SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------------------------
AMENDMENT NO. 1 ON FORM 10-K/A TO 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 52-1711436
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
10455 Pacific Center Count
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
Common Stock, $.10 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.
<PAGE>
FORM 10-K/A
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(c) Exhibits
13 Annual Report to Shareholders for the fiscal year ended October 2,
1999 (only those portions incorporated herein by reference).
23 Consent of Arthur Andersen LLP.
27 Restated Financial Data Schedule for the fiscal year ended October
2, 1999.
27.1 Restated Financial Data Schedule for the fiscal year ended October
3, 1998.
27.2 Restated Financial Data Schedule for the fiscal year ended
September 27, 1997.
Attached is Exhibit 13 of the Registrant's Form 10-K for the
year ended October 2, 1999. The Registrant's financial
statements have been restated to reflect a decision by the
Registrant's parent company, Thermo Electron Corporation, to
sell the Registrant's Trex Medical Corporation subsidiary, which
has been classified as discontinued operations. This amended
information replaces the corresponding information filed
originally in the Exhibit 13 to Form 10-K.
<PAGE>
FORM 10-K/A
THERMOTREX CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 on
Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: May 9, 2000
THERMOTREX CORPORATION
By: /s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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 $ 65,759 $ 30,248 $ 19,725
Contract revenues 22,423 24,219 17,788
Service revenues 19,815 23,329 26,704
--------- --------- --------
107,997 77,796 64,217
--------- --------- --------
Costs and Operating Expenses:
Cost of product revenues (Note 8) 47,054 15,909 9,710
Cost of contract revenues 19,705 19,598 13,960
Cost of service revenues 26,893 25,030 24,620
Selling, general, and administrative expenses (Notes 7 and 8) 34,074 36,022 29,421
Research and development expenses 7,311 7,409 7,362
Restructuring and nonrecurring costs (Notes 3 and 8) 66,730 10,155 1,400
--------- --------- --------
201,767 114,123 86,473
--------- --------- --------
Operating Loss (93,770) (36,327) (22,256)
Interest Income 5,237 10,352 2,857
Interest Expense (includes $604, $511, and $197 to (8,449) (9,479) (835)
parent company; Note 7)
Gain on Issuance of Stock by Subsidiary (Note 11) - - 5,929
Equity in Loss of Joint Ventures (Note 3) (200) (1,203) (700)
Other Expense (Note 8) (5,666) - -
--------- --------- --------
Loss from Continuing Operations Before Income Taxes, (102,848) (36,657) (15,005)
Minority Interest, and Extraordinary Item
Income Tax (Provision) Benefit (Note 6) (1,474) (5,610) 6,596
Minority Interest (Expense) Income (90) 278 3,915
--------- --------- --------
Loss from Continuing Operations Before Extraordinary Item (104,412) (41,989) (4,494)
Income (Loss) from Discontinued Operations (net of income (19,416) 36,367 12,935
tax (provision) benefit of $11,978, $(11,636), and
$(12,790); Note 18) --------- --------- --------
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
========= ========= ========
Basic and Diluted Loss per Share from Continuing Operations $ (5.26) $ (2.24) $ (.23)
========= ========= ========
Basic and Diluted Earnings (Loss) per Share (Note 15) $ (6.24) $ (.14) $ .44
========= ========= ========
Basic and Diluted Weighted Average Shares (Note 15) 19,851 18,704 19,210
========= ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
ThermoTrex Corporation 1999 Financial Statements
Consolidated Balance Sheet
<S> <C> <C>
(In thousands) October 2, October 3,
1999 1998
- ------------------------------------------------------------------------------ ------------- -------------
Assets
Current Assets:
Cash and cash equivalents (includes $112,480 under repurchase $ 11,483 $ 114,398
agreement with parent company in fiscal 1998)
Advance to affiliate 30,199 -
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 $2,444 and $1,004 (Note 8) 15,181 14,744
Unbilled contract costs and fees 14,606 5,833
Inventories (Note 8) 12,363 9,955
Deferred tax asset 4,310 7,509
Prepaid expenses and other assets 6,059 2,736
Net assets of discontinued operations (Note 18) 65,349 121,644
-------- ---------
223,724 284,895
-------- ---------
Property, Plant, and Equipment, at Cost, Net (Note 8) 14,759 41,412
-------- ---------
Other Assets 10,703 14,929
-------- ---------
Cost in Excess of Net Assets of Acquired Companies (Notes 3 and 8) 28,233 33,593
-------- ---------
Long-term Net Assets of Discontinued Operations (Note 18) 92,159 62,300
-------- ---------
$369,578 $ 437,129
======== =========
