 0
Kenneth Y. Tang 89,637 10,430 350,440 51,706 37,500
Gary S. Weinstein 0 337 67,824 15,000 6,250
Nicholas T. Zervas 10,647 0 89,554 1,500 5,000
All directors and current
executive officers as a
group (14 persons) 441,685 4,988,307 691,980 252,133 53,750
</TABLE>
(1) Except as reflected in the footnotes to this table, shares of Common Stock
and the common stock of Thermo Electron, ThermoLase, Trex Medical and
Trex Communications beneficially owned consist of shares owned by the
indicated person or by that person for the benefit of minor children, and
all share ownership includes sole voting and investment power.
(2) Shares of Common Stock beneficially owned by Mr. Collins, Mr. Crisp, Mr.
Ferrari, Dr. Hatsopoulos, Mr. Howard, Mr. Keiser, Mr. Lyons, Dr. Tang, Dr.
Zervas and all directors and current executive officers as a group include
6,750, 6,550, 6,550, 30,000, 30,000, 90,000, 55,000, 75,000, 5,850, and
310,700 shares, respectively, that such person or group has the right to
acquire within 60 days of October 2, 1999, through the exercise of stock
options. Shares beneficially owned by Mr. Collins, Mr. Crisp, Dr. Zervas,
and all directors and current executive officers as a group include 3,055,
4,825, 4,797, and 12,677 shares, respectively, that had been allocated
through October 2, 1999, to their respective accounts maintained under the
company's Deferred Compensation Plan for Directors. Shares beneficially
owned by Mr. Howard include 7,407 shares issuable upon conversion of
$200,000 in principal amount of the company's 3 1/4% convertible debenture
due in 2007. Shares beneficially owned by Dr. Hatsopoulos include 160
shares held by Dr. Hatsopoulos' spouse. No director or named executive
officer beneficially owned more than 1% of Common Stock as of October 2,
1999; all directors and current executive officers as a group beneficially
owned 1.97% of Common Stock outstanding as of such date.
(3) Shares of the common stock of Thermo Electron beneficially owned by Mr.
Crisp, Dr. Hatsopoulos, Mr. Howard, Mr. Keiser, Mr. Lyons, Dr. Tang, and
all directors and current executive officers as a group include 9,673,
2,206,486, 5,737, 243,334, 5,000, 9,000, and 2,922,335 shares,
respectively, that such person or group has the right to acquire within 60
days of October 2, 1999, through the exercise of stock options. Shares
beneficially owned by Dr. Hatsopoulos and all directors and current
executive officers as a group include 2,266 and 4,763 full shares,
respectively, allocated to their respective accounts maintained pursuant to
Thermo Electron's employee stock ownership plan, of which the trustees, who
have investment power over its assets were, as of October 2, 1999,
executive officers of Thermo Electron. Shares beneficially owned by Mr.
Crisp and all directors and current executive officers as a group include
48,527 full shares, allocated through October 2, 1999, to Mr. Crisp's
account maintained pursuant to Thermo Electron's deferred compensation plan
for directors. Shares beneficially owned by Dr. Hatsopoulos include 144,437
shares held by his spouse, 330,747 shares held by a family trust of
21
<PAGE>
which his spouse is the trustee and 566,262 shares held by a family limited
partnership indirectly controlled by Dr. Hatsopoulos. Shares beneficially
owned by Dr. Hatsopoulos also include 50,000 shares that a family trust, of
which Dr. Hatsopoulos' spouse is the trustee, has the right to acquire
within 60 days of October 2, 1999, and 2,149,500 shares that a family
limited partnership indirectly controlled by Dr. Hatsopoulos has the right
to acquire within 60 days of October 2, 1999, through the exercise of stock
options. Dr. Hatsopoulos disclaims beneficial interest in the shares owned
by the family limited partnership except to the extent of his pecuniary
interest therein. No director or named executive officer beneficially owned
more than 1% of the common stock of Thermo Electron as of October 2, 1999,
except for Dr. Hatsopoulos who beneficially owned 2.42% of such common
stock; all directors and current executive officers as a group beneficially
owned 3.12% of the common stock of Thermo Electron outstanding as of such
date.
(4) Shares of the common stock of ThermoLase beneficially owned by Mr. Collins,
Mr. Crisp, Mr. Ferrari, Dr. Hatsopoulos, Mr. Howard, Mr. Lyons, Dr. Tang,
Dr. Zervas, and all directors and current executive officers as a group
include 13,754, 22,758, 22,758, 28,800, 250, 10,000, 304,000, 68,318, and
547,638 shares, respectively, that such person or group has the right to
acquire within 60 days of October 2, 1999, through the exercise of stock
options. Shares beneficially owned by Dr. Zervas and all directors and
current executive officers as a group include 2,080 shares, allocated
through October 2, 1999, to Dr. Zervas's account maintained pursuant to
ThermoLase's deferred compensation plan for directors. Shares beneficially
owned by Dr. Hatsopoulos include 32 shares held by his spouse. No director
or named executive officer beneficially owned more than 1% of the common
stock of ThermoLase as of October 2, 1999; all directors and current
executive officers as a group beneficially owned 1.75% of the common stock
of ThermoLase outstanding as of such date.
(5) Shares of the common stock of Trex Medical beneficially owned by Mr.
Collins, Mr. Crisp, Mr. Ferrari, Dr. Hatsopoulos, Mr. Howard, Mr. Keiser,
Mr. Lyons, Dr. Tang, Dr. Zervas, and all directors and current executive
officers as a group include 1,500, 1,500, 1,500, 40,000, 40,000, 20,000,
10,000, 40,000, 1,500, and 216,000 shares, respectively, that such person
or group has the right to acquire within 60 days of October 2, 1999,
through the exercise of stock options. Shares beneficially owned by Dr.
Hatsopoulos include 16 shares held by his spouse and 40,000 shares held by
a family limited partnership indirectly controlled by Dr. Hatsopoulos. Dr.
Hatsopoulos disclaims beneficial interest in the shares owned by the family
limited partnership except to the extent of his pecuniary interest therein.
No director or named executive officer beneficially owned more than 1% of
the common stock of Trex Medical as of October 2, 1999; all directors and
current executive officers as a group beneficially owned less than 1% of
the common stock of Trex Medical outstanding as of such date.
(6) As of October 2, 1999, no director or executive officer owned more than 1%
of the outstanding common stock of Trex Communications; all directors and
current executive officers as a group beneficially owned less than 1% of
the Trex Communications common stock outstanding as of such date.
(7) Thermo Electron beneficially owned 80.47% of Common Stock as of October 2,
1999. Shares beneficially owned by Thermo Electron include 370,370 shares
issuable upon conversion of $10,000,000 in principal amount of the
company's 3 1/4% subordinated convertible debentures due in 2007. Thermo
Electron's address is 81 Wyman Street, Waltham, Massachusetts 02454-9046.
As of October 2, 1999, Thermo Electron had the power to elect all of the
members of the company's board of directors.
(8) Information regarding the number of shares of Common Stock beneficially
owned by Nicholas Company, Inc. is based on the most recent Schedule 13G of
Nicholas Company, Inc. received by the company, which reported such
ownership as of February 11, 1999. The address of Nicholas Company, Inc. is
700 N. Water Street, Suite 1010, Milwaukee, Wisconsin 53202. Shares
reported as beneficially owned by Nicholas Company, Inc. consist of shares
beneficially owned by advisory clients of Nicholas Company, Inc. Based on
such information, Nicholas Company, Inc. beneficially owned 5.69% of Common
Stock outstanding as of October 2, 1999.
Item 13. Certain Relationships and Related Transactions
Thermo Electron has, from time to time, caused its subsidiaries to sell
minority interests to investors, resulting in several majority-owned, private
and publicly-held subsidiaries. Thermo Electron has created the company as a
majority-owned, publicly-held subsidiary. The company and such other
majority-owned Thermo Electron subsidiaries are hereinafter referred to as the
"Thermo Subsidiaries."
22
<PAGE>
Thermo Electron and each of the Thermo Subsidiaries recognize that the
benefits and support that derive from their affiliation are essential elements
of their individual performance. Accordingly, Thermo Electron and each of the
Thermo Subsidiaries, including the company, have adopted the Charter to define
the relationships and delineate the nature of such cooperation among themselves.
The purpose of the Charter is to ensure that (1) all of the companies and their
stockholders are treated consistently and fairly; (2) the scope and nature of
the cooperation among the companies, and each company's responsibilities, are
adequately defined; (3) each company has access to the combined resources and
financial, managerial and technological strengths of the others; and (4) Thermo
Electron and the Thermo Subsidiaries, in the aggregate, are able to obtain the
most favorable terms from outside parties.
To achieve these ends, the Charter identifies the general principles to be
followed by the companies, addresses the role and responsibilities of the
management of each company, provides for the sharing of group resources by the
companies, and provides for centralized administrative, banking and credit
services to be performed by Thermo Electron. The services provided by Thermo
Electron include collecting and managing cash generated by members, coordinating
the access of Thermo Electron and the Thermo Subsidiaries (the Thermo Group) to
external financing sources, ensuring compliance with external financial
covenants and internal financial policies, assisting in the formulation of
long-range planning and providing other banking and credit services. Pursuant to
the Charter, Thermo Electron may also provide guarantees of debt or other
obligations of the Thermo Subsidiaries or may obtain external financing at the
parent level for the benefit of the Thermo Subsidiaries. In certain instances,
the Thermo Subsidiaries may provide credit support to, or on behalf of, the
consolidated entity or may obtain financing directly from external financing
sources. Under the Charter, Thermo Electron is responsible for determining that
the Thermo Group remains in compliance with all covenants imposed by external
financing sources, including covenants related to borrowings of Thermo Electron
or other members of the Thermo Group, and for apportioning such constraints
within the Thermo Group. In addition, Thermo Electron establishes certain
internal policies and procedures applicable to members of the Thermo Group. The
cost of the services provided by Thermo Electron to the Thermo Subsidiaries is
covered under existing corporate services agreements between Thermo Electron and
the Thermo Subsidiaries.
The Charter currently provides that it shall continue in effect so long as
Thermo Electron and at least one Thermo Subsidiary participate. The Charter may
be amended at any time by agreement of the participants. Any Thermo Subsidiary,
including the company, can withdraw from participation in the Charter upon 30
days' prior notice. In addition, Thermo Electron may terminate a subsidiary's
participation in the Charter in the event the subsidiary ceases to be controlled
by Thermo Electron or ceases to comply with the Charter or the policies and
procedures applicable to the Thermo Group. A withdrawal from the Charter
automatically terminates the corporate services agreement and tax allocation
agreement (if any) in effect between the withdrawing company and Thermo
Electron. The withdrawal from participation does not terminate outstanding
commitments to third parties made by the withdrawing company, or by Thermo
Electron or other members of the Thermo Group, prior to the withdrawal. In
addition, a withdrawing company is required to continue to comply with all
policies and procedures applicable to the Thermo Group and to provide certain
administrative functions mandated by Thermo Electron so long as the withdrawing
company is controlled by or affiliated with Thermo Electron.
As provided in the Charter, the company and Thermo Electron have entered
into the Services Agreement under which Thermo Electron's corporate staff
provides certain administrative services, including certain legal advice and
services, risk management, employee benefit administration, tax advice and
preparation of tax returns, centralized cash management and financial and other
services to the company. The company was assessed an annual fee equal to 0.8% of
the company's revenues for these services in fiscal 1999. The annual fee will
remain at 0.8% of the company's revenues for fiscal 2000. The fee is reviewed
annually and may be changed by mutual agreement of the company and Thermo
Electron. During fiscal 1999, Thermo Electron assessed the company $2,769,000 in
fees under the Services Agreement. Management believes that the charges under
the Services Agreement are reasonable and that the terms of the Services
Agreement are fair to the company. In fiscal 1999, the company and its
affiliates were billed an additional $259,000 by Thermo Electron for certain
administrative services required by the company and its affiliates that were not
covered by the Services Agreement. The Services Agreement automatically renews
for successive one-year terms, unless canceled by the company upon 30 days'
prior notice. In addition, the Services Agreement terminates
23
<PAGE>
automatically in the event the company ceases to be a member of the Thermo Group
or ceases to be a participant in the Charter. In the event of a termination of
the Services Agreement, the company will be required to pay a termination fee
equal to the fee that was paid by the company for services under the Services
Agreement for the nine-month period prior to termination. Following termination,
Thermo Electron may provide certain administrative services on an as-requested
basis by the company or as required in order to meet the company's obligations
under Thermo Electron's policies and procedures. Thermo Electron will charge the
company a fee equal to the market rate for comparable services if such services
are provided to the company following termination.
The company has entered into a Tax Allocation Agreement with Thermo
Electron that outlines the terms under which the company will be included in
Thermo Electron's consolidated federal and state income tax returns. Under
current law, the company will be included in such tax returns so long as Thermo
Electron owns at least 80% of Common Stock outstanding. As of July 1999, the
company and ThermoLase joined the Thermo Electron consolidated federal income
tax return as Thermo Electron's stock ownership in the company and the combined
Thermo Electron and company ownership of ThermoLase exceeded 80%. As a result,
Thermo Electron charges or pays the company and ThermoLase amounts based on
their relative contribution to Thermo Electron's tax liability. If Thermo
Electron's equity ownership of the company were to drop below 80%, the company
would file its own tax returns. The agreement provides that Thermo Electron
charges or pays the company amounts based on the company's relative contribution
to Thermo Electron's tax liability at the time that Thermo Electron pays its tax
liability or receives a tax benefit. Due to the tax losses incurred by the
company since June 1999 when the company became part of a consolidated tax group
with Thermo Electron, Thermo Electron will pay to the company with respect to
fiscal 1999, an amount equal to the tax benefit received by Thermo Electron with
respect to such tax losses.
At fiscal year-end 1998, $146,534,000 of the company's cash equivalents
were invested in a repurchase agreement with Thermo Electron. Under this
agreement, the company in effect lent excess cash to Thermo Electron, which
Thermo Electron collateralized 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 were
readily convertible into cash by the company. The repurchase agreement earned a
rate based on the 90-day Commercial Paper Composite Rate plus 25 basis points,
set at the beginning of each quarter. Effective June 1999, the company adopted a
new cash management arrangement with Thermo Electron, described below, that
replaces the repurchase agreement.
As of October 2, 1999, $39,000,000 of the company's cash equivalents were
invested in a cash management arrangement with Thermo Electron, which was
effective June 1999. Under the cash management arrangement, the company lends
its excess cash to Thermo Electron and has the contractual right to withdraw its
invested funds upon 30 days' prior notice. Thermo Electron is contractually
required to maintain cash, cash equivalents and/or immediately available bank
lines of credit equal to at least 50% of all the funds invested under the
arrangement by all Thermo Electron subsidiaries other than wholly-owned
subsidiaries. The company's funds invested in the cash management arrangement
earn a rate equal to the 30-day Dealer Commercial Paper Rate as reported in The
Wall Street Journal plus 50 basis points, set at the beginning of each month.
Thermo Electron has announced a proposed reorganization involving certain
of Thermo Electron's subsidiaries, including the company and ThermoLase. Under
this plan, the company and ThermoLase would be merged into Thermo Electron. As a
result, the company and ThermoLase would become wholly owned subsidiaries of
Thermo Electron. The public shareholders of the company and ThermoLase would
receive common stock in Thermo Electron in exchange for their shares. In
December 1999, the board of directors of the company and Thermo Electron
approved a definitive agreement and plan of merger with Thermo Electron under
which Thermo Electron would acquire all of the outstanding shares of Common
Stock held by shareholders other than Thermo Electron in exchange for Thermo
Electron common stock at a ratio of one share of Common Stock for .5503 shares
of Thermo Electron common stock. In addition, the board of directors of
ThermoLase and Thermo Electron approved a definitive agreement and plan of
merger with Thermo Electron under which Thermo Electron would acquire all of the
outstanding shares of ThermoLase held by shareholders other than the company and
Thermo Electron for not less than 0.132 shares, and not
24
<PAGE>
more than 0.198 shares, of Thermo Electron common stock for each share of
ThermoLase common stock. These proposals are subject to completion of review by
the Securities and Exchange Commission of certain required filings regarding the
proposed transactions and the listing on the New York Stock Exchange of Thermo
Electron common stock to be issued in connection with the mergers.
Miscellaneous
From time to time, the company may transact business with other companies
in the Thermo Group. In fiscal 1999, such transactions included the following:
Trex Medical has an arrangement with the Tecomet division of Thermo
Electron for the manufacture of the Trex Medical's proprietary HTC grid. Under
this arrangement, Tecomet manufactures the grid for Trex Medical pursuant to
written purchase orders. Trex Medical owns the intellectual property rights to
the grid. During fiscal 1999, Trex Medical purchased grids for an aggregate
purchase price of $1,352,000 under this arrangement.
Under an arrangement with Thermedics Detection Inc., a majority-owned
subsidiary of Thermo Electron, Trex Medical manufactures an X-ray source that is
used as a component in a fill-measuring device produced by Thermedics Detection.
Trex Medical manufactures these X-ray sources for Thermedics Detection pursuant
to written purchase orders. During fiscal 1999, Thermedics Detection purchased
X-ray source units from Trex Medical for an aggregate purchase price of $43,000
under this arrangement.