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) $ 1,448 $ -
Accounts payable 7,011 7,062
Accrued payroll and employee benefits 4,294 3,541
Accrued warranty costs 285 2,350
Accrued restructuring costs (Note 8) 19,013 5,153
Payable for acquired company 5,000 -
Other accrued expenses (Notes 3 and 8) 17,047 9,266
Due to parent company and affiliated companies 763 4,438
-------- ---------
54,861 31,810
-------- ---------
Deferred Income Taxes 2,096 5,983
-------- ---------
Deferred Lease Liability 233 1,172
-------- ---------
Long-term Obligations:
Subordinated convertible debentures (includes $18,225 203,948 203,948
and $14,500 of related-party debt; Note 9)
Other 45 66
-------- ---------
203,993 204,014
-------- ---------
Common Stock of Subsidiary Subject to Redemption (Note 1) 40,500 40,500
-------- ---------
Minority Interest 8,337 6,127
-------- ---------
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)
Accumulated other comprehensive items (Note 14) 3 (6)
-------- ---------
59,558 147,523
-------- ---------
$369,578 $ 437,129
======== =========
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 loss to loss from
continuing operations:
(Income) loss from discontinued operations (Note 18) 19,416 (36,367) (12,935)
--------- --------- --------
Loss from continuing operations (104,412) (38,980) (4,494)
Adjustments to reconcile loss from continuing
operations to net cash used in operating
activities:
Depreciation and amortization 8,278 7,790 4,672
Provision for losses on accounts receivable (Note 8) 1,900 273 81
Gain on issuance of stock by subsidiaries (Note 11) - - (5,929)
Gain on repurchase of subordinated convertible - (4,701) -
debentures (Note 9)
Minority interest expense (income) 90 (278) (3,915)
Increase (decrease) in deferred income taxes (3,887) 9,647 (4,308)
Noncash restructuring costs (Note 8) 43,906 4,193 -
Equity in loss of joint ventures (Note 3) 200 1,203 700
Other noncash items (Note 8) 8,257 930 2,505
Changes in current accounts, excluding the
effects of acquisitions and disposition:
Accounts receivable 613 (319) (3,803)
Inventories and unbilled contract costs and fees (4,245) (4,827) (982)
Other current assets 2,610 (651) (4,400)
Accounts payable 143 (3,558) 329
Other current liabilities (Note 8) 11,996 9,217 7,310
--------- --------- --------
Net cash used in continuing operations (34,551) (20,061) (12,234)
Net cash provided by (used in) 4,325 (17,989) (1,838)
discontinued operations --------- --------- --------
Net cash used in operating activities $ (30,226) $ (38,050) $(14,072)
--------- --------- --------
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
- ----------------------------------------------------------- --------------- --------------- --------------
Investing Activities
Acquisitions, net of cash acquired (Note 3) $ (18,759) $ (7,207) $(10,712)
Advances to affiliate, net (30,199) - -
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 (10,559) (6,108) (21,427)
Advances under notes receivable to related parties (Note 7) - (4,667) -
Reduction (investment) in other assets 907 (675) (1,200)
Other 1,638 (827) 595
--------- --------- --------
Net cash provided by (used in) (113,972) (10,084) 856
continuing operations
Net cash used in discontinued operations (12,535) (39,340) (6,021)
--------- --------- --------
Net cash used in investing activities (126,507) (49,424) (5,165)
--------- --------- --------
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 3,773 12,229
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 (1,465) (38,966) (26,072)
Proceeds from issuance of notes payable to parent company - - 11,000
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 exercises (25) (3,342) (1,334)
Other 82 - -
--------- --------- --------
Net cash provided by continuing operations 41,776 41,793 106,876
Net cash provided by (used in) (22,717) 67,684 4,141
discontinued operations --------- --------- --------
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
--------- --------- --------
19,558 157,107 135,720
Cash and Cash Equivalents of Discontinued (8,075) (42,709) (36,490)
Operations at End of Period --------- --------- --------
Cash and Cash Equivalents at End of Year $ 11,483 $ 114,398 $ 99,230
========= ========= ========
6
<PAGE>
Year Ended
-----------------------------------------
(In thousands) October 2, October 3, September 27,
1999 1998 1997
- ----------------------------------------------------------- --------------- --------------- --------------
Cash Paid For
Interest $ 8,114 $ 7,919 $ 15
Income taxes $ - $ - $ -
Noncash Activities
Fair value of assets of acquired companies $ 35,877 $ 22,687 $ 14,677
Cash paid for acquired companies (27,273) (7,548) (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 $ 3,964 $ 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.