The company developed imaging crystals for ThermoSpectra Corporation, a
majority-owned subsidiary of Thermo Electron. During fiscal 1999, the company
recorded revenues of $317,000 associated with this work. In addition, the
company performs research for Thermo Coleman Corporation, a wholly owned
subsidiary of Thermo Electron. During fiscal 1999, the company recorded $119,000
of such revenues.
During fiscal 1999, ThermoLase purchased products totaling $169,000 from
Bird Products Corporation, a wholly owned subsidiary of Thermo Electron.
As of October 2, 1999, the company owed Thermo Electron $10,000,000
principal amount pursuant to 3 1/4% Convertible Subordinated Debentures due
2007, convertible into shares of the company's common stock at $27.00 per share.
As of October 2, 1999, ThermoLase owed Thermo Electron $8,225,000
principal amount pursuant to 4 3/8% Convertible Subordinated Debentures due
2004, convertible into shares of ThermoLase common stock at $17.385 per share.
As of October 2, 1999, Thermo Electron owned 1,620,127 units consisting of
a share of ThermoLase common stock coupled with a right to have the ThermoLase
redeem such share of common stock for $20.25 in April 2001. If all such units
were redeemed in April 2001, ThermoLase would owe Thermo Electron $32,805,000.
As a result of the proposed merger of ThermoLase into Thermo Electron,
ThermoLase common stock included in the units will be exchanged for fractional
shares of Thermo Electron common stock which will be coupled with a right to
have Thermo Electron redeem each of such fractional shares for $20.25 in April
2001. If all units consisting of such fractional shares of Thermo Electron held
by parties other than Thermo Electron and its affiliates were redeemed in April
2001, Thermo Electron would pay to such parties $7,695,000, which amount would
then be payable to Thermo Electron by ThermoLase, or in the event that
ThermoLase is unable to make such payment, by the company.
As of October 2, 1999, the company owed Thermo Electron and its other
subsidiaries an aggregate of $1,997,000 for amounts due under the Corporate
Services Agreement and related administrative charges, for other products and
services, and for miscellaneous items excluding loans described above, net of
amounts owed to the company by Thermo Electron and its other subsidiaries for
products and services and miscellaneous items. The largest amount of net
indebtedness owed by the company to Thermo Electron and its other subsidiaries
since October 3, 1998, was $5,252,000. These amounts do not bear interest and
are expected to be paid in the normal course of business.
25
<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 Comprehensive Income and 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 December 17, 1999, the Company filed a Current Report on Form 8-K
dated December 17, 1999, with respect to the execution of an Agreement
and Plan of Merger.
(c) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
26
<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, 1999 THERMOTREX CORPORATION
By: /s/ Anne Pol
-----------------
Anne Pol
Interim President
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, 1999.
Signature Title
By: /s/ Anne Pol Interim President
Anne Pol
By: /s/ Theo Melas-Kyriazi Chief Financial Officer
Theo Melas-Kyriazi
By: /s/ Paul F. Kelleher Chief Accounting Officer
Paul F. Kelleher
By: /s/ John T. Keiser Chairman of the Board and
John T. Keiser Director
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 F. Magee Director
John F. Magee
By: /s/ Nicholas T. Zervas Director
Nicholas T. Zervas
27
<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 November 9, 1999 (except with respect to
the matters discussed in Notes 3, 16, and 18, as to which the date is December
16, 1999). 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 26 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
November 9, 1999
28
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SCHEDULE II
THERMOTREX CORPORATION
Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Balance at Provision Accounts Balance
Beginning Charged to Written at End
Description of Year Expense (a) Off Other (b) of Year
- -------------------------------------- ------------ ------------- ------------- ------------- ------------
Allowance for Doubtful Accounts
Year Ended October 2, 1999 $ 3,671 $ 4,120 $ (1,262) $ (547) $ 5,982
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
Balance at Established Activity Balance
Beginning as Cost of Charged to at End
Description of Year Acquisitions Reserve Other (d) of Year
- -------------------------------------- ------------ ------------- ------------- ------------- ------------
Accrued Acquisition Expenses (c)
Year Ended October 2, 1999 $ 1,393 $ 2,603 $ (1,748) $ (235) $ 2,013
Year Ended October 3, 1998 $ 302 $ 1,735 $ (731) $ 87 $ 1,393
Year Ended September 27, 1997 $ 680 $ - $ (378) $ - $ 302
Balance at Provision Activity Currency Balance
Beginning Charged to Charged to Translation at End
Description of Year Expense (f) Reserve of Year
- -------------------------------------- ------------ ------------- ------------- ------------- ------------
Accrued Restructuring Costs (e)
Year Ended October 2, 1999 $ 5,153 $ 30,319 $ (12,735) $ (22) $ 22,715
Year Ended October 3, 1998 $ - $ 10,155 $ (5,002) $ - $ 5,153
(a) Includes a provision of $1.6 million in fiscal 1999, recorded in connection
with certain restructuring actions, described in Note 8 to Consolidated
Financial Statements in the Registrant's Fiscal 1999 Annual Report to
Shareholders.
(b) Includes allowances of businesses acquired during the year as described in
Note 3 to Consolidated Financial Statements in the Registrant's Fiscal 1999
Annual Report to Shareholders, bad debts recovered, and the effect of
foreign currency translation.
(c) The nature of activity in this account is described in Note 3 to
Consolidated Financial Statements in the Registrant's Fiscal 1999 Annual
Report to Shareholders.
(d) Primarily represents the effect of foreign currency translation.
(e) The nature of activity in this account is described in Note 8 to
Consolidated Financial Statements in the Registrants Fiscal 1999 Annual
Report to Shareholders.
(f) Excludes noncash charges of $2.9 million, primarily for the write-off of
leasehold improvements and related spa assets and $1.3 million for the
write-off of a joint venture in fiscal 1998. Excludes noncash charges of
$19.9 million for the loss on the sale of the spa business and $18.1
million, primarily for the write-off of leasehold improvements and equipment
in fiscal 1999.
29
<PAGE>
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 Certificate of Amendment of Restated Certificate of Incorporation
of the Registrant (filed as Exhibit 2 to the Registrant Form 8-A
filed September 30, 1999 [File No. 1-10791] and incorporated
herein by reference).
3.3 By-Laws of the Registrant, as amended and restated (filed as
Exhibit 3 to the Registrant's Form 8-A filed September 30, 1999
[File No. 1-10791] and incorporated herein by reference).
4.1 Indenture dated 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).
30
<PAGE>
EXHIBIT INDEX
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 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
31
<PAGE>
Exhibit
Number Description of Exhibit
- ----------------------------------------------------------------------------------------------------------
10.16 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).
10.17 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).
10.18 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).
10.19 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).
10.20 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).
10.21 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).
10.22 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).
10.23 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).
10.24 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).
10.25 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, and incorporated herein by reference).
10.26 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, and incorporated herein by reference).
32
<PAGE>
Exhibit
Number Description of Exhibit
- ----------------------------------------------------------------------------------------------------------
10.27 Amended and Restated Nonqualified Stock Option Plan of the Registrant (filed as Exhibit
10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3,
1999, and incorporated herein by reference).
10.28 Amended and Restated Directors Stock Option Plan of the Registrant (filed as Exhibit 10.3
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999, and
incorporated herein by reference).
10.29 Amended and Restated Deferred Compensation Plan for Directors of
the Registrant (filed as Exhibit 10.4 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended July 3, 1999,
and incorporated herein by reference).
10.30 Amended and Restated ThermoTrex Corporation - ThermoLase Corporation Nonqualified Stock
Option Plan (filed as Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended July 3, 1999, and incorporated herein by reference).
10.31 Amended and Restated ThermoTrex Corporation - Trex Medical Corporation Nonqualified Stock
Option Plan (filed as Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended July 3, 1999, and incorporated herein by reference).
10.32 Amended and Restated ThermoTrex Corporation - Trex Communications Corporation
Nonqualified Stock Option Plan (filed as Exhibit 10.7 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended July 3, 1999, and incorporated herein by
reference). (As a result of the assumption of this plan by ThermoTrex Corporation, the
maximum number of ThermoTrex shares issuable under this plan is 20,596 shares).
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.
10.33 Master Cash Management, Guarantee Reimbursement and Loan
Agreement dated as of June 1, 1999, by and between the Registrant
and Thermo Electron Corporation (filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
July 3, 1999, and incorporated herein by reference).
10.34 Master Cash Management, Guarantee Reimbursement and Loan
Agreement dated as of June 1, 1999, by and between Trex Medical
Corporation and Thermo Electron Corporation (filed as Exhibit
10.1 to Trex Medical Corporation's Quarterly Report on Form 10-Q
for the quarter ended July 3, 1999 [File No. 1-11827] and
incorporated herein by reference).
10.35 Master Cash Management, Guarantee Reimbursement and Loan
Agreement dated as of June 1, 1999, by and between ThermoLase
Corporation and Thermo Electron Corporation (filed as Exhibit
10.1 to ThermoLase Corporation's Quarterly Report on Form 10-Q
for the quarter ended July 3, 1999 [File No. 1-13104] and
incorporated herein by reference).
33
<PAGE>
Exhibit
Number Description of Exhibit
- ----------------------------------------------------------------------------------------------------------
10.36 Agreement for Sale of Shares dated June 4, 1999, between the Registrant and Thermo
Electron Corporation (filed as Exhibit 10.10 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended July 3, 1999, and incorporated herein by reference).
10.37 Stock Purchase Agreement between ThermoLase Corporation and TGH,
LLC, dated June 27, 1999 (filed as Exhibit 2.1 to ThermoLase
Corporation's Current Report on Form 8-K filed July 12, 1999
[File No. 1-13104] and incorporated herein by reference).
10.38 Asset Purchase Agreement between ThermoLase Corporation and GH
Day Spas, Inc., dated June 27, 1999 (filed as Exhibit 2.2 to
ThermoLase Corporation's Current Report on Form 8-K filed July
12, 1999 [File No. 1-13104] and incorporated herein by
reference).
10.39 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).
10.40 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).
10.41 Agreement and Plan of Merger by and among the Registrant, Thermo
Electron Corporation, and ThermoTrex Acquisition Corporation
dated as of December 14, 1999 (filed as Exhibit 2.1 to the
Registrant's Current Report on Form 8-K filed December 17, 1999
[File No. 1-10791] and incorporated herein by reference).
10.42 Agreement and Plan of Merger by and among ThermoLase Corporation,
Thermo Electron Corporation, and ThermoLase Acquisition
Corporation dated as of December 14, 1999 (filed as Exhibit 2.1
to ThermoLase Corporation's Current Report on Form 8-K filed
December 17, 1999 [File No. 1-13104] and incorporated herein by
reference).
13 Annual Report to Shareholders for the fiscal year ended October
2, 1999 (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).
</TABLE>
Exhibit 13
ThermoTrex Corporation
Consolidated Financial Statements
Fiscal Year 1999
<PAGE>
<TABLE>
<CAPTION>
ThermoTrex Corporation 1999 Financial Statements
Consolidated Statement of Operations
Year Ended
------------------------------------------
<S> <C> <C> <C>
(In thousands except per share amounts) October 2, October 3, September 27,
1999 1998 1997
- ----------------------------------------------------------- --------------- --------------- --------------
Revenues (Notes 7 and 13)
Product revenues $ 303,909 $ 294,310 $237,629
Other revenues 42,238 47,548 44,492
--------- --------- --------
346,147 341,858 282,121
--------- --------- --------
Costs and Operating Expenses:
Cost of product revenues (Note 8) 213,452 165,688 141,556
Cost of other revenues 46,598 44,628 38,580
Selling, general, and administrative expenses (Notes 7 103,236 91,028 69,043
and 8)
Research and development expenses 39,702 39,826 32,067
Restructuring and nonrecurring costs (Notes 3 and 8) 76,620 10,155 1,400
--------- --------- --------
479,608 351,325 282,646
--------- --------- --------
Operating Loss (133,461) (9,467) (525)
Interest Income 5,799 12,942 4,752
Interest Expense (includes $604, $511, and $197 to (8,662) (9,479) (835)
parent company; Note 7)
Gain on Issuance of Stock by Subsidiaries (Note 11) - 23,798 7,926
Equity in Loss of Joint Ventures (Note 3) (200) (1,203) (700)
Other Expense (Note 8) (5,897) - -
--------- --------- --------
Income (Loss) Before Income Taxes, Minority Interest, (142,421) 16,591 10,618
and Extraordinary Item
Income Tax (Provision) Benefit (Note 6) 10,687 (17,463) (3,474)
Minority Interest (Expense) Income 7,906 (4,750) 1,297
--------- --------- --------
Income (Loss) Before Extraordinary Item (123,828) (5,622) 8,441
Extraordinary Item, Net of Income Taxes of $1,692 (Note 9) - 3,009 -
--------- --------- --------
Net Income (Loss) $(123,828) $ (2,613) $ 8,441
========= ========= ========
Earnings (Loss) per Share (Note 15)
Basic $ (6.24) $ (.14) $ .44
========= ========= ========
Diluted $ (6.24) $ (.14) $ .43
========= ========= ========
Weighted Average Shares (Note 15)
Basic 19,851 18,704 19,210
========= ========= ========
Diluted 19,851 18,704 19,599
========= ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
ThermoTrex Corporation 1998 Financial Statements
Consolidated Balance Sheet
<S> <C> <C>
(In thousands) October 2, October 3,
1999 1998
- ------------------------------------------------------------------------------ ------------- -------------
Assets
Current Assets:
Cash and cash equivalents (includes $146,534 under repurchase $ 19,558 $ 157,107
agreement with parent company in fiscal 1998)
Advance to affiliate 39,000 -
Available-for-sale investments, at quoted market value 64,174 8,076
(amortized cost of $64,169 and $8,086; Note 2)
Accounts receivable, less allowances of $5,982 and $3,671 (Note 8) 63,061 85,790
Unbilled contract costs and fees 15,863 7,409
Inventories (Note 8) 70,475 86,223
Prepaid expenses and other assets 15,634 5,890
Prepaid income taxes (Note 6) 16,777 13,988
-------- ---------
304,542 364,483
-------- ---------
Property, Plant, and Equipment, at Cost, Net (Note 8) 24,909 60,511
-------- ---------
Other Assets 11,405 15,867
-------- ---------
Cost in Excess of Net Assets of Acquired Companies (Notes 3 and 8) 142,499 154,845
-------- ---------
$483,355 $ 595,706
======== =========
3
<PAGE>
ThermoTrex Corporation 1999 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) October 2, October 3,
1999 1998
- ------------------------------------------------------------------------------ ------------- -------------
Liabilities and Shareholders' Investment
Current Liabilities:
Current maturities of long-term obligations (Note 9) $ 1,825 $ 435
Accounts payable 22,076 30,871
Accrued payroll and employee benefits 10,781 12,147
Accrued warranty costs 7,981 9,233
Customer deposits 5,807 5,476
Accrued commissions 5,614 7,629
Accrued restructuring costs (Note 8) 22,715 5,153
Other accrued expenses (Notes 3 and 8) 33,283 26,610
Due to parent company and affiliated companies 1,997 5,252
-------- ---------
112,079 102,806
-------- ---------
Deferred Income Taxes 3,060 6,418
-------- ---------
Deferred Lease Liability 233 1,172
-------- ---------
Long-term Obligations:
Subordinated convertible debentures (includes $18,225
and $14,500 of related-party debt; Note 9) 203,948 203,948
Other 222 697
-------- ---------
204,170 204,645
-------- ---------
Common Stock of Subsidiary Subject to Redemption (Note 1) 40,500 40,500
-------- ---------
Minority Interest 65,856 90,578
-------- ---------
Commitments and Contingencies (Notes 3, 7, 8, and 10)
Shareholders' Investment (Notes 4 and 5):
Common stock, $.01 par value, 50,000,000 shares authorized; 233 196
23,302,518 and 19,590,446 shares issued
Capital in excess of par value 109,043 73,293
Retained earnings (accumulated deficit) (28,844) 94,984
Treasury stock at cost, 933,421 and 929,100 shares (20,877) (20,944)
Deferred compensation (579) -
Accumulated other comprehensive items (Note 14) (1,519) 2,058
-------- ---------
57,457 149,587
-------- ---------
$483,355 $ 595,706
======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
ThermoTrex Corporation 1999 Financial Statements
Consolidated Statement of Cash Flows
Year Ended
-----------------------------------------
<S> <C> <C> <C>
(In thousands) October 2, October 3, September 27,
1999 1998 1997
- ----------------------------------------------------------- --------------- --------------- --------------
Operating Activities
Net income (loss) $(123,828) $ (2,613) $ 8,441
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 16,808 15,111 10,964
Provision for losses on accounts receivable (Note 8) 4,120 970 279
Gain on issuance of stock by subsidiaries (Note 11) - (23,798) (7,926)
Gain on repurchase of subordinated convertible - (4,701) -
debentures (Note 9)
Minority interest expense (income) (7,906) 4,750 (1,297)
Increase (decrease) in deferred income taxes (3,358) 10,080 (4,308)
Noncash restructuring costs (Note 8) 46,241 4,193 -
Equity in loss of joint ventures (Note 3) 200 1,203 700
Other noncash items (Note 8) 18,596 1,823 640
Changes in current accounts, excluding the
effects of acquisitions and disposition:
Accounts receivable 20,477 (13,605) (19,694)
Inventories and unbilled contract costs and fees 2,427 (27,310) (11,290)
Other current assets (9,972) (2,334) (3,311)
Accounts payable (8,344) (4,777) 1,522
Other current liabilities (Note 8) 14,313 2,958 11,208
--------- --------- --------
Net cash used in operating activities (30,226) (38,050) (14,072)
--------- --------- --------
Investing Activities
Acquisitions, net of cash acquired (Note 3) (18,759) (45,002) (10,712)
Advances to affiliate, net (39,000) - -
Purchases of available-for-sale investments (65,000) (4,000) (10,400)
Proceeds from sale and maturities of 8,000 13,400 44,000
available-for-sale investments
Purchases of property, plant, and equipment (14,633) (10,612) (26,853)
Advances under notes receivable to related parties - (4,667) -
(Note 7)
Reduction (investment) in other assets 907 701 (1,200)
Other 1,978 756 -
--------- --------- --------
Net cash used in investing activities $(126,507) $ (49,424) $ (5,165)
--------- --------- --------
5
<PAGE>
ThermoTrex Corporation 1999 Financial Statements
Consolidated Statement of Cash Flows (continued)
Year Ended
-----------------------------------------