7
<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):
Unrealized gains on available-for-sale investments 9 7 34
--------- --------- --------
9 7 34
Minority Interest - (3) (13)
--------- --------- --------
$(123,819) $ (2,609) $ 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
--------- --------- --------
8
<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)
--------- --------- --------
Accumulated Other Comprehensive Items (Note 14):
Balance at beginning of year (6) (13) (47)
Other comprehensive items 9 7 34
--------- --------- --------
Balance at end of year 3 (6) (13)
--------- --------- --------
$ 59,558 $ 147,523 $176,135
========= ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
9
<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 personal-care
products and services and performs advanced technology research. 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). 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 (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). On January 31, 2000, Thermo Electron announced its
revised reorganization plan, including a plan to seek a buyer for the Company's
Trex Medical Corporation subsidiary (Note 18).
Principles of Consolidation and Presentation
The accompanying financial statements include the accounts of the Company,
its wholly owned subsidiaries and its publicly held ThermoLase subsidiary. All
material intercompany accounts and transactions have been eliminated. The
results of operations of the Company's Trex Medical subsidiary, which represents
the Medical Products segment, have been classified as discontinued operations as
a result of a decision to divest this business. In addition, certain amounts in
fiscal 1998 and 1997 have been reclassified to conform to the presentation in
the fiscal 1999 financial statements.
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.
10
<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 Subsidiary
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.
11
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
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.
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 has 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, $112,480,000 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.
12
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
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 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 $ 7,727 $ 4,472
Work in Process 3,826 1,939
Finished Goods 810 3,544
------- --------
$12,363 $ 9,955
======= ========
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.
13
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
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, 40 years;
machinery and equipment, 3 to 10 years; and leasehold improvements, the shorter
of the term of the lease or the life of the asset. Property, plant, and
equipment consists of the following:
(In thousands) 1999 1998
- ------------------------------------------------------------------------------ ------------- -------------
Land $ 1,500 $ 730
Buildings 1,421 7,494
Machinery and Equipment 12,494 26,944
Leasehold Improvements 6,685 17,929
------- --------
22,100 53,097
Less: Accumulated Depreciation and Amortization 7,341 11,685
------- --------
$14,759 $ 41,412
======= ========
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.
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 $5,900,000 and $3,667,000 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
14
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
connection with this offer, in April 1997, ThermoLase issued 2,000,000 units in
exchange for 2,261,706 shares of its common stock and $502,000 in cash, net of
expenses. As a result of these transactions, $40,500,000 was reclassified from
"Shareholders' investment" and "Minority interest" to "Common stock of
subsidiary subject to redemption," based on the issuance of 2,000,000 redemption
rights, each carrying a maximum liability to ThermoLase of $20.25. 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).
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.
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
15
<PAGE>
3. Acquisitions, Disposition, and Joint Ventures (continued)
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
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 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 $ 110,781 $ 97,167
Loss from Continuing Operations Before Extraordinary Item (104,700) (41,818)
Net Loss (124,116) (2,442)
Basic and Diluted Loss per Share from Continuing Operations (5.27) (2.24)
Basic and Diluted Loss per Share (6.25) (.13)
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.
16
<PAGE>
3. Acquisitions, Disposition, and Joint Ventures (continued)
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.
A summary of the changes in accrued acquisition expenses for severance
follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands) LNR Other Total
- ---------------------------------------------------------------- ---------- ---------- ---------- --------
Balance at September 28, 1996 $ - $ 680 $ 680
Usage - (378) (378)
------- ------- -------
Balance at September 27, 1997 - 302 302
Reserves established - 100 100
Usage - (302) (302)
------- ------- -------
Balance at October 3, 1998 - 100 100
Reserves established 879 - 879
Usage (700) (100) (800)
------- ------- -------
Balance at October 2, 1999 $ 179 $ - $ 179
======= ======= =======
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.
17
<PAGE>
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.
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.
</TABLE>
18
<PAGE>
5. Employee Benefit Plans (continued)
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
===== ===== =====
A summary of the status of the Company's stock options at October 2, 1999,
is as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Options Outstanding and Exercisable
-----------------------------------------------------
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 certain financial information would
have been as follows:
(In thousands except per share amounts) 1999 1998 1997
- -------------------------------------------------------------------- ------------ ------------ -----------
Loss from Continuing Operations Before Extraordinary Item:
As reported $(104,412) $ (41,989) $ (4,494)
Pro forma (105,114) (42,993) (4,986)
Basic and Diluted Loss per Share from Continuing
Operations Before Extraordinary Item:
As reported (5.26) (2.24) (.23)
Pro forma (5.30) (2.30) (.26)
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) .44
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>
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 $783,000, $614,000, and $478,000
in fiscal 1999, 1998, and 1997, respectively.