(In thousands) October 2, October 3, September 27,
1999 1998 1997
- ----------------------------------------------------------- --------------- --------------- --------------
Financing Activities
Net proceeds from issuance of subordinated $ - $ 121,814 $112,551
convertible debentures (Note 9)
Purchase of subordinated convertible debentures (Note 9) - (30,486) -
Net proceeds from issuance of Company and subsidiaries' 41,884 71,530 16,370
common stock and sale of subsidiary put options (Note 11)
Net proceeds from subsidiary stock exchange offer (Note 11) - - 502
Purchases of Company and subsidiaries common stock (24,112) (38,966) (26,072)
Proceeds from issuance of notes payable to parent - - 11,000
company
Repayment of notes payable to parent company - (11,000) (2,000)
Repayment of note receivable from related party 1,300 - -
Payment of withholding taxes related to stock option (25) (3,415) (1,334)
exercises
Other 12 - -
--------- --------- --------
Net cash provided by financing activities 19,059 109,477 111,017
--------- --------- --------
Exchange Rate Effect on Cash 125 (616) -
--------- --------- --------
Increase (Decrease) in Cash and Cash Equivalents (137,549) 21,387 91,780
Cash and Cash Equivalents at Beginning of Year 157,107 135,720 43,940
--------- --------- --------
Cash and Cash Equivalents at End of Year $ 19,558 $ 157,107 $135,720
========= ========= ========
Cash Paid For
Interest $ 8,643 $ 8,255 $ 197
Income taxes $ 1,898 $ 16,858 $ 6,622
Noncash Activities
Fair value of assets of acquired companies $ 35,877 $ 96,509 $ 14,677
Cash paid for acquired companies (27,273) (47,757) (11,150)
Amount payable for acquired company (5,358) - -
Issuance of subsidiaries' common stock for acquired companies - (11,175) -
--------- --------- --------
Liabilities assumed of acquired companies $ 3,246 $ 37,577 $ 3,527
========= ========= ========
Exchange of subsidiary common stock for common $ - $ - $ 40,500
stock of subsidiary subject to redemption (Note 1) ========= ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
ThermoTrex Corporation 1999 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment
Year Ended
-----------------------------------------
(In thousands) October 2, October 3, September 27,
1999 1998 1997
- ---------------------------------------------------------- --------------- --------------- --------------
Comprehensive Income
Net Income (Loss) $(123,828) $ (2,613) $ 8,441
--------- --------- --------
Other Comprehensive Items (Note 14):
Foreign currency translation adjustment (3,586) 2,064 -
Unrealized gains on available-for-sale investments 9 7 34
--------- --------- --------
(3,577) 2,071 34
Minority Interest 1,008 (684) (13)
--------- --------- --------
$(126,397) $ (1,226) $ 8,462
========= ========= ========
Shareholders' Investment
Common Stock, $.01 Par Value:
Balance at beginning of year $ 196 $ 193 $ 192
Net proceeds from issuance of Company common 37 - -
stock (Note 4)
Issuance of stock under employees' and - 3 1
directors' stock plans --------- --------- --------
Balance at end of year 233 196 193
--------- --------- --------
Capital in Excess of Par Value:
Balance at beginning of year 73,293 78,601 116,753
Net proceeds from issuance of Company common 41,724 - -
stock (Note 4)
Activity under employees' and directors' stock plans (72) 1,147 (103)
Tax benefit related to employees' and - 670 3,017
directors' stock plans
Effect of majority-owned subsidiaries' equity transactions (5,902) (7,125) (41,066)
--------- --------- --------
Balance at end of year 109,043 73,293 78,601
--------- --------- --------
Retained Earnings (Accumulated Deficit):
Balance at beginning of year 94,984 97,597 89,156
Net income (loss) (123,828) (2,613) 8,441
--------- --------- --------
Balance at end of year $ (28,844) $ 94,984 $ 97,597
--------- --------- --------
7
<PAGE>
ThermoTrex Corporation 1999 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment (continued)
Year Ended
-----------------------------------------
(In thousands) October 2, October 3, September 27,
1999 1998 1997
- ----------------------------------------------------------- --------------- --------------- --------------
Treasury Stock:
Balance at beginning of year $ (20,944) $ (243) $ (975)
Activity under employees' and directors' stock plans 128 (537) 732
Purchases of Company common stock (61) (20,164) -
--------- --------- --------
Balance at end of year (20,877) (20,944) (243)
--------- --------- --------
Deferred Compensation (Note 5):
Balance at beginning of year - - -
Subsidiary issuance of restricted stock under (615)
employees' stock plans, net of forfeitures
Amortization of deferred compensation 36 - -
--------- --------- --------
Balance at end of year (579) - -
--------- --------- --------
Accumulated Other Comprehensive Items (Note 14):
Balance at beginning of year 2,058 (13) (47)
Other comprehensive items (3,577) 2,071 34
--------- --------- --------
Balance at end of year (1,519) 2,058 (13)
--------- --------- --------
$ 57,457 $ 149,587 $176,135
========= ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE>
ThermoTrex Corporation 1999 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 71%-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 developed laser-based hair-removal
and skin-resurfacing systems and offered related services to customers through
retail spas through June 1999. ThermoLase 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
1999, ThermoLase began the process of terminating its physician-licensing
program, and terminated or renegotiated the terms of its licensing arrangements
in various countries following a decision to exit the hair-removal business
(Note 8). The Company's 100%-owned Trex Communications Corporation subsidiary
manufactures ground-based satellite communication systems, and develops and
integrates telemetry systems. In November 1999, the Company purchased all of the
outstanding shares of Trex Communications that it did not previously own (Note
18). 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 2, 1999, Thermo Electron owned
17,927,330 shares of the Company's common stock, representing 80% of such stock
outstanding.
Thermo Electron has announced a proposed reorganization involving certain
of Thermo Electron's subsidiaries, including the Company and ThermoLase. Under
this plan, the Company and ThermoLase would be merged into Thermo Electron. As a
result, the Company and ThermoLase would become wholly owned subsidiaries of
Thermo Electron (Note 16).
Principles of Consolidation
The accompanying financial statements include the accounts of the Company,
its wholly owned subsidiaries 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 1999, 1998, and 1997 are for the years ended
October 2, 1999, October 3, 1998, and September 27, 1997, respectively. Fiscal
1999 and 1997 each included 52 weeks; 1998 included 53 weeks.
9
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
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. Prior to ThermoLase's exiting the spa business in June
1999, ThermoLase offered a variety of treatment plans for its spa-based
services, which included one-time services and multiple treatment plans that
provided varying numbers of treatments or treatment periods. ThermoLase
recognized revenue from the one-time treatment plan upon performance of the
related service. Revenues from multiple treatment plans were recognized over the
anticipated treatment period, which was six months in each period based upon the
average service pattern for customers treated. ThermoLase earned an initial
technology licensing fee and ongoing royalties from licensing its SoftLight
technology to a network of independent physicians. Initial nonrefundable
technology licensing fees were recorded as revenue at the time the technology
was transferred to the practitioner. Royalties arising from hair-removal and
skin-resurfacing procedures performed by these physicians were recognized when
such procedures were performed. During fiscal 1998, ThermoLase initiated the
process of modifying the terms of its physician-licensing program under which
per-procedure royalties were reduced or eliminated and a minimum royalty and/or
flat periodic fee was required. Minimum royalties and flat fees were recognized
monthly. During fiscal 1999, ThermoLase began to terminate its
physician-licensing program and by the end of calendar 1999 will no longer be
earning monthly royalties from licensees. ThermoLase earned an initial
technology licensing fee and ongoing technology licensing royalties from its
international arrangements. Initial nonrefundable technology licensing fees were
recorded as revenue at the time the technology was transferred. Ongoing
technology licensing royalties were recorded when earned in accordance with
contractual terms. The accompanying statement of operations includes
international licensing fees of $724,000, $2,760,000, and $4,195,000 in fiscal
1999, 1998, and 1997, respectively. During fiscal 1999, ThermoLase terminated or
renegotiated the terms of its licensing arrangements in various countries (Note
8).
The Company recognizes contract revenues and profits using the
percentage-of-completion method. Revenues recorded under the
percentage-of-completion method were $32,022,000, $23,642,000, and $16,174,000
in fiscal 1999, 1998, and 1997, 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 11 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 comprehensive income
and shareholders' investment as effect of majority-owned subsidiaries' equity
transactions.
10
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
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 shareholders' investment.
Income Taxes
The Company was required to file its own federal income tax returns for
fiscal 1998 and 1997 because Thermo Electron's equity ownership in the Company
was below 80%. Effective in the third quarter of fiscal 1999, Thermo Electron's
equity ownership of the Company exceeded 80% as a result of the sale of stock by
the Company to Thermo Electron (Note 4). As a result, the Company will be
included in Thermo Electron's consolidated tax return as provided for under a
tax allocation agreement between the Company and Thermo Electron. This agreement
provides that Thermo Electron charges or pays the Company amounts based on the
Company's relative contribution to Thermo Electron's tax liability.
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
Basic earnings (loss) per share have been computed by dividing net income
(loss) by the weighted average number of shares outstanding during the period.
Except where the result would be antidilutive, diluted earnings (loss) 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, $146,534,000 of the Company's cash equivalents
were invested in a repurchase agreement with Thermo Electron. Under this
agreement, the Company in effect lent excess cash to Thermo Electron, which
Thermo Electron collateralized 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 were
readily convertible into cash by the Company. The repurchase agreement earned a
rate based on the 90-day Commercial Paper Composite Rate plus 25 basis points,
set at the beginning of each quarter. Effective June 1999, the Company adopted a
new cash management arrangement with Thermo Electron, described below, that
replaces the repurchase agreement. At fiscal year-end 1999 and 1998, the
Company's cash and cash equivalents also include cash held in accounts in the
United States and foreign countries.
Advance to Affiliate
Effective June 1999, the Company and Thermo Electron commenced use of a
new domestic cash management arrangement. Under the new arrangement, amounts
advanced to Thermo Electron by the Company for domestic cash management purposes
bear interest at the 30-day Dealer Commercial Paper Rate (DCP Rate) plus 50
basis points, set
11
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
at the beginning of each month. Thermo Electron is contractually required to
maintain cash, cash equivalents, and/or immediately available bank lines of
credit equal to at least 50% of all funds invested under this cash management
arrangement by all Thermo Electron subsidiaries other than wholly owned
subsidiaries. The Company has the contractual right to withdraw its funds
invested in the cash management arrangement upon 30 days' prior notice. Amounts
invested in this arrangement are included in "advance to affiliate" in the
accompanying balance sheet.
In addition, under this arrangement, amounts may be borrowed from Thermo
Electron by the Company or its majority-owned subsidiaries for domestic cash
management purposes, and bear interest at the 30-day DCP Rate plus 150 basis
points, set at the beginning of each month. Such rate shall be reduced to the
DCP Rate plus 50 points to the extent of any funds invested by the Company or
its majority-owned subsidiaries in the cash management arrangement. The Company
had no borrowings under this arrangement at October 2, 1999.
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>
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1999 1998
- ------------------------------------------------------------------------------ ------------- -------------
Raw Materials and Supplies $35,039 $ 38,788
Work in Process 18,896 20,134
Finished Goods 16,540 27,301
------- --------
$70,475 $ 86,223
======= ========
The Company periodically reviews the quantities of inventories on hand and
compares these amounts to expected usage of each particular product or product
line. The Company records as a charge to cost of product revenues any amounts
required to reduce the carrying value of inventories to net realizable value.
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, 20 to 31.5
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. Property, plant, and
equipment consists of the following:
(In thousands) 1999 1998
- ------------------------------------------------------------------------------ ------------- -------------
Land $ 2,799 $ 2,029
Buildings 6,052 11,707
Machinery and Equipment 25,075 47,420
Leasehold Improvements 8,449 21,350
------- --------
42,375 82,506
Less: Accumulated Depreciation and Amortization 17,466 21,995
------- --------
$24,909 $ 60,511
======= ========
12
<PAGE>
ThermoTrex Corporation 1999 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Other Assets
Other assets includes the long-term portion of a note receivable recorded
at its estimated fair value (Note 8). Other assets also includes a cost method
investment in a private company that was written down to its estimated
realizable value in fiscal 1999 (Note 8), and deferred debt expense, which is
amortized over the term of the debt.
Other assets in the accompanying balance sheet also includes the cost of
specifically identifiable intangible assets. The intangible assets are amortized
using the straight-line method over their estimated useful lives, which range
from one to five years. At fiscal year-end 1999 and 1998, these assets were
$702,000 and $1,240,000, respectively, net of accumulated amortization of
$820,000 and $384,000, respectively.
Cost in Excess of Net Assets of Acquired Companies
The excess of cost over the fair value of net assets of acquired companies
is amortized using the straight-line method over periods of 10 to 40 years.
Accumulated amortization was $18,210,000 and $12,484,000 at fiscal year-end 1999
and 1998, 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 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. During fiscal 1999, Thermo Electron purchased
1,620,127 of ThermoLase's units in the open market. In connection with the
proposed merger of ThermoLase with Thermo Electron, which was approved by the
ThermoLase and Thermo Electron boards of directors in December 1999, the
ThermoLase common stock included in the units would be replaced with fractional
shares of Thermo Electron common stock (Note 16).
Foreign Currency
All assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates, and revenues and expenses are translated
at average exchange rates for the year in accordance with SFAS No. 52, "Foreign
Currency Translation." Resulting translation adjustments are reflected in the
"Accumulated other comprehensive items" component of shareholders' investment.
Foreign currency transaction gains and losses are included in the accompanying
statement of operations and are not material for the three years presented.
13
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
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.
As discussed in Note 8, during fiscal 1999, ThermoLase recorded
significant restructuring and related costs associated with its hair removal
business. These amounts include management's best estimate of the exit costs
associated with this business. In addition, the Company recorded a charge
related to its planned disposition of its Trex Communications subsidiary. This
charge was determined using management's best estimate of the selling price of
Trex Communications. It is reasonably possible that the amounts that ThermoLase
will ultimately expend and the amount that the Company will realize from the
sale of Trex Communications could differ materially in the near term from the
amounts estimated in the accompanying financial statements. ThermoLase's
estimates will be affected principally by the amount of future sublease income
from the leased facilities and the result of any negotiations to settle the
lease obligations. The amount that will be realized from the sale of Trex
Communications will depend on the terms of any final agreement.
Presentation
Certain amounts in fiscal 1998 and 1997 have been reclassified to conform
to the presentation in the fiscal 1999 financial statements.
2. Available-for-sale Investments
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 in the "Accumulated other comprehensive items" component of
shareholders' investment.
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 $5,000
and $10,000 at fiscal year-end 1999 and 1998, respectively, which represent
gross unrealized gains of $10,000 and losses of $5,000 in fiscal 1999 and gross
unrealized losses of $10,000 in fiscal 1998, on those investments.
Available-for-sale investments in the accompanying 1999 balance sheet have
contractual maturities of one year or less.
3. Acquisitions, Disposition, and Joint Ventures
Acquisitions
In November 1998, Trex Communications acquired LNR Communications, Inc.
(LNR) for $18,759,000 in cash and the right to receive 1,250,000 shares of Trex
Communications common stock valued at approximately $5,000,000, net of cash
acquired. Of the cash portion of the purchase price, $358,000 had not been paid
as of October 2, 1999, and was included in other accrued expenses in the
accompanying fiscal 1999 balance sheet. The arrangement with the former owners
of LNR permits them to receive shares of Trex Communications or up to $5,000,000
in cash in lieu of the shares following the first anniversary of the acquisition
and ending no later than August 2000. Accordingly, the maximum potential
obligation of $5,000,000 associated with this arrangement is included in other
accrued expenses in the accompanying balance sheet. The cost of this acquisition
exceeded the fair value of the acquired net assets by $9,629,000, which is being
amortized over 15 years. LNR is a manufacturer of electronic subsystems and
turnkey earth stations for the satellite communication market. In November 1999,
the Company offered to pay to the former shareholders of LNR $3.80 in cash by
November 30, 1999, (or $4.00 in cash by April 1, 2000) in lieu of each share of
Trex Communications common stock to which such persons are entitled under the
agreement by which LNR
14
<PAGE>
3. Acquisitions, Disposition, and Joint Ventures (continued)
was acquired. As of December 16, 1999, holders of rights to receive
approximately 72% of the 1,250,000 shares of Trex Communications common stock to
be issued under the LNR acquisition agreement had agreed to accept the Company's
offer to pay them cash in lieu of Trex Communications common stock.