6. Income Taxes
The components of the income tax (provision) benefit are as follows:
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------- ------------- ------------- -------------
Currently Refundable (Payable):
Federal $ (1,502) $ 2,634 $ (720)
State 640 152 (417)
-------- -------- ---------
(862) 2,786 (1,137)
-------- -------- ---------
(Deferred) Prepaid, Net:
Federal (472) (7,889) 7,505
State (140) (507) 228
-------- -------- ---------
(612) (8,396) 7,733
-------- -------- ---------
$ (1,474) $ (5,610) $ 6,596
======== ======== =========
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 $3,017,000
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 1997.
The income tax (provision) benefit in the accompanying statement of
operations differs from the 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 Benefit at Statutory Rate $ 35,997 $ 12,830 $ 5,252
(Increases) Decreases Resulting from:
Increase in valuation allowance (36,190) (17,908) -
Gain on issuance of stock by subsidiary - - 2,075
State income taxes, net of federal tax (325) 231 123
Amortization of cost in excess of net assets of acquired companies (794) (457) (191)
Write-off of acquired technology - - (490)
Other (162) (306) (173)
-------- -------- --------
$ (1,474) $ (5,610) $ 6,596
======== ======== ========
</TABLE>
21
<PAGE>
6. Income Taxes (continued)
Prepaid and deferred income taxes in the accompanying balance sheet
consist of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1999 1998
- ------------------------------------------------------------------------------ ------------- -------------
Prepaid (Deferred) Income Taxes:
Inventory basis differences $ 1,738 $ 660
Accruals and other reserves 9,412 3,317
Net operating loss carryforwards 45,161 20,778
Accrued compensation 896 554
Other, net 4,028 (916)
------- --------
61,235 24,393
Less: Valuation allowance 59,021 22,867
------- --------
$ 2,214 $ 1,526
======= ========
The valuation allowance relates primarily to loss carryforwards at
ThermoLase and increased in fiscal 1999 due to operating losses at ThermoLase.
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 $125,000,000 of federal tax net operating loss carryforwards that
will begin to expire in fiscal 2005.
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 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.
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.
22
<PAGE>
7. Related-party Transactions
Corporate Services Agreement
The Company and Thermo Electron have a corporate services agreement under
which Thermo Electron's corporate staff provides certain administrative
services, including certain legal advice and services, risk management, certain
employee benefit administration, tax advice and preparation of tax returns,
centralized cash management, and certain financial and other services, for which
the Company currently pays Thermo Electron annually an amount equal to 0.8% of
the Company's revenues. In calendar 1997 and 1996, the Company paid an amount
equal to 1.0% of the Company's revenues. For these services, the Company was
charged $864,000, $666,000, and $642,000 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).
Related-party Revenues
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 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.
23
<PAGE>
8. Restructuring and Related Costs
During fiscal 1999, the Company announced broad-scale restructuring
actions. In connection with these actions, described below, the Company's
continuing operations recorded restructuring and related costs of $76.4 million
in fiscal 1999, including restructuring and nonrecurring costs of $66.7 million,
inventory and warranty provisions of $2.3 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 Company's continuing operations recorded charges by segment as
follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Fiscal 1999 Personal-care Advanced Corporate Total
(In thousands) Products and Technology
Services Research
- ------------------------------------ ------------- ------------- ------------- -------------- ------------
Cost of Product Revenues $ 2,323 $ - $ - $ 2,323
Selling, General, and 1,649 - - 1,649
Administrative Expenses
Restructuring and Other Nonrecurring Costs 62,790 3,400 540 66,730
Other Expense 3,399 - 2,267 5,666
-------- -------- --------- --------
$ 70,161 $ 3,400 $ 2,807 $ 76,368
======== ======== ========= ========
Continuing Operations
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.
24
<PAGE>
8. Restructuring and Related Costs (continued)
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.
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
======= ======= ======= =======
25
<PAGE>
8. Restructuring and Related Costs (continued)
(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 business. The
Company has decided not to pursue such growth and to focus on its remaining
businesses. In February 2000, the Company sold its Trex Communications
subsidiary (Note 18). 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.
Discontinued Operations
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
26
<PAGE>
8. Restructuring and Related Costs (continued)
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:
Severance Facility- Total
closing
(In thousands) Costs Other (b)
- ----------------------------------------------- -------------- -------------- -------------- -------------
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.
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.