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 The Greenhouse Spa. The
Greenhouse Spa operates a luxury destination spa in Arlington, Texas. The cost
of this acquisition exceeded the estimated fair value of the acquired net assets
by $7,686,000, which was being amortized over 40 years. In connection with
certain restructuring activities, ThermoLase sold The Greenhouse Spa in June
1999 (Note 8).
In May 1998, Trex Communications acquired Electro-Magnetic Processes, Inc.
(EMP) for 800,000 shares of Trex Communications common stock valued at
$3,200,000, $2,500,000 in cash, and the repayment of $675,000 of debt. The cost
of this acquisition exceeded the fair value of the acquired net assets by
$5,641,000, which is being amortized over 15 years. 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 and the repayment of $8,707,000 of debt. The cost of this
acquisition exceeded the fair value of the acquired net assets by $33,044,000,
which is being amortized over 40 years.
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. The cost of this acquisition exceeded the fair value of the
acquired net assets by $7,531,000, which is being amortized over 15 years.
Digitec manufactures physiological-monitoring equipment and digital-image
archiving and networking systems used in cardiac catheterization 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. The cost of this acquisition exceeded the
fair value of the acquired net assets by $7,437,000, which is being amortized
over 10 years. 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.
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.
Allocation of the purchase price for these acquisitions was based on estimates
of the fair value of the net assets acquired.
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. The effect of the
acquisitions not included in the pro forma data was not material to the
Company's results of operations.
(In thousands except per share amounts) 1999 1998
- ------------------------------------------------------------------------------ ------------- -------------
Revenues $ 348,931 $ 361,229
Net Loss (124,116) (2,442)
Basic and Diluted Loss per Share (6.25) (.13)
15
<PAGE>
3. Acquisitions, Disposition, and Joint Ventures (continued)
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 these acquisitions, the Company has undertaken
restructuring activities at the acquired businesses. The Company's restructuring
activities, which were accounted for in accordance with Emerging Issues Task
Force Pronouncement (EITF) 95-3, primarily have included reductions in staffing
levels and abandoned-facility payments. In connection with these restructuring
activities, as part of the cost of the acquisitions, the Company established
reserves as detailed below, primarily for severance and excess facilities. In
accordance with EITF 95-3, the Company finalizes its restructuring plans no
later than one year from the dates of the acquisitions.
The reserves established in fiscal 1998 and 1999 primarily related to
severance across all functions at Trophy's operations in France and the U.S.,
abandonment of sales offices in the U.S., Japan, and Europe, and abandonment of
manufacturing facilities in Europe. Trex Medical expects to pay the severance
costs during the first half of fiscal 2000 and the abandoned-facility costs over
the term of facility leases, which expire primarily through fiscal 2001. In
addition, the restructuring actions undertaken by Trex Communications at LNR
principally included a reduction in staffing levels across all functions.
A summary of the changes in accrued acquisition expenses for severance
follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(In thousands) Trophy LNR Other Total
- ---------------------------------------------------------------- ---------- ---------- ---------- --------
Balance at September 28, 1996 $ - $ - $ 680 $ 680
Usage - - (378) (378)
------ ------ ------ ------
Balance at September 27, 1997 - - 302 302
Reserves established 1,014 - 100 1,114
Usage (429) - (302) (731)
Currency translation 42 - - 42
------ ------ ------ ------
Balance at October 3, 1998 627 - 100 727
Reserves established 1,352 879 - 2,231
Usage (375) (700) (100) (1,175)
Currency translation (174) - - (174)
------ ------ ------ ------
Balance at October 2, 1999 $1,430 $ 179 $ - $1,609
====== ====== ====== ======
</TABLE>
A summary of the changes in accrued acquisition expenses for abandonment
of excess facilities follows:
<TABLE>
<CAPTION>
<S> <C>
(In thousands) Trophy
- ------------------------------------------------------------------------------------------------ ----------
Balance at September 27, 1997 $ -
Reserves established 621
Currency translation 45
------
Balance at October 3, 1998 666
Reserves established 372
Usage (573)
Currency translation (61)
------
Balance at October 2, 1999 $ 404
======
16
<PAGE>
3. Acquisitions, Disposition, and Joint Ventures (continued)
The Company established a reserve in 1992 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 approximately $1,100,000 at fiscal year-end 1999
and 1998 and is included in other accrued expenses in the accompanying balance
sheet. 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 of this matter could have a material
adverse effect on Trex Medical's future results of operations and financial
position.
Disposition
In June 1999, ThermoLase sold the stock of its destination spa, The
Greenhouse Spa, and the assets, subject to certain liabilities, of its domestic
day spas to companies in which the former president of its day spa division has
a controlling interest. The aggregate sales price of $12.5 million consists of
two promissory notes that bear interest at 10% and are due in June 2000, subject
to a six-month extension period that is contingent upon, among other conditions,
payment of $4.0 million of the outstanding balance on the promissory note
relating to the sale of The Greenhouse Spa. Accordingly, in the accompanying
fiscal 1999 balance sheet, the $4.0 million current portion of the notes
receivable is included in prepaid expenses and other assets, and the balance,
which has been recorded at its estimated fair value, is classified as long-term
and is included in prepaid income taxes and other assets. ThermoLase recorded a
loss in fiscal 1999 of $19.9 million on the sale of the spa business during
1999. Unaudited revenues and operating losses before restructuring costs of the
spa business through the date of sale were $9.0 million and $19.3 million,
respectively, in fiscal 1999.
Joint Ventures
ThermoLase entered into joint venture arrangements to market its SoftLight
system internationally. ThermoLase currently has two joint venture arrangements
in which it holds a 46% and 50% stake. Amounts advanced under such arrangements
totaled $2,650,000 in fiscal 1998 and $1,144,000 in fiscal 1997. No amounts were
advanced in fiscal 1999. As of October 2, 1999, ThermoLase had no material
obligation for further funding of such arrangements. The accompanying fiscal
1999, 1998, and 1997 statement of operations includes $200,000, $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 liquidated its joint venture relating to the SoftLight system in
France and in fiscal 1999 terminated or renegotiated the terms of its remaining
joint venture arrangements (Note 8). The costs associated with these actions are
included in restructuring and nonrecurring costs in the accompanying statement
of operations.
4. Common Stock
Sale of Common Stock
In June 1999, the Company sold 3,712,072 of its common stock to Thermo
Electron for proceeds of $41,761,000 million. Following this transaction, Thermo
Electron owned 80% of the Company's common stock.
Reserved Shares
As of October 2, 1999, the Company had reserved 5,094,635 unissued shares
of its common stock for possible issuance under stock-based compensation plans
and possible issuance upon conversion of its subordinated convertible
debentures.
17
<PAGE>
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 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 generally lapse ratably over a one- to
ten-year period, depending on the term of the option, which generally ranges
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.
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 per share
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, which are
included in the fiscal 1999 grants in the table below. 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. The options exchanged were canceled by the Company.
In June 1999, Trex Medical awarded 112,900 shares of restricted common
stock to certain key employees. The shares had an aggregate value of $635,000
and vest three years from the date of award, assuming continued employment, with
certain exceptions. The Company has recorded the fair value of the restricted
stock as deferred compensation in the accompanying balance sheet and is
amortizing such amount over the vesting period. At fiscal year-end 1999, 3,500
of these shares have been forfeited.
18
<PAGE>
5. Employee Benefit Plans (continued)
</TABLE>
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1999 1998 1997
------------------ ------------------ ------------------
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 984 $19.51 1,368 $15.93 1,412 $15.21
Granted 530 8.71 367 21.35 81 26.83
Exercised (6) .30 (414) 6.91 (77) 5.98
Forfeited (267) 23.05 (337) 22.47 (48) 29.43
Canceled due to exchange (223) 23.00 - - - -
----- ---- -----
Options Outstanding, End of Year 1,018 $12.31 984 $19.51 1,368 $15.93
===== ====== ==== ====== ===== ======
Options Exercisable 1,018 $12.31 984 $19.51 1,368 $15.93
===== ====== ==== ====== ===== ======
Options Available for Grant 714 604 485
===== ==== =====
</TABLE>
A summary of the status of the Company's stock options at October 2, 1999,
is as follows:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
-----------------------------------------------------
<S> <C> <C> <C>
Range of Exercise Prices Number Weighted Weighted
of Average Average
Shares Remaining Exercise
(In thousands) Contractual Life Price
- ------------------------------------------------ ----------------- ------------------- -------------------
$ 0.30 - $ 7.01 129 6.2 years $ 6.27
7.02 - 13.72 423 5.0 years 9.65
13.73 - 20.42 435 5.2 years 15.94
20.43 - 27.13 31 4.5 years 22.84
-----
$ 0.30 - $27.13 1,018 5.2 years $12.31
=====
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 may 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. Prior to November 1, 1998, the
applicable shares of common stock could 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. Shares are
purchased through payroll deductions of up to 10% of each participating
employee's gross wages. During fiscal 1998 and 1997, the Company issued 1,990
shares and 17,068 shares of its common stock, respectively, under this plan. No
shares were issued by the Company in fiscal 1999. The Company's employee stock
purchase program was terminated effective October 31, 1999. Employees are
eligible to participate in Thermo Electron's employee stock purchase program
beginning November 1, 1999.
19
<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:
(In thousands except per share amounts) 1999 1998 1997
- -------------------------------------------------------------------- ------------ ------------ -----------
Net Income (Loss):
As reported $(123,828) $ (2,613) $ 8,441
Pro forma (125,680) (4,229) 7,346
Basic Earnings (Loss) per Share:
As reported (6.24) (.14) .44
Pro forma (6.33) (.23) .38
Diluted Earnings (Loss) per Share:
As reported (6.24) (.14) .43
Pro forma (6.33) (.23) .37
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 $4.19,
$9.42, and $12.17 in fiscal 1999, 1998, and 1997, 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:
1999 1998 1997
- -------------------------------------------------------------------- ------------ ------------ -----------
Volatility 43% 41% 37%
Risk-free Interest Rate 4.7% 5.6% 6.1%
Expected Life of Options 4.8 years 4.9 years 5.8 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.
20
<PAGE>
ThermoTrex Corporation 1998 Financial Statements
Notes to Consolidated Financial Statements
5. Employee Benefit Plans (continued)
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 $2,252,000, $1,954,000, and
$1,558,000 in fiscal 1999, 1998, and 1997, respectively.
6. Income Taxes
The components of income (loss) before income taxes, minority interest,
and extraordinary item are as follows:
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------- ------------- ------------- -------------
Domestic $(142,601) $ 16,624 $ 10,618
Foreign 180 (33) -
--------- --------- ----------
$(142,421) $ 16,591 $ 10,618
========= ========= ==========
The components of the income tax (provision) benefit are as follows:
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------- ------------- ------------- -------------
Currently Refundable (Payable):
Federal $ 7,131 $ (7,003) $ (8,146)
State (609) (2,051) (2,861)
Foreign (681) (132) -
-------- -------- ---------
5,841 (9,186) (11,007)
-------- -------- ---------
(Deferred) Prepaid, Net:
Federal 4,639 (7,797) 7,333
State 207 (480) 200
-------- -------- ---------
4,846 (8,277) 7,533
-------- -------- ---------
$ 10,687 $(17,463) $ (3,474)
======== ======== =========
The Company receives a tax deduction upon exercise of nonqualified stock
options by its 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
and $3,999,000 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 and 1997,
respectively.
21
<PAGE>
6. Income Taxes (continued)
The income tax (provision) benefit in the accompanying statement of
operations differs from the (provision) benefit calculated by applying the
statutory federal income tax rate of 35% to income (loss) before income taxes,
minority interest, and extraordinary item due to the following:
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------- ------------- ------------- -------------
Income Tax (Provision) Benefit at Statutory Rate $ 49,847 $ (5,807) $ (3,716)
(Increases) Decreases Resulting from:
Increase in valuation allowance (40,196) (17,764) -
Gain on issuance of stock by subsidiaries - 8,329 2,774
State income taxes, net of federal tax 1,529 (1,645) (1,730)
Amortization of cost in excess of net assets of acquired (1,352) (1,024) (730)
companies
Write-off of acquired technology - - (490)
Research and development tax credits 750 972 -
Other 109 (524) 418
-------- -------- --------
$ 10,687 $(17,463) $ (3,474)
======== ======== ========
Prepaid and deferred income taxes in the accompanying balance sheet
consist of the following:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1999 1998
- ------------------------------------------------------------------------------ ------------- -------------
Prepaid (Deferred) Income Taxes:
Inventory basis differences $ 7,932 $ 2,875
Accruals and other reserves 15,205 7,308
Net operating loss carryforwards 50,887 22,462
Accrued compensation 1,376 827
Other, net 2,646 (1,769)
------- --------
78,046 31,703
Less: Valuation allowance 64,329 24,133
------- --------
$13,717 $ 7,570
======= ========
The valuation allowance relates primarily to loss carryforwards at
ThermoLase and increased in fiscal 1999 due to operating losses at ThermoLase
and, to a lesser extent, at Trex Medical. During fiscal 1998, ThermoLase
established a valuation allowance totaling $5,879,000 for previously benefited
loss carryforwards. ThermoLase took this action as a result of increased
operating losses, uncertainty concerning its ability to successfully convert its
existing spas to Greenhouse day spas (Note 8), and resulting uncertainty
concerning realization of the tax asset. Based on these factors, the Company
concluded in fiscal 1998 that it was more likely than not that the tax benefit
from ThermoLase's loss carryforwards would not be realized. As of October 2,
1999, the Company and its subsidiaries had approximately $134,000,000 of federal
tax net operating loss carryforwards that will begin to expire in fiscal 2005
and $35,000,000 of state loss carryforwards.
In June 1999, Thermo Electron's equity ownership of the Company increased
to in excess of 80%, and as a result, the Company will be included in Thermo
Electron's consolidated federal income tax return for periods thereafter. The
majority of the existing tax loss carryforwards of the Company and its
subsidiaries were generated at a
22
<PAGE>
6. Income Taxes (continued)
time when they were not in a consolidated tax group with Thermo Electron. The
Company's ability to obtain a benefit for such tax loss carryforwards is
dependent on the level of future taxable income of the Company and its
subsidiaries. Tax losses incurred by the Company and its subsidiaries after they
became part of a consolidated tax group with Thermo Electron in June 1999 may be
usable by Thermo Electron under certain circumstances, and the Company and its
subsidiaries will be paid by Thermo Electron for the use of such tax losses
pursuant to tax allocation agreements with Thermo Electron. Such payments are
reflected as contributions to shareholders' investment. ThermoLase has recorded
a receivable of $720,000 from Thermo Electron as of October 2, 1999, for the tax
benefit resulting from approximately $2,000,000 of losses generated by
ThermoLase subsequent to being included in the Thermo Electron consolidated tax
group.
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 subsidiaries tax-free.
As of July 1999, the Company and ThermoLase joined the Thermo Electron
consolidated federal income tax return as Thermo Electron's stock ownership in
the Company and the combined Thermo Electron and Company ownership of ThermoLase
exceeded 80%. As a result, Thermo Electron charges or pays the Company and
ThermoLase amounts based on their relative contribution to Thermo Electron's tax
liability.
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. For these services, the Company was
charged $2,769,000, $2,906,000, and $2,821,000 in fiscal 1999, 1998, and 1997,
respectively. The 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.
Notes Payable to Parent Company
In September 1996, the Company borrowed $2,000,000 from Thermo Electron
pursuant to a 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.
Long-term Obligations
Thermo Electron purchased $3,725,000 principal amount of ThermoLase
debentures in fiscal 1999, and $10,000,000 and $4,500,000 principal amount of
Company and ThermoLase debentures in fiscal 1998, respectively (Note 9).
23
<PAGE>
7. Related-party Transactions (continued)
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 1999,
1998, and 1997, Trex Medical recorded $43,000, $406,000, and $37,000,
respectively, of revenues under this arrangement.
ThermoTrex developed imaging crystals for ThermoSpectra Corporation, a
majority-owned subsidiary of Thermo Electron. During fiscal 1999 and 1998,
ThermoTrex recorded revenues of $317,000 and $17,000, respectively, associated
with this work. In addition, ThermoTrex performs research for Thermo Coleman
Corporation, a majority-owned subsidiary of Thermo Electron. During fiscal 1999,
ThermoTrex recorded $119,000 of such revenues.
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 were received through fiscal 1999. During fiscal
1999, 1998, and 1997, Trex Medical purchased high-transmission cellular grids
valued at $1,352,000, $486,000, and $678,000, 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.
Cash Management
The Company invests excess cash in arrangements with Thermo Electron as
discussed in Note 1.
8. Restructuring and Related Costs
During fiscal 1999, the Company announced broad-scale restructuring
actions. In connection with these actions, described below, the Company recorded
restructuring and related costs of $100.2 million in fiscal 1999, including
restructuring and nonrecurring costs of $76.6 million, inventory and warranty
provisions of $16.2 million, provisions for uncollectible accounts receivable of
$1.6 million, and other nonoperating expenses of $5.7 million. The inventory and
warranty provisions are included in cost of product revenues and the provisions
for uncollectible accounts receivable are included in selling, general, and
administrative expenses in the accompanying fiscal 1999 statement of operations.
The following table summarizes the restructuring and related costs by
segment:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Fiscal 1999 Medical Personal-care Advanced
(In thousands) Products Products and Technology
Services Research Corporate Total
- ------------------------------------ ------------- ------------- ------------- -------------- ------------
Cost of Product Revenues $ 13,905 $ 2,323 $ - $ - $ 16,228
Selling, General, and - 1,649 - - 1,649
Administrative Expenses
Restructuring and Other Nonrecurring 9,890 62,790 3,400 540 76,620
Costs
Other Expense - 3,399 - 2,267 5,666
-------- -------- -------- --------- --------
$ 23,795 $ 70,161 $ 3,400 $ 2,807 $100,163
======== ======== ======== ========= ========
24
<PAGE>
8. Restructuring and Related Costs (continued)
Trex Medical
During fiscal 1999, Trex Medical recorded $23.8 million of restructuring
and related costs, including restructuring costs of $9.9 million and inventory
and warranty provisions of $13.9 million. The restructuring costs are primarily
in connection with the consolidation of Trex Medical's Bennett X-Ray Corporation
and Continental X-Ray Corporation facilities into its Danbury, Connecticut, and
Littleton, Massachusetts, sites and, to a lesser extent, actions to reduce costs
in other operations. Restructuring costs include $2.3 million for
facility-closing costs, net of assumed sublease income; $2.0 million to write
off leasehold improvements at facilities to be closed and to write down fixed
assets to their estimated disposal value; $2.9 million for severance for 348
employees across all functions, 169 of whom were terminated in fiscal 1999; $1.3
million of costs relating to the consolidation and relocation of facilities,
which were recorded in the period in which they were incurred; $1.1 million for
retention bonuses that were earned; and $0.3 million for the loss on the sale of
a business.
In connection with these actions, Trex Medical expects to record
approximately $2.2 million of additional costs as they are incurred over the
first half of fiscal 2000 for costs not permitted currently as charges, pursuant
to EITF 94-3. These additional costs primarily include costs for certain
employee and business relocation and related costs.
The inventory and warranty charge of $13.9 million includes $10.2 million
to establish inventory provisions and $1.1 million to terminate purchase
commitments for products that have become obsolete due to planned product
changes or excess as a result of the recent decline in demand. The largest
component of the inventory charge was recorded as a result of the August 1999
decision by the United States Food and Drug Administration (FDA) to deny Trex
Medical's 510(k) filing for its digital mammography systems and resulting design
changes expected to be made to the system. Provisions resulting from other
planned product and technology changes, as well as decreased sales of certain
products at Trex Medical's Lorad division, are also principal components of the
inventory charge. The warranty charge of $2.6 million represents estimated costs
to address certain product warranty issues including costs associated with
corrective actions to be taken with respect to certain previously sold
mammography products.
The Company's Medical Products segment recorded restructuring charges for
its restructuring plans as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Facility-
closing
(In thousands) Severance Costs Other (b) Total
- ----------------------------------------------- -------------- -------------- -------------- -------------
Balance at October 3, 1998 $ - $ - $ - $ -
Provision charged to expense in fiscal 1999 (a) 2,947 2,250 2,358 7,555
Usage in fiscal 1999 (1,952) - (1,879) (3,831)
Currency translation (22) - - (22)
------- ------- ------- -------
Balance at October 2, 1999 $ 973 $ 2,250 $ 479 $ 3,702
======= ======= ======= =======
(a) Excludes warranty provisions of $2.6 million, noncash inventory provisions
of $10.2 million, and $1.1 million for termination of purchase commitments,
all of which were included in cost of revenues, and other noncash charges of
$2.0 million for an asset write-down and $0.3 million for the loss on the
sale of a business.
(b) Includes provisions in fiscal 1999 of $1.3 million for
facilities-consolidation costs incurred during the period and $1.1 million
for retention bonuses.
Trex Medical intends to complete implementation of its restructuring plan
in the first half of fiscal 2000. The aggregate future cash expenditures for
restructuring will include amounts accrued at October 2, 1999, as well as future
costs that will be incurred in fiscal 2000. These amounts totaled $5.9 million,
of which $4.4 million will be paid during fiscal 2000, and the balance will be
paid over the term of facility leases expiring through 2005.
25
<PAGE>
8. Restructuring and Related Costs (continued)
ThermoLase
During fiscal 1998, ThermoLase initiated certain restructuring activities,
including the announced closure of three domestic spas and the termination of a
joint venture that operated its spa in France following unsuccessful efforts to
reduce significant operating losses at these facilities. Two of the domestic
spas were closed during the first quarter of fiscal 1999. ThermoLase closed the
third spa, as well as two additional spas, in the third quarter of fiscal 1999.
Also during fiscal 1999, ThermoLase sold its remaining nine day spas, as well as
the stock in its destination spa, The Greenhouse Spa, as a result of concluding
that ThermoLase would be unable to operate these facilities profitably. In
connection with the sale and closures announced in fiscal 1999, as well as other
actions, ThermoLase recorded restructuring and related costs of $67.7 million
during fiscal 1999, including restructuring costs of $60.3 million, an
investment write-down of $3.4 million, inventory provisions of $2.3 million, and
provisions for uncollectible accounts receivable of $1.6 million. The
restructuring costs include a $19.9 million loss on the sale of the spa
business, discussed below; $17.4 million for the write-off of leasehold
improvements and equipment pertaining to the hair-removal business; $11.7
million for ongoing lease obligations, net of assumed sublease income; $10.0
million of estimated costs to terminate certain other obligations related to
ThermoLase's hair-removal business (primarily payments to licensees and joint
venture partners to sever relationships and terminate all existing
arrangements); $0.4 million for losses on laser purchase commitments; $0.3
million for the write-downs of investments in international joint ventures; and
$0.4 million for other related costs. The fiscal 1999 restructuring charges are
net of a reduction of $1.2 million in the cost of the fiscal 1998 restructuring
plan, principally due to the favorable resolution of certain lease obligations.
In addition, fiscal 1999 restructuring costs include $0.2 million of severance
costs for 26 employees across all functions, 23 of whom were terminated during
fiscal 1999. The fiscal 1999 restructuring actions commenced in June 1999, and
are expected to be substantially completed by the middle of calendar 2000.
Provisions for severance and leases were accounted for in accordance with
EITF 94-3. The inventory provisions were for certain branded product lines at
ThermoLase's Creative Beauty Innovations, Inc. subsidiary that have been
discontinued, and the investment write-down was to reduce the carrying value of
ThermoLase's investment in a privately held company to its estimated realizable
value. The accounts receivable write-down resulted principally from certain
international receivables that the Company deems uncollectible due to the
decision to cease certain international operations and, to a lesser extent, from
the bankruptcy of a retail chain customer of CBI. The fiscal 1999 restructuring
actions commenced in June 1999 and are expected to be completed by the middle of
calendar 2000.
During fiscal 1998, restructuring costs recorded by ThermoLase totaled
$10.2 million. These costs consist of $4.6 million related to the closure of
three domestic Spa Thira locations, including $2.4 million for the write-off of
leasehold improvements and related spa assets and $2.2 million primarily for
abandoned-facility payments, net of assumed sublease income. In addition, in
connection with the closure of its spa in France, which operated under a joint
venture agreement, ThermoLase recorded costs of $3.6 million, including payments
of $2.3 million to third parties to liquidate the joint venture and $1.3 million
to write off its remaining investment. Restructuring costs also include $1.9
million related to certain actions including the relocation of ThermoLase's
corporate office to its CBI subsidiary in Carrollton, Texas. This amount
primarily represents severance of $1.1 million for 40 terminated employees and
the write-off of fixed assets no longer of use. The fiscal 1998 restructuring
actions commenced in June 1998, and were completed during the first quarter of
fiscal 2000. The fiscal 1998 restructuring plan was completed for $1.2 million
less than had been accrued, primarily as a result of a favorable settlement of
certain lease obligations. These charges recorded by ThermoLase in fiscal 1999
and 1998 were substantially noncash except for amounts recorded as accrued
restructuring costs.
26
<PAGE>
8. Restructuring and Related Costs (continued)
A summary of the Company's Personal-care Products and Services segment
accrued restructuring costs is as follows:
(In thousands) Abandonment Other
of Excess Exit
Severance Facilities Obligations Total
- --------------------------------------------------- ----------- ------------- -------------- -------------
Fiscal 1998 Restructuring Plan
Provision charged to expense in fiscal 1998 (a) $ 1,169 $ 2,399 $ 2,394 $ 5,962
Fiscal 1998 usage (757) - (52) (809)
------- ------- ------- -------
Balance at October 3, 1998 412 2,399 2,342 5,153
Fiscal 1999 usage (412) (1,258) (2,216) (3,886)
Transfer to fiscal 1999 restructuring - (1,141) (76) (1,217)
plan principally due to favorable
resolution of lease obligations
------- ------- ------- -------
Balance at October 2, 1999 $ - $ - $ 50 $ 50
======= ======= ======= =======
Fiscal 1999 Restructuring Plan
Transfer from fiscal 1998 restructuring $ - $ 1,141 $ 76 $ 1,217
plan principally due to favorable
resolution of lease obligations
Provision charged to expense in fiscal 1999 (b) 157 11,728 10,400 22,285
Fiscal 1999 usage (58) (1,870) (2,783) (4,711)
------- ------- ------- -------
Balance at October 2, 1999 $ 99 $10,999 $ 7,693 $18,791
======= ======= ======= =======
(a) Excludes noncash restructuring charges of $2.9 million, primarily for the
write-off of leasehold improvements and related spa assets and $1.3 million
for the write-off of an investment in a joint venture.
(b) Excludes noncash charges of $19.9 million for the loss on the sale of the
spa business, $17.3 million for the write-off of leasehold improvements and
equipment, and $0.3 million for the write-downs of investments in
international joint ventures. Excludes noncash charges of $0.4 million for
other related costs and $0.1 million for the write-off of equipment no
longer of use.
Of the total restructuring costs accrued as of October 2, 1999, ThermoLase
expects to pay $10.0 million in fiscal 2000, and $8.8 million in fiscal 2001 and
thereafter through the expiration of various leases in fiscal 2014. The timing
of these cash payments will be affected by the terms of any subleases or
settlement arrangements with landlords.
Other
During fiscal 1999, the Company recorded restructuring and nonrecurring
costs of $5.9 million, representing a write-off of cost in excess of net assets
of acquired companies. Of the total write-off, $3.4 million was recorded by the
Advanced Technology segment and results from a decision to hold for sale its
Trex Communications subsidiary and represents a reduction in the carrying value
of Trex Communications to the amount of expected proceeds from its sale. Trex
Communications had unaudited revenues and operating income before restructuring
costs of $49.6 million and $1.6 million, respectively, in fiscal 1999. Trex
Communications will require significant investment to grow its
27
<PAGE>
8. Restructuring and Related Costs (continued)
business. The Company has decided not to pursue such growth and to focus on its
remaining businesses. The balance of the write-off was recorded by the
Personal-care Products and Services segment and represents cost in excess of net
assets of acquired companies that arose from repurchases of ThermoLase common
stock by the Company. This asset has become impaired as a result of continuing
losses at ThermoLase's spa business which it exited in June 1999.
Also in fiscal 1999, the Company provided a reserve of $2.3 million for
impairment of a note receivable from an unaffiliated company. This amount is
included in other expense in the accompanying statement of operations. In fiscal
1999, the Company also incurred $0.5 million of restructuring costs at its
corporate office.
9. 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 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 2,
1999, $88,948,000 principal amount of these debentures remained outstanding.
In August 1997, ThermoLase issued and sold at par value $115,000,000
principal amount of 4 3/8% subordinated convertible debentures due 2004 (Note
16). 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.
In addition, at fiscal year-end 1999 and 1998, Trex Medical had other
borrowings of $554,000 and $1,066,000, respectively.
The annual requirements for long-term obligations as of October 2, 1999,
are $397,000 in fiscal 2000; $46,000 in fiscal 2001; $47,000 in fiscal 2002;
$26,000 in fiscal 2003; $115,028,000 in fiscal 2004; and $89,024,000 in fiscal
2005 and thereafter. Total requirements of long-term obligations are
$204,568,000.
See Note 12 for fair value information pertaining to the Company's
long-term obligations.
10. Commitments and Contingencies
Operating Leases
The Company leases portions of its office and operating facilities under
various operating lease arrangements. The accompanying statement of operations
includes expenses from these operating leases of $9,053,000, $9,923,000, and
$6,288,000 in fiscal 1999, 1998, and 1997, respectively. Future minimum payments
due under noncancellable operating leases as of October 2, 1999, are $6,616,000
in fiscal 2000; $6,471,000 in fiscal 2001; $6,466,000 in fiscal 2002; $6,488,000
in fiscal 2003; $5,661,000 in fiscal 2004; and $20,550,000 in fiscal 2005 and
thereafter. Total future minimum lease payments are $52,252,000, of which
$21,798,000 relates to lease payments for the spas that have been closed and
sold, for which ThermoLase will be responsible in the event that the buyer of
the Greenhouse day spas does not continue to sublease these facilities. This
amount, net of assumed sublease receipts, is included in other accrued expenses
in the accompanying fiscal 1998 balance sheet (Note 8).
Technology License Agreement
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.
28
<PAGE>
10. Commitments and Contingencies (continued)
Purchase Commitments
During fiscal 1999, Trex Medical entered into certain purchase commitments
aggregating $5,535,000, of which $820,000 is payable in calendar 1999,
$3,080,000 in calendar 2000, and $1,635,000 in calendar 2001.
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. In the opinion of management, these contingencies will not have a
material adverse effect upon the financial position of the Company or its
operations.
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 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.
See Note 3 for a discussion of certain other litigation.
The Company intends to vigorously defend itself against these lawsuits and
counterclaims. 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.
11. 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.
The Company's percentage ownership of its majority-owned subsidiaries at
fiscal year-end was as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
- ------------------------------------------------------------------------------------- ------ ------- -----
ThermoLase 71% 71% 67%
Trex Medical 71% 67% 79%
Trex Communications 69% 73% 78%
29
<PAGE>
12. Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, advance to affiliate, available-for-sale investments, accounts
receivable, current maturities of long-term obligations, 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 $148,666,000 and $162,870,000 at
fiscal year-end 1999 and 1998, respectively. The fair value is less than the
carrying amount in both periods, primarily due to a decrease in the market price
of the Company's and ThermoLase's 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 $34,750,000 and $30,750,000 at fiscal year-end 1999
and 1998, respectively.
13. Business Segments, Geographical Information, and Significant Customer
The Company's businesses operate in three business segments: Medical
Products, Personal-care Products and Services, and Advanced Technology Research.
The Medical Products segment includes Trex Medical, which develops and
manufactures mammography equipment, minimally invasive digital breast-biopsy
equipment, general-purpose and specialized medical X-ray equipment, and dental
X-ray systems. The Personal-care Products and Services segment includes
ThermoLase, which manufactures and markets skin-care and other personal-care
products, and has marketed hair-removal services and skin-resurfacing services,
and licensed the SoftLight hair-removal system to physicians in the U.S. and to
international licensees. Prior to the sale of the Greenhouse spas in June 1999,
ThermoLase provided hair-removal and skin resurfacing, as well as more
traditional day spa services, through its spa locations (Note 3). During fiscal
1999, ThermoLase began the process of terminating its physician-licensing
program, and terminated or renegotiated the terms of its joint ventures and
licensing arrangements in various countries. The Advanced Technology Research
segment, which includes Trex Communications and the Company's wholly owned
subsidiary, performs advanced technology research, focusing on the areas of
avionics, X-ray detection, signal processing, and lasers. Trex Communications
develops and manufactures ground-based satellite communications systems and
telemetry systems. Prior to the sale of CCS in December 1999, CCS provided
interactive information, voice-response systems, and call-automation systems
(Note 18).
30
<PAGE>
13. Business Segments, Geographical Information, and Significant Customer (continued)
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------------- ----------- ----------- -----------
Business Segment Information
Revenues:
Medical Products $ 241,604 $ 266,964 $ 229,294
Personal-care Products and Services 36,255 40,091 45,233
Advanced Technology Research 72,294 41,351 21,250
Intersegment sales elimination (a) (4,006) (6,548) (13,656)
--------- --------- ---------
$ 346,147 $ 341,858 $ 282,121
========= ========= =========
Income (Loss) Before Income Taxes, Minority Interest, and
Extraordinary Item:
Medical Products (b) $ (37,792) $ 29,153 $ 24,147
Personal-care Products and Services (c) (87,400) (31,770) (18,402)
Advanced Technology Research (d) (1,417) (1,488) (1,345)
Corporate (e) (6,852) (5,362) (4,925)
--------- --------- ---------
Total operating loss (133,461) (9,467) (525)
Interest and other income (expense), net (f) (8,960) 26,058 11,143
--------- --------- ---------
$(142,421) $ 16,591 $ 10,618
========= ========= =========
Total Assets:
Medical Products $ 277,027 $ 342,521 $ 229,437
Personal-care Products and Services 39,750 127,460 167,339
Advanced Technology Research 77,574 47,712 34,168
Corporate and eliminations (g) 89,004 78,013 19,173
--------- --------- ---------
$ 483,355 $ 595,706 $ 450,117
========= ========= =========
Depreciation and Amortization:
Medical Products $ 8,531 $ 7,323 $ 6,292
Personal-care Products and Services 4,632 5,759 3,799
Advanced Technology Research 3,580 1,964 873
Corporate 65 65 -
--------- --------- ---------
$ 16,808 $ 15,111 $ 10,964
========= ========= =========
Capital Expenditures:
Medical Products $ 4,074 $ 4,503 $ 5,461
Personal-care Products and Services 5,095 4,033 20,285
Advanced Technology Research 5,464 2,076 1,107
--------- --------- ---------
$ 14,633 $ 10,612 $ 26,853
========= ========= =========
31
<PAGE>
ThermoTrex Corporation 1998 Financial Statements
Notes to Consolidated Financial Statements
13. Business Segments, Geographical Information, and Significant Customer (continued)
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------------- ----------- ----------- -----------
Geographical Information
Revenues (h):
United States $ 282,998 $ 319,684 $ 282,121
France 36,294 19,163 -
Other 26,855 3,011 -
--------- --------- ----------
$ 346,147 $ 341,858 $ 282,121
========= ========= ==========
Long-lived Assets (i):
United States $ 23,485 $ 62,000 $ 57,357
France 1,650 1,821 -
Other 774 687 -
--------- --------- ----------
$ 25,909 $ 64,508 $ 57,357
========= ========= ==========
Export Revenues Included in United States Revenues Above (j) $ 39,793 $ 52,678 $ 43,208
========= ========= ==========
(a) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(b) Reflects restructuring and related costs of $23.8 million in fiscal 1999.
(c) Reflects restructuring and related costs of $66.8 million and $10.2 million
in fiscal 1999 and 1998, respectively (Note 8).
(d) Reflects restructuring costs of $3.4 million at Trex Communications in
fiscal 1999 and the write-off in fiscal 1997 of $1.4 million of acquired
technology related to the acquisition of CCS.
(e) Primarily general and administrative expenses, and in fiscal 1999 reflects
restructuring costs of $0.5 million.
(f) Reflects nonrecurring costs of $5.7 million.
(g) Primarily cash and cash equivalents and available-for-sale investments. (h)
Revenues are attributable to countries based on selling location. (i) Includes
property, plant, and equipment, net and other long-term tangible assets.
(j) 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 one-time fee of $4.7
million 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. Trex Medical did not have sales to the customer after fiscal
1998.
14. Comprehensive Income
During the first quarter of fiscal 1999, the Company adopted SFAS 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.
32
<PAGE>
14. Comprehensive Income (continued)
Accumulated other comprehensive items in the accompanying balance sheet
consists of:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1999 1998
- ---------------------------------------------------------------------------- ---------------- ------------
Cumulative Translation Adjustment $(1,522) $2,064
Net Unrealized Gains (Losses) on Available-for-sale Investments 3 (6)
------- ------
$(1,519) $2,058
======= ======
15. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands except per share amounts) 1999 1998 1997
- ---------------------------------------------------------------- ------------- -------------- ------------
Basic
Net Income (Loss) $(123,828) $ (2,613) $ 8,441
--------- --------- ---------
Weighted Average Shares 19,851 18,704 19,210
--------- --------- ---------
Basic Earnings (Loss) per Share $ (6.24) $ (.14) $ .44
========= ========= =========
Diluted
Net Income (Loss) $(123,828) $ (2,613) $ 8,441
Effect of Majority-owned Subsidiaries' Dilutive - (96) (73)
--------- --------- ---------
Securities
Income (Loss) Available to Common Shareholders, as Adjusted $(123,828) $ (2,709) $ 8,368
--------- ---------- ---------
Weighted Average Shares 19,851 18,704 19,210
Effect of Stock Options - - 389
--------- ---------- ---------
Weighted Average Shares, as Adjusted 19,851 18,704 19,599
--------- --------- ---------
Diluted Earnings (Loss) per Share $ (6.24) $ (.14) $ .43
========= ========= =========
Options to purchase 1,099,000, 1,135,000, and 69,000 shares of common
stock were not included in the computation of diluted earnings (loss) per share
for fiscal 1999, 1998, and 1997, respectively, because their effect would have
been antidilutive due to the options' exercise prices exceeding the average
market price for the common stock and, in fiscal 1999 and 1998, due to the
Company's net loss position in certain quarters. In addition, the computation of
diluted earnings per share for all periods 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, because the effect
would be antidilutive.
An extraordinary gain recorded by the Company reduced basic and diluted
loss per share by $.16 in fiscal 1998 (Note 9).
33
<PAGE>
16. Proposed Reorganization
Thermo Electron has announced a proposed reorganization involving certain
of Thermo Electron's subsidiaries, including the Company and ThermoLase. Under
this plan, the Company and ThermoLase would be merged into Thermo Electron. As a
result, the Company and ThermoLase would become wholly owned subsidiaries of
Thermo Electron. The public shareholders of the Company and ThermoLase would
receive common stock in Thermo Electron in exchange for their shares. In
December 1999, the board of directors of the Company and Thermo Electron
approved a definitive agreement and plan of merger with Thermo Electron under
which Thermo Electron would acquire all of the outstanding shares of Company
common stock held by shareholders other than Thermo Electron in exchange for
Thermo Electron common stock at a ratio of one share of Company common stock for
.5503 shares of Thermo Electron common stock. In addition, the board of
directors of ThermoLase and Thermo Electron approved a definitive agreement and
plan of merger with Thermo Electron under which Thermo Electron would acquire
all of the outstanding shares of ThermoLase held by shareholders other than the
Company and Thermo Electron for not less than 0.132, and not more than 0.198
shares of Thermo Electron common stock. These proposals are subject to certain
conditions including the completion of review by the Securities and Exchange
Commission of certain required filings regarding the proposed transactions and
listing on the New York Stock Exchange of Thermo Electron common stock to be
issued in connection with the mergers.
In October 1999, the American Stock Exchange (the Exchange) notified
ThermoLase that if ThermoLase did not have a definitive agreement to merge with
Thermo Electron by December 15, 1999, the Exchange would request a meeting to
discuss its intent to proceed with delisting ThermoLase's shares from the
Exchange due to a possible failure to meet listing requirements. Holders of
ThermoLase's subordinated convertible debentures would be entitled to have their
debentures redeemed by ThermoLase if ThermoLase's shares are neither listed for
trading on a United States national securities exchange nor approved for trading
on an established automated over-the-counter trading market in the United
States. As a result of the agreement to merge with Thermo Electron, described
above, ThermoLase expects that its shares will continue to be listed through the
completion of the merger transaction. Accordingly, the Company has classified
the debentures as long-term in the accompanying fiscal 1999 balance sheet.
34
<PAGE>
17. Unaudited Quarterly Information
</TABLE>
<TABLE>
<CAPTION>
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
1999 First (a) Second (b) Third (c) Fourth (d)
- ----------------------------------------------------------- ----------- ----------- ----------- ----------
Revenues $ 87,144 $ 86,388 $ 91,868 $ 80,747
Gross Profit 27,761 23,724 12,320 22,292
Net Loss (10,204) (11,375) (95,111) (7,138)
Basic and Diluted Loss per Share: (.55) (.61) (4.82) (.32)
1998 First Second (e) Third (f) Fourth (g)
- ----------------------------------------------------------- ----------- ----------- ----------- ----------
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)
(a) Reflects the November 1998 acquisition of LNR.
(b) Reflects restructuring costs of $1.1 million.
(c) Reflects restructuring and nonrecurring costs of $93.9 million.
(d) Reflects restructuring and nonrecurring costs of $5.2 million.
(e) Results include a nontaxable gain of $23.8 million from the issuance of
stock by a subsidiary.
(f) Reflects the April 1998 acquisition of Trophy.
(g) Reflects restructuring costs of $10.2 million, the establishment of a tax
valuation allowance, and the effect of an extraordinary gain of $3.0
million, which reduced basic and diluted loss per share by $.16.
18. Subsequent Events
Purchase of Minority Interest
In November 1999, the Company agreed to purchase the outstanding shares of
Trex Communications that it did not already own for $4.00 per share. The Company
expects that the total cash outlay for purchasing the minority interest in Trex
Communications as well as settling an obligation to deliver cash or shares of
Trex Communications in connection with a fiscal 1999 acquisition (Note 3) will
be approximately $18 million.
Sale of Subsidiary
In December 1999, the Company sold the CCS subsidiary of Trex
Communications for approximately $8,000,000 in cash and a $2,000,000 note
receivable due in December 2004, with an interest rate equal to the prime
lending rate, payable quarterly. The sale is subject to a post-closing
adjustment based on a determination of net working capital of CCS at the date of
sale.
35
<PAGE>
ThermoTrex Corporation 1999 Financial Statements
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 80%-owned subsidiary of Thermo Electron
Corporation) and subsidiaries as of October 2, 1999, and October 3, 1998, the
related consolidated statements of operations, cash flows, and comprehensive
income and shareholders' investment for each of the three years in the period
ended October 2, 1999. 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 2, 1999, and October 3, 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended October 2, 1999, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
November 9, 1999 (except with respect to the matters
discussed in Notes 3, 16, and 18, as to which the date is December 16, 1999)
36
<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 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 X-ray equipment; and dental X-ray systems. Trex Medical, through its
Trophy Radiologie subsidiary, which was acquired in fiscal 1998, manufactures
digital and conventional dental X-ray systems. Trophy is based just outside
Paris.
During fiscal 1999, Trex Medical experienced a decline in business due to
the loss of an original equipment manufacturer (OEM) customer and lower demand
for its products resulting from a decline in the radiographic market, and a
decline in sales of cardiac catheterization systems. In response, Trex Medical
initiated certain restructuring activities in fiscal 1999, including
consolidation of manufacturing facilities and headcount reductions to achieve
material cost improvements and focus on cost efficiencies (Note 8). In
connection with these actions, Trex Medical expects to record approximately $2.2
million of additional costs as they are incurred over the first half of fiscal
2000 for costs not permitted as charges currently, pursuant to the requirements
of Emerging Issues Task Force Pronouncement No. 94-3. These additional costs
primarily include costs for certain employee and business relocation and related
costs. Trex Medical plans to complete implementation of its restructuring plans
in the first half of fiscal 2000. Trex Medical estimates that it will achieve
operating savings of approximately $9 to $10 million in fiscal 2000 as a result
of the cost reductions. In addition to undertaking restructuring actions, Trex
Medical is in the process of reorganizing its product distribution channels by
consolidating and reassigning certain dealer relationships.
In August 1999, Trex Medical received notification from the United States
Food and Drug Administration (FDA) denying its 510(k) filing for its digital
mammography system. In September, Trex Medical received a letter from the FDA
indicating that the FDA believes that a pre-market approval (PMA) application,
followed by significant post-approval screening trials, may be the more viable
option for obtaining market clearance for digital mammography systems. A PMA is
generally more burdensome than a 510(k), because it applies to devices
considered to be of higher risk. In light of the FDA's letter, Trex Medical
continues to evaluate its options relating to marketing authorization. For
example, Trex Medical may incorporate the data that formed the basis of its
510(k) application into a PMA application for submission to the FDA. After such
submission, Trex Medical may implement various design and engineering changes
that may require additional preapproval clinical trials, but there can be no
assurance regarding the timing or results of the submission of a new filing to
the FDA or such clinical trials.
ThermoLase 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 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
37
<PAGE>
Overview (continued)
its fourteenth spa in October 1997. In May 1998, ThermoLase received clearance
from the FDA to market cosmetic skin-resurfacing services, known as the
SoftLight Laser Peel, using the same laser as ThermoLase's hair-removal system.
In June 1996, ThermoLase commenced a program to license to physicians and
others the right to perform ThermoLase'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 other 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 modified the terms and conditions
offered to licensees. Under the terms of the modified licenses, per-procedure
royalties were reduced or eliminated and a minimum royalty and/or flat periodic
fee requirement was introduced. In fiscal 1999, ThermoLase began offering
licensees the opportunity to purchase or lease SoftLight lasers in lieu of
paying ongoing license fees.
Beginning in January 1996, ThermoLase sought to market the SoftLight
system internationally through joint ventures and other licensing arrangements.
In connection with its June 1998 acquisition of The Greenhouse Spa, Inc.,
a full-service, luxury, destination spa (Note 3), ThermoLase converted 11
domestic Spa Thiras to Greenhouse day spas, which, in addition to hair-removal
and skin-resurfacing services, offered more traditional day-spa services, such
as massages and facials. Following conversion of the facilities to Greenhouse
day spas, significant losses continued and, during fiscal 1998, ThermoLase
initiated certain restructuring actions, including the announced closure of
three of its domestic day spas and the termination of a joint venture that
operated its spa in France. ThermoLase closed two of the domestic day spas in
November 1998 and the third spa, as well as two additional spas, were closed in
the third quarter of fiscal 1999. In May 1999, ThermoLase announced additional
plans to undertake a broad-scale restructuring of its business. As part of the
restructuring plan, ThermoLase decided to exit the spa business and, as a
result, sold The Greenhouse Spa, located in Arlington, Texas, and the remaining
nine Greenhouse day spas. In addition, ThermoLase has begun the process of
terminating the physician-licensing program, has terminated or renegotiated the
terms of its international joint ventures and licensing arrangements, and is
discontinuing certain branded product lines at ThermoLase's Creative Beauty
Innovations, Inc. (CBI) subsidiary (Note 8). ThermoLase expects to complete its
restructuring plan by the middle of calendar 2000.
ThermoLase manufactures and markets skin-care, bath and body products, and
markets dietary supplements through CBI. This business represents ThermoLase's
principal operations following the sale of the spas and the termination of
various licensing agreements.
The Company's Advanced Technology Research segment performs research
primarily in the fields 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. The Advanced
Technology Research segment includes the Company's Trex Communications
subsidiary. 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. As part of the
restructuring plans announced in May 1999, the Company has decided to hold its
Trex Communications subsidiary for sale (Note 8).
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<PAGE>
Overview (continued)
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 contracts to reduce its exposure to
currency fluctuations.
Thermo Electron has announced a proposed reorganization involving certain
of Thermo Electron's subsidiaries, including the Company and ThermoLase. Under
this plan, the Company and ThermoLase would be merged into and become wholly
owned subsidiaries of Thermo Electron (Note 16).
Results of Operations
Fiscal 1999 Compared With Fiscal 1998
Total revenues increased to $346.1 million in fiscal 1999 from $341.9
million in fiscal 1998. Medical Products segment revenues, excluding
intersegment sales, decreased to $238.2 million in fiscal 1999 from $264.1
million in fiscal 1998. Revenues increased $44.8 million as a result of the
inclusion for the full fiscal 1999 year of revenues from Trophy, which was
acquired in April 1998. Excluding Trophy, Medical Products segment revenues
decreased $70.7 million. Revenues primarily decreased due to the termination of
an OEM contract with U.S. Surgical, which accounted for $38.0 million of
revenues in fiscal 1998; due to lower demand for general purpose X-ray systems,
radiographic/fluoroscopic systems, and X-ray imaging systems; and the inclusion
in fiscal 1998 of an $9.0 million cardiac catheterization system sale to a
Russian customer. This decrease was offset in part by higher demand for
mammography systems and mammography system upgrade components. Trex Medical's
backlog at October 2, 1999, excluding intersegment orders, decreased to $45.6
million from $58.7 million at October 3, 1998, primarily due to an overall
decline in orders of its medical imaging products. As a result of the decline in
backlog and based on the volume of bookings in October and November 1999, Trex
Medical expects to report lower comparative sales and operating results in the
first quarter of fiscal 2000. Trex Medical believes that this decline in
business is due in part to the consolidation of facilities and a reorganization
of its distribution system; however, there can be no assurance that this trend
will not continue.
Personal-care Products and Services segment revenues were $36.3 million
and $40.1 million in fiscal 1999 and 1998, respectively. ThermoLase earned
service revenues of $10.2 million in fiscal 1999, compared with $17.3 million in
fiscal 1998. Spa revenues decreased primarily due to the sale and closure of
ThermoLase's Greenhouse day spas during fiscal 1999 (Note 8), as well as lower
demand and price reductions at ThermoLase's spas while they were in operation.
Revenues from ThermoLase's licensing program decreased in fiscal 1999, compared
with fiscal 1998, due to a reduction in the number of participating licensees, a
reduction in royalty rates and other changes to the financial terms of the
licenses, and a decrease in the number of one-time fees from new licensees.
During fiscal 1999, ThermoLase began to terminate its licensing program, and by
the end of calendar 1999 will no longer earn monthly royalties from licensees.
International revenues decreased due to a decline in minimum guaranteed payments
recorded upon granting technology rights under international licensing
arrangements. During fiscal 1999, ThermoLase terminated or renegotiated the
terms of its international licensing arrangements. These decreases in revenues
were offset in part by an increase in revenues of $2.2 million from The
Greenhouse Spa, acquired in June 1998, primarily due to increased demand for its
custom products. In June 1999, ThermoLase sold The Greenhouse Spa (Note 3).
ThermoLase earned product revenues of $26.1 million in fiscal 1999, compared
with $22.8 million in fiscal 1998. Product revenues include beauty product sales
at ThermoLase's spas and lasers sold in international and domestic markets.
Product revenues increased due to the introduction of sales of SoftLight lasers
in fiscal 1999, as well as an increase in sales of beauty products at the spas.
As a result of the sale of the spa business in June 1999, ThermoLase no longer
sells its beauty products at the spas. Product revenues increased, to a lesser
extent, due to increased demand for its custom products.
39
<PAGE>
Fiscal 1999 Compared With Fiscal 1998 (continued)
Advanced Technology Research segment revenues, excluding intersegment
sales, increased to $71.7 million in fiscal 1999 from $37.7 million in fiscal
1998. Revenues increased $32.3 million due to the inclusion of revenues from
EMP, which was acquired in May 1998, and LNR, which was acquired in November
1998. Revenues also increased due to an increase in government contracts.
The gross profit margin was 25% in fiscal 1999, compared with 38% in
fiscal 1998. The Medical Products segment gross profit margin, excluding
intersegment sales, decreased to 30% in fiscal 1999 from 43% in fiscal 1998.
Excluding inventory and warranty provisions of $13.9 million (Note 8) the gross
profit margin was 35% at the Medical Products segment in fiscal 1999. The gross
profit margin decreased primarily due to a lower contribution toward fixed costs
as a result of lower sales. The Personal-care Products and Services segment
gross profit margin, excluding intersegment sales, was negative 20% in fiscal
1999 compared with a gross profit margin of 9% in fiscal 1998. ThermoLase's
service revenues had a negative gross profit of $13.8 million in fiscal 1999,
compared with a negative gross profit of $5.0 million in fiscal 1998. This
decrease in gross profit was primarily due to increased overhead costs as a
result of the assembly of a management team to oversee the spa operations prior
to ThermoLase's decision to sell the spa business and increased spa-specific
marketing and advertising expenses related to ThermoLase's conversion of its
existing spas to Greenhouse day spas prior to their sale. To a lesser extent,
the gross profit margin decreased due to a reduction in higher-margin minimum
guaranteed payments relating to international licensing arrangements and initial
sign-up fees relating to the licensing program. ThermoLase's product revenues
had a gross profit margin of 21% in fiscal 1999, compared with 32% in fiscal
1998, primarily due to the write-off of inventory related to exiting certain
branded product lines (Note 8) and, to a lesser extent, changes in product mix.
The gross profit margin from the Advanced Technology Research segment, excluding
intersegment sales, decreased to 30% in fiscal 1999 from 37% in 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 30% in fiscal 1999 from 27% in fiscal 1998. The Medical Products
segment selling, general, and administrative expenses as a percentage of
revenues, excluding intersegment sales, increased to 29% in fiscal 1999 from 21%
in fiscal 1998, primarily due to the decrease in revenues from existing
businesses and the inclusion of a full year of expenses at Trophy, which has
higher costs as a percentage of revenues. The Personal-care Products and
Services segment selling, general, and administrative expenses decreased to
$16.1 million in fiscal 1999 from $22.3 million in fiscal 1998, primarily due
the ongoing cost-reduction efforts implemented by ThermoLase during the second
half of fiscal 1998. These efforts primarily included reductions in personnel.
This decrease was offset in part by a $1.6 million provision for uncollectible
accounts receivable (Note 8), principally for accounts receivable from parties
with whom ThermoLase is terminating business relationships.
Research and development expenses remained flat at $39.7 million in fiscal
1999 and $39.8 million in fiscal 1998. Research and development spending
increased primarily due to the inclusion of $5.2 million of expenses at acquired
companies, offset in part by reduced spending at Trex Medical primarily for
costs associated with full-field digital mammography while Trex Medical
evaluated the FDA's latest guidelines for product approval, and a $1.5 million
decrease at ThermoLase primarily due to a reduction in the number of outside
testing facilities and consultants used, as well as a reduction in payroll
costs.
During fiscal 1999, the Company undertook broad-scale restructuring
actions. As a result, the Company recorded restructuring and nonrecurring costs
of $76.6 million (Note 8). The Company expects to complete its restructuring
actions by the middle of fiscal 2000.
Interest income decreased to $5.8 million in fiscal 1999 from $12.9
million in fiscal 1998, primarily as a result of lower average invested balances
due in part to purchases of Company and subsidiary common stock and due to the
funding of losses at ThermoLase. Interest expense decreased to $8.7 million in
fiscal 1999 from $9.5 million in fiscal 1998, primarily due to the purchase by
the Company of a portion of its subordinated convertible debentures in the
fourth quarter of fiscal 1998.
40
<PAGE>
ThermoTrex Corporation 1999 Financial Statements
Forward-looking Statements
Fiscal 1999 Compared With Fiscal 1998 (continued)
The Company adopted a strategy of spinning out certain of its businesses
into separate subsidiaries and having these subsidiaries sell a minority
interest to outside investors. As a result of the sale of stock by subsidiaries,
the Company recorded a gain of $23.8 million in fiscal 1998 (Note 11). This gain
represents an increase in the Company's net investment in the subsidiaries and
is classified as "Gain on issuance of stock by subsidiaries" in the accompanying
statement of operations. 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 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.
Other expense in fiscal 1999 represents the write-down of an investment
held by ThermoLase to its net realizable value and a charge for impairment of a
note receivable (Note 8).
The effective tax rates reflect the establishment of a valuation allowance
for the tax benefit associated with losses arising primarily at ThermoLase and
to a lesser extent, Trex Medical, during fiscal 1999 and at ThermoLase during
fiscal 1998. The Company establishes valuation allowances in accordance with the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." The Company believes that it is more likely than not that tax
benefits that arose during these periods will not be used prior to their
expiration. The effective tax rate in fiscal 1998 exceeded the statutory federal
income tax rate primarily due to the ThermoLase valuation allowance and the
effect of state income taxes and certain nondeductible expenses, including
amortization of cost in excess of net assets of acquired companies, offset in
part by the impact of a nontaxable gain on issuance of subsidiary stock.
The Company recorded minority interest income of $7.9 million in fiscal
1999, compared with minority interest expense of $4.8 million in fiscal 1998,
primarily due to losses at Trex Medical in fiscal 1999. The Company is unable to
record minority interest income in ThermoLase's net loss because the Company's
minority interest related to ThermoLase has been reduced to zero.
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 10). 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 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
to a customer in Russia and, to a lesser extent, an increase in direct and
dealer sales of cardiac catheterization laboratories due to higher demand,
offset in part by a decrease in international sales of cardiac catheterization
laboratories to OEM customers due to shifting from OEM to direct and dealer
sales. In addition, increased sales occurred 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). These increases 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 an economic
crisis in the Far East and a decrease in sales of electrophysiology equipment.
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
41
<PAGE>
Fiscal 1998 Compared With Fiscal 1997 (continued)
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 in fiscal 1997. 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. Service revenues 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. 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
The Greenhouse Spa, 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 at
Trex Medical increased due to manufacturing efficiencies. 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 service revenues had negative gross profit of $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 attempted to develop its client
base, expand its product lines, and refine its operating procedures. 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. This
decrease in gross profit was offset in part by the effect of 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 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 of
$7.7 million at Trex Medical, offset in part by decreased spending at
ThermoLase. Trex Medical's increases reflect spending to develop and
commercialize new products, including the full-field digital mammography system
and direct-detection X-ray sensor, enhancing existing systems, and, to a lesser
extent, the inclusion of expenses at Trophy. 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 8). 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 (Note 8).
42
<PAGE>
Fiscal 1998 Compared With Fiscal 1997 (continued)
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.
As a result of the sale of stock by subsidiaries, the Company recorded a
gain of $23.8 million in fiscal 1998 (Note 11). This gain represents an increase
in the Company's net investment in the subsidiaries and is classified as "Gain
on issuance of stock by subsidiaries" in the accompanying statement of
operations.
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).
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.
The effective tax rate in fiscal 1998 also reflects the establishment of a
valuation allowance for the tax asset associated with previously benefited loss
carryforwards and the tax loss arising in fiscal 1998 at ThermoLase. The Company
establishes valuation allowances in accordance with the provisions of SFAS No.
109, "Accounting for Income Taxes." 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.
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.
Liquidity and Capital Resources
Consolidated working capital was $192.5 million at October 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 $83.7 million at
October 2, 1999, compared with $165.2 million at October 3, 1998. Of the $83.7
million balance at October 2, 1999, $9.5 million was held by the Company's
majority-owned subsidiaries, and the remainder was held by the Company and its
wholly owned subsidiary. In addition, as of October 2, 1999, the Company had
$39.0 million invested in an advance to Thermo Electron. Of the $39.0 million
balance, $28.9 million was advanced by the Company's majority-owned subsidiaries
and the remainder by the Company and its wholly owned subsidiaries. Prior to the
use of a new domestic cash management arrangement between the Company and Thermo
Electron Corporation, which became effective June 1999, amounts invested with
Thermo Electron were included in cash and cash equivalents.
Net cash used in operating activities during fiscal 1999 was $30.2
million. Cash was primarily used to fund the Company's loss, excluding noncash
items. A decrease in accounts receivable provided $20.5 million of cash during
the year, due primarily to lower revenues at Trex Medical and, to a lesser
extent, improved collections at the Advanced
43
<PAGE>
Liquidity and Capital Resources (continued)
Technology segment. Cash of $10.0 million was used by an increase in other
assets primarily as a result of an increase in prepaid and refundable income
taxes resulting from the tax benefit for the period. Cash of $14.3 million was
provided by an increase in other current liabilities, primarily due to
restructuring costs recorded during fiscal 1999, which were not paid as of
October 2, 1999 (Note 8). Of the total restructuring costs accrued as of October
2, 1999, as well as future costs that will be incurred in fiscal 2000, the
Company expects to pay $14.4 million in fiscal 2000 and $10.3 million in fiscal
2001 and thereafter through the expiration of various leases in fiscal 2014. The
timing of these cash payments will be affected by the terms of any subleases or
settlement arrangements with landlords. The Company expects to expend $2.0
million in the future for accrued acquisition expenses, including $1.6 million
in the first half of fiscal 2000 and the remainder over the term of leases
expiring primarily through fiscal 2001.
In connection with the acquisition of U.S. Surgical by Tyco International,
Ltd., and U.S. Surgical's decision to focus on other areas of its business, Trex
Medical has committed to purchase inventories that had been sold to U.S.
Surgical in prior periods. Estimated payments under the purchase obligation,
which aggregates approximately $5.5 million, are as follows: $3.9 million in
fiscal 2000 and $1.6 million in fiscal 2001.
Excluding available-for-sale investments and advance to affiliate
activity, the Company's primary investing activities consisted of an acquisition
and capital expenditures. The Company expended $18.8 million, net of cash
acquired, for an acquisition (Note 3). The Company expended $14.6 million for
property, plant, and equipment during fiscal 1999. The Company expects to make
capital expenditures of approximately $6.0 million during fiscal 2000.
In November 1999, the Company agreed to purchase the outstanding shares of
Trex Communications that it did not already own for $4.00 per share. The Company
expects that the total cash outlay for purchasing the minority interest in Trex
Communications as well as settling an obligation to deliver cash or shares of
Trex Communications in connection with a fiscal 1999 acquisition (Note 3) will
be approximately $18 million. In December 1999, the Company sold the CCS
subsidiary of Trex Communications for $8.0 million in cash and a $2.0 million
note receivable due in December 2004 (Note 18). The sale is subject to a
post-closing adjustment based on a determination of net working capital of CCS
at the date of sale. Also, subsequent to year end, Trex Medical sold a building
for $3.3 million in cash and a small operating division for $0.4 million in
cash.
The Company's financing activities provided $19.1 million of cash during
fiscal 1999. In June 1999, the Company sold shares of its common stock to Thermo
Electron for proceeds of $41.8 million. During this period, two of the Company's
majority-owned subsidiaries expended $24.1 million to purchase their own
securities. These purchases were funded from working capital. As of October 2,
1999, an additional $2.4 million may be purchased through December 1999 under a
subsidiary's authorization from its Board of Directors.
In October 1999, the American Stock Exchange (the Exchange) notified
ThermoLase that if ThermoLase did not have a definitive agreement to merge with
Thermo Electron by December 15, 1999, the Exchange would request a meeting to
discuss its intent to proceed with delisting ThermoLase's shares from the
Exchange due to a possible failure to meet listing requirements. Holders of
ThermoLase's subordinated convertible debentures would be entitled to have their
debentures redeemed by ThermoLase if ThermoLase's shares are neither listed for
trading on a United States national securities exchange nor approved for trading
on an established automated over-the-counter trading market in the United
States. As a result of the agreement to merge with Thermo Electron, described in
Note 16, ThermoLase expects that its shares will continue to be listed through
the completion of the merger transaction. Accordingly, the Company has
classified the debentures as long-term in the accompanying fiscal 1999 balance
sheet.
The Company believes its existing resources are sufficient to meet the
capital requirements of its existing operations for the foreseeable future.
Thermo Electron has expressed its willingness to lend Trex Medical up to $10
million for short-term liquidity should the need arise. ThermoLase has an
obligation to pay $40.5 million, in the aggregate, to the holders of redemption
rights if all of the holders thereof exercise their redemption rights in April
2001
44
<PAGE>
Liquidity and Capital Resources (continued)
when such rights become exercisable. ThermoLase does not have sufficient funds
to satisfy these obligations. The Company has agreed to reimburse Thermo
Electron, the guarantor of this obligation, in the event that Thermo Electron
needs to make a payment on such guaranty. The exercise of the redemption rights
would adversely affect the Company's liquidity in fiscal 2001.
Although the Company does not presently intend to actively seek to acquire
additional businesses in the near future, it may consider acquiring one or more
complementary businesses if they are presented to the Company on terms the
Company believes to be attractive. Such acquisitions may require significant
amounts of cash. The Company expects that it will finance acquisitions of
businesses, if any, 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.
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 1999
and 1998 market equity prices would result in a negative impact of $4.3 million
and $24.4 million, respectively, on the net fair value of the Company's
price-sensitive equity financial instruments. The change in the net fair value
from fiscal 1998 to 1999 is primarily due to a decrease in the market price of
the Company's and ThermoLase's common stock relative to the conversion price of
the debentures.
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 1999 and
1998 market interest rates would result in a negative impact of $1.6 million and
$1.7 million, respectively, on the net fair value of the Company's interest
sensitive financial instruments.
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 1999 and 1998 functional
currencies, relative to the U.S. dollar, would result in a reduction of the
Company's shareholders' investment of $3.4 million and $4.2 million,
respectively.
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Year 2000
The following information constitutes a "Year 2000 Readiness Disclosure"
under the Year 2000 Information and Readiness Disclosure Act. The Company
continues to assess the potential impact of the year 2000 date recognition issue
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) assessing the year 2000 readiness of its key
suppliers and vendors; 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 non-information technology systems
will be ready for the year 2000. The first phase of the program, testing and
evaluating the Company's critical information technology systems and
non-information technology systems for year 2000 compliance, has been
substantially completed. During phase one, the Company tested and evaluated its
significant computer systems, software applications, and related equipment for
year 2000 compliance. The Company also evaluated the potential year 2000 impact
on its critical non-information technology systems, which efforts included
testing the year 2000 readiness of its manufacturing, utility, and
telecommunications systems at its critical facilities. During phase two of its
program, the Company remediated any material noncompliant systems or
non-information technology systems identified during phase one. The Company has
upgraded or replaced its material noncompliant information technology systems.
In many cases, such upgrades or replacements were made in the ordinary course of
business, without accelerating previously scheduled upgrades or replacements.
There can be no assurance that the Company has identified all of the year 2000
problems with its critical information technology systems and facilities.
The Company has also tested and evaluated 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 or not date sensitive.
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 has
identified all of the year 2000 problems with its current products. Certain of
the Company's older products, which it no longer manufactures or sells, may not
be year 2000 compliant nor capable of being upgraded to make them year 2000
compliant. The Company has made upgrades and/or has potential solutions for all
currently supplied products available to customers or dealers.
The Company has assessed 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 developed and distributed
questionnaires relating to year 2000 compliance to its significant suppliers and
vendors. No significant supplier or vendor has indicated that it believes its
business operations will be materially disrupted by the year 2000 issue.
Contingency Plan
The Company has developed a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
The plan identifies and secures alternate suppliers. 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.
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. 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 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.
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Year 2000
Reasonably Likely Worst Case Scenario
At this point in time, the Company is not able to determine the most
reasonably likely worst case scenario to result from the year 2000 issue. One
possible worst case scenario would be that certain of the Company's material
suppliers or vendors experience business disruptions due to the year 2000 issue
and are unable to provide materials and services to the Company on time. The
Company's operations could be delayed or temporarily shut down, and it could be
unable to meet its obligations to customers in a timely fashion. The Company's
business, operations, and financial condition could be adversely affected in
amounts that cannot be reasonably estimated at this time. If the Company
believes that any of its key suppliers or vendors may not be year 2000
compliant, it will seek to identify and secure other suppliers or vendors as
part of its contingency plan.
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. 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. As discussed above, 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 material adverse impact on the Company's business,
operations, and financial condition in amounts that cannot be reasonably
estimated at this time.
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ThermoTrex Corporation 1999 Financial Statements
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important risk 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 2000 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 significant 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.
Difficulty in Retaining Qualified Management and Personnel. ThermoLase has
had difficulty in retaining management, technical, marketing, and sales
personnel, due in part to the relocation of ThermoLase headquarters to
Carrollton, Texas. ThermoLase's future success depends in part on whether
ThermoLase 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 continuing business. The failure to hire
and retain such personnel could materially adversely affect the financial
position and results of operations of ThermoLase.
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.
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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.
Government Regulation; No Assurance of Regulatory Approvals. The Company's
products are subject to regulation by the United States Food and Drug
Administration (FDA) regulations governing the use and marketing of medical
devices and equivalent regulations 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. Failure to comply with applicable regulatory requirements can
result in, among other things, civil and criminal fines, suspensions of
approvals, recalls or seizures of products, injunctions, and criminal
prosecutions. Obtaining regulatory approvals is a lengthy, expensive, and
uncertain process. There can be no assurance that foreign regulatory agencies
will grant the necessary clearances or that the process to obtain such
clearances will not be excessively expensive or lengthy.
Most of Trex Medical's products have been classified by the FDA as Class
II medical devices and have been eligible for FDA marketing clearance pursuant
to the FDA's 510(k) premarket notification process, which is generally shorter
than the more involved premarket approval (PMA) process. The 510(k) premarket
notification process analyzes whether a product is substantially equivalent to
(or as safe and effective as) a device marketed before May 28, 1976, the
enactment date of the Medical Device Amendments that govern the marketing of
medical devices. Trex Medical believes that most of its currently anticipated
future products and substantial modifications to existing products will be
eligible for the 510(k) premarket notification process. However, the FDA has not
yet classified full-field digital mammography systems such as the one being
developed by Trex Medical. In December 1997, Trex Medical submitted a 510(k)
application with clinical data for its full-field digital mammography system. In
August 1999, Trex Medical received a letter from the FDA notifying Trex Medical
that based on the data provided, Trex Medical's full-field digital mammography
system was not substantially equivalent to analog, or "film screen,"
mammography. In September, Trex Medical received a letter from the FDA
indicating that the FDA believes that a PMA application, followed by significant
post-approval screening trials, may be a more viable option for obtaining
clearance to market a full-field digital mammography system. Trex Medical is
reevaluating its strategy based on this new information from the FDA. For
example, Trex Medical may incorporate the data that formed the basis of its
510(k) submission into a PMA submission. After submission, Trex Medical may
implement various design and engineering changes that may require additional
preapproval clinical trials. However, 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 clear Trex Medical's full-field
digital mammography system for marketing. Regardless of whether a 510(k) or a
PMA is finally accepted by the FDA, there can be no assurance that the product
will ultimately receive FDA marketing clearance or approval. Further, there can
be no assurance that the necessary regulatory clearances for any of Trex
Medical's other products currently under development or developed in the future
will be obtained on a timely basis, if at all.
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In addition, full-field digital mammography systems will be subject to
alternative quality assurance standards under the Mammography Quality Standards
Act. These alternate standards will be submitted by Trex Medical to the FDA for
review. Trex Medical can make no prediction as to when the FDA will approve such
standards, if at all.
FDA regulations also require manufacturers of medical devices to adhere to
current good manufacturing practices as set forth in the Quality System
Regulation (QSR). These include testing, quality control, and documentation
procedures. Enforcement of QSRs has increased significantly in the last several
years and is generally stricter for facilities where PMA products are
manufactured. If Trex Medical or any of its facilities was determined to be in
noncompliance, and it was not possible to convince the FDA of the adequacy of
compliance, the FDA could impose penalties or other remedies, including a recall
or temporary suspension of product shipments or withholding of marketing
clearances or approvals until compliance was achieved. These penalties or
remedies could have a material adverse effect on Trex Medical's business and
results of operations. No assurances can be given that the FDA will not in the
future find Trex Medical to be in violation of the QSRs or that equivalent
agencies in foreign countries will not in the future find Trex Medical to be in
violation of such equivalent regulations.
Trex Medical's manufacturing facilities are subject to periodic inspection
by the FDA. The FDA also imposes various requirements on manufacturers and
sellers of products under its jurisdiction, such as labeling, manufacturing
practices, record keeping, and reporting. The FDA may also require post-market
testing and surveillance programs of drugs or devices to monitor a product's
effects. Failure to comply with applicable regulatory requirements can result
in, among other things, civil and criminal fines, suspensions of approvals,
recalls of products, seizures, injunctions, and/or criminal prosecutions.
The laser used in the SoftLight hair-removal and skin-resurfacing process
must comply with FDA regulations governing the use and marketing of medical
devices. ThermoLase's hair-removal system received FDA clearance in April 1995
and its SoftLight Laser Peel skin-resurfacing procedure received FDA clearance
in May 1998. In addition, ThermoLase is subject to regulatory requirements in
foreign countries where ThermoLase conducts its business or advertises its
services and products. Obtaining regulatory approvals is a lengthy, expensive,
and an uncertain process. There can be no assurance that foreign regulatory
agencies will grant the necessary clearances or that the process to obtain such
clearances will not be excessively expensive or lengthy. For example, in 1996,
ThermoLase established a joint venture to commercialize the SoftLight laser
hair-removal process in Japan and, in 1999, withdrew its application seeking the
approval of the Japanese Ministry of Health to commercialize the SoftLight
process in Japan.
Most of CBI's products are classified as cosmetics, which are regulated by
the FDA, and are subject to inspection by the FDA. Furthermore, CBI manufactures
a few preparations, principally sunscreens and skin-bleaching agents, that are
classified as over-the-counter drugs, and CBI has an FDA license for this
purpose. This license requires, among other things, that CBI adheres to the
FDA's Good Manufacturing Practices procedures for finished pharmaceuticals, and
subjects CBI's facility to inspection by the FDA. CBI also markets nutritional
supplements that are also subject to FDA regulations.
The FDA also imposes various requirements on manufacturers and sellers of
products under its jurisdiction such as labeling, manufacturing practices,
record keeping, and reporting. The FDA may also require post-market testing and
surveillance programs of drugs or devices to monitor a product's effects.
Failure to comply with applicable regulatory requirements can result in, among
other things, civil and criminal fines, suspensions of approvals, recalls of
products, seizures, injunctions, and/or criminal prosecutions.
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
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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. Competition limits the prices
ThermoLase is able to charge for its products.
Trex Medical encounters and expects to continue to encounter intense
competition. Trex Medical believes that its products compete on the basis of
product features, product performance and reputation, price, and service. Trex
Medical's competitors include large multinational corporations and their
operating units, including GE Medical Systems, the Philips Medical Systems
subsidiary of Philips N.V., Siemens AG, Toshiba, Shimadzu Corporation, Picker
International, Inc., and United States Surgical Corporation. These companies and
certain of Trex Medical's other competitors have substantially greater
financial, marketing, and other resources than Trex Medical. As a result, they
may be able to adapt more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the promotion and sale
of their products than Trex Medical. In addition, Trex Medical competes outside
the U.S. with Planmeca OY, Sirona Dental Systems, and the Soredex division of
Orion Corporation. In the U.S., the Dental Imaging segment'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.
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.
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 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 receive similar 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.
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In April 1992, Fischer Imaging Corporation commenced 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. In April 1998, Fischer
filed a second lawsuit in the same court against Lorad, alleging that its
manufacture of breast-imaging equipment and breast-biopsy systems incorporating
a digital-imaging system, which includes Lorad's prone breast-biopsy system,
infringes a second Fischer patent on a motorized mammographic biopsy apparatus,
which was issued April 7, 1998. 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. If Trex Medical is unsuccessful in
defending this lawsuit, it may be enjoined from manufacturing and selling its
Trex Universal Breast Biopsy System (formerly called the StereoGuide) without a
license from Fischer. No assurance can be given that Trex Medical will be able
to obtain such a license, if required, on commercially reasonable terms, if at
all. In addition, Trex Medical may be subject to damages for past infringement.
No assurance can be given as to whether Trex Medical will be subject to such
damages or the amount of damages that Trex Medical may be required to pay.
On October 20, 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 is party to a lawsuit 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.
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. ThermoLase incurred losses of $93.3
million, $41.2 million, $12.4 million, $1.4 million, and $1.7 million in fiscal
1999, 1998, 1997, 1996, and 1995, respectively. There can be no assurance that
ThermoLase will achieve profitable operations in any future period.
Potential for Customer Claims; Product Liability. ThermoLase has received
complaints from several of its physician licensees, joint venture partners, and
consumers stating 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
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 ThermoLase. Such claims could result in
damages against ThermoLase and negative publicity. ThermoLase currently carries
general liability, product liability, and other insurance coverage. 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
ThermoLase at reasonable cost or at all.
Trex Medical's business exposes it to potential product liability claims,
which are inherent in the manufacturing, marketing, and sale of medical devices,
and as such Trex Medical may face substantial liability to patients for damages
resulting from the faulty design or manufacture of products. Trex Medical
currently maintains product liability insurance, but there can be no assurance
that this insurance will provide sufficient coverage in the event of a claim,
that Trex Medical will be able to maintain such coverage on acceptable terms, if
at all, or that a product-liability claim would not materially adversely affect
the business or financial condition of Trex Medical.
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Risks Associated with Acquisition Strategy. The Company's strategy has
included the acquisition of businesses that complement or augment the Company's
existing products and services. There can be no assurance 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 problems will
not have a material adverse impact on the Company's business, operations, or
financial condition. 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. As discussed above,
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 material adverse
impact on the Company's business, operations, and financial condition in amounts
that cannot be reasonably estimated at this time.
Risks Associated with Cash Management Arrangement with Thermo Electron.
The Company participates in a cash management arrangement with Thermo Electron.
Under this cash management arrangement, the Company lends its excess cash to
Thermo Electron on an unsecured basis. The Company has the contractual right to
withdraw its funds invested in the cash management arrangement upon 30 days'
prior notice. Thermo Electron is contractually required to maintain cash, cash
equivalents and/or immediately available bank lines of credit equal to at least
50% of all funds invested under the cash management arrangement by all Thermo
Electron subsidiaries other than wholly owned subsidiaries. The funds are held
on an unsecured basis and therefore are subject to the credit risk of Thermo
Electron. The Company's ability to receive its cash upon notice of withdrawal
could be adversely affected if participants in the cash management arrangement
demand withdrawal of their funds in an aggregate amount in excess of the 50%
reserve required to be maintained by Thermo Electron. In the event of a
bankruptcy of Thermo Electron, the Company would be treated as an unsecured
creditor and its right to receive funds from the bankruptcy estate would be
subordinated to secured creditors and would be treated on a pari passu basis
with all other unsecured creditors. Further, all cash withdrawn by the Company
from the cash management arrangement within one year before the bankruptcy would
be subject to rescission. The inability of Thermo Electron to return the
Company's cash on a timely basis or at all could have a material adverse effect
on the Company's results of operations and financial position.
53
<PAGE>
ThermoTrex Corporation 1999 Financial Statements
Selected Financial Information
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Nine
Months
Year Ended Ended (e)
-------------------------------------------------------------------
(In thousands except per share Oct. 2, Oct. 3, Sept. 27, Sept. 28, Sept. 30, Sept. 30,
amounts) 1999 (a) 1998 (b) 1997 (c) 1996 (d) 1995 1995
- ------------------------------------- ---------- ----------- ----------- ----------- ---------- ----------
(Unaudited)
Statement of Operations Data
Revenues $ 346,147 $ 341,858 $ 282,121 $ 182,029 $111,610 $ 86,531
Income (Loss) Before Provision (142,421) 16,591 10,618 48,292 38,895 37,891
for Income Taxes, Minority
Interest, and Extraordinary
Item
Net Income (Loss) (123,828) (2,613) 8,441 42,575 36,658 36,341
Earnings (Loss) per Share:
Basic (6.24) (.14) .44 2.23 2.66 1.92
Diluted (6.24) (.14) .43 2.16 2.60 1.87
Balance Sheet Data
Working Capital $ 192,463 $ 261,677 $ 202,276 $ 127,863 $ 103,297
Total Assets 483,355 595,706 450,117 320,222 230,781
Long-term Obligations 204,170 204,645 115,000 - -
Common Stock of Subsidiary 40,500 40,500 40,500 - -
Subject to Redemption
Shareholders' Investment 57,457 149,587 176,135 205,079 162,388
(a) Reflects restructuring and related costs of $100.2 million and the November
1998 acquisition of LNR.
(b) Reflects the April 1998 acquisition of Trophy, issuance of stock by
subsidiaries, which resulted in nontaxable gains of $23.8 million; reflects
restructuring costs of $10.2 million; and $5.9 million for the establishment
of a tax valuation allowance. 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) 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.
54
<PAGE>
ThermoTrex Corporation 1997 Financial Statements
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 1999 and 1998, as reported in the
consolidated transaction reporting system.
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998
--------------------- --------------------
<S> <C> <C> <C> <C>
Quarter High Low High Low
- ------------------------------------------------------------ ---------- ------------ ---------- ---------
First $13 7/8 $ 8 1/8 $28 1/8 $21 3/4
Second 8 13/16 5 5/16 23 1/4 17
Third 8 11/16 5 1/4 21 7/8 17 1/8
Fourth 9 1/4 6 18 15/16 12 1/2
As of October 29, 1999, the Company had 441 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 29, 1999, was $7 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).
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.
</TABLE>
Exhibit 21
THERMOTREX CORPORATION
Subsidiaries of the Registrant
At November 17, 1999, the Registrant owned the following companies:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
NAME STATE OR PERCENT OF
JURISDICTION OF OWNERSHIP
INCORPORATION
- ----------------------------------------------------------------------------------------------------------
ThermoLase Corporation Delaware 71.06
(additionally, 13.91% of the shares
are owned directly by Thermo Electron
Corporation)
Creative Beauty Innovations, Inc. Texas 100
ThermoLase England L.L.C. Delaware 46*
ThermoLase (Scotland) Ltd. Scotland 100
ThermoLase (Ireland) Ltd. Ireland 100
ThermoLase UK Limited England 100
ThermoDess S.A.S. France 71.05*
ThermoLase International L.L.C. Delaware 100
ThermoLase Iberica, S.A. Spain 100
ThermoLase (South Africa) Ltd. South Africa 100
ThermoLase Japan L.L.C. Wyoming 50*
ThermoTrex East Inc. Massachusetts 100
Trex Medical Corporation Delaware 71.49
(additionally, 7.01% of the shares are owned
directly by Thermo Electron Corporation)
Trex Medical France 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 KK Japan 100
Trophy Radiologie GmbH Germany 100
P.T. Trophy Rajawali Indonesia Indonesia 51
Trophy Radiologia Espana SA Spain 100
Trophy Rontgen SAS Turkey 77
Trophy Radiologie U.K. Ltd. England 100
SCI Boucher Debard Baudry Guillot France 100
Trex Medical Systems Corporation Delaware 100
Trex Trophy Dental Inc. Virginia 100
Trex Communications Corporation Delaware 100
EMP TrexCom Inc. Delaware 100
LNR TrexCom, 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 November 9, 1999 (except with respect to the
matters discussed in Notes 3, 16, and 18, as to which the date is December 16,
1999), included in or incorporated by reference into ThermoTrex Corporation's
Annual Report on Form 10-K for the year ended October 2, 1999, into the
Company's previously filed 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. 33-70512 on Form S-8,
Registration Statement No. 33-80891 on Form S-8, Registration Statement No.
333-34909 on Form S-3, and Registration Statement No. 333-81175 on Form S-8.
Arthur Andersen LLP
Boston, Massachusetts
December 17, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMOTREX
CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED OCTOBER 2, 1999
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-02-1999
<PERIOD-END> OCT-02-1999
<CASH> 19,558
<SECURITIES> 64,174
<RECEIVABLES> 69,043
<ALLOWANCES> 5,982
<INVENTORY> 70,475
<CURRENT-ASSETS> 304,542
<PP&E> 42,375
<DEPRECIATION> 17,466
<TOTAL-ASSETS> 483,355
<CURRENT-LIABILITIES> 112,079
<BONDS> 185,945
0
0
<COMMON> 233
<OTHER-SE> 57,224
<TOTAL-LIABILITY-AND-EQUITY> 483,355
<SALES> 303,909
<TOTAL-REVENUES> 346,147
<CGS> 213,452
<TOTAL-COSTS> 260,050
<OTHER-EXPENSES> 116,322
<LOSS-PROVISION> 4,120
<INTEREST-EXPENSE> 8,662
<INCOME-PRETAX> (142,421)
<INCOME-TAX> (10,687)
<INCOME-CONTINUING> (123,828)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (123,828)
<EPS-BASIC> (6.24)
<EPS-DILUTED> (6.24)
</TABLE>