27
<PAGE>
9. Long-term Obligations (continued)
The annual requirements for long-term obligations as of October 2, 1999,
are $20,000 in fiscal 2000; $23,000 in fiscal 2001; $23,000 in fiscal 2002;
$115,000,000 in fiscal 2004; and $88,948,000 in fiscal 2005 and thereafter.
Total requirements of long-term obligations are $204,014,000. No interest costs
of continuing operations have been allocated to discontinued operations in the
accompanying statement of operations.
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 $5,668,000, $6,416,000, and
$3,394,000 in fiscal 1999, 1998, and 1997, respectively. Future minimum payments
due under noncancellable operating leases as of October 2, 1999, are $4,231,000
in fiscal 2000; $4,101,000 in fiscal 2001; $4,089,000 in fiscal 2002; $4,174,000
in fiscal 2003; $3,877,000 in fiscal 2004; and $11,664,000 in fiscal 2005 and
thereafter. Total future minimum lease payments are $32,136,000, 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.
Contingencies
Continuing Operations
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.
Discontinued 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.
28
<PAGE>
10. Commitments and Contingencies (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.
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 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).
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%
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.
29
<PAGE>
13. Business Segment Information
The Company's businesses operate in two business segments: Personal-care
Products and Services and Advanced Technology Research. 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 Segment Information (continued)
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------------- ----------- ----------- -----------
Business Segment Information
Revenues:
Personal-care Products and Services $ 36,255 $ 40,110 $ 45,233
Advanced Technology Research 72,294 41,351 21,250
Intersegment sales elimination (a) (552) (3,665) (2,266)
--------- --------- ---------
$ 107,997 $ 77,796 $ 64,217
========= ========= =========
Loss Before Income Taxes, Minority Interest, and
Extraordinary Item:
Personal-care Products and Services (b) $ (87,400) $ (31,770) $ (18,402)
Advanced Technology Research (c) (1,417) (1,488) (1,345)
Corporate (d) (4,953) (3,069) (2,509)
--------- --------- ---------
Total operating loss (93,770) (36,327) (22,256)
Interest and other income (expense), net (e) (9,078) (330) 7,251
--------- --------- ---------
$(102,848) $ (36,657) $ (15,005)
========= ========= =========
Total Assets:
Personal-care Products and Services $ 39,750 $ 127,460 $ 167,339
Advanced Technology Research 77,574 47,712 34,168
Corporate and eliminations (f) 252,254 261,957 169,997
--------- --------- ---------
$ 369,578 $ 437,129 $ 371,504
========= ========= =========
Depreciation and Amortization:
Personal-care Products and Services $ 4,632 $ 5,761 $ 3,799
Advanced Technology Research 3,580 1,964 873
Corporate 66 65 -
--------- --------- ---------
$ 8,278 $ 7,790 $ 4,672
========= ========= =========
Capital Expenditures:
Personal-care Products and Services $ 5,095 $ 4,033 $ 20,285
Advanced Technology Research 5,464 2,075 1,142
--------- --------- ---------
$ 10,559 $ 6,108 $ 21,427
========= ========= =========
Export Revenues Included in United States Revenues Above (g) $ 11,796 $ 6,510 $ 4,173
========= ========= =========
31
<PAGE>
13. Business Segment Information (continued)
(a) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(b) Reflects restructuring and related costs of $66.7 million and $10.2 million
in fiscal 1999 and 1998, respectively (Note 8).
(c) 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.
(d) Primarily general and administrative expenses, and in fiscal 1999 reflects
restructuring costs of $0.5 million.
(e) Reflects nonrecurring costs of $5.7 million.
(f) Primarily cash and cash equivalents, available-for-sale investments, and net
assets of discontinued operations. (g) In general, export sales are denominated
in U.S. dollars. Includes revenues from ThermoLase's international licensing agreements.
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 unrealized net of tax gains and losses on available-for-sale
investments.
15. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
(In thousands except per share amounts) 1999 1998 1997
- ---------------------------------------------------------------- ------------- -------------- ------------
Basic
Loss from Continuing Operations $(104,412) $ (41,989) $ (4,494)
Income (Loss) from Discontinued Operations (19,416) 36,367 12,935
Extraordinary Item - 3,009 -
--------- --------- --------
Net Income (Loss) $(123,828) $ (2,613) $ 8,441
--------- --------- --------
Weighted Average Shares 19,851 18,704 19,210
--------- --------- --------
Basic Earnings (Loss) per Share:
Continuing operations $ (5.26) $ (2.24) $ (.23)
Discontinued operations (.98) 1.94 .67
Extraordinary item - .16 -
--------- --------- --------
$ (6.24) $ (.14) $ .44
========= ========= ========
32
<PAGE>
15. Earnings (Loss) per Share (continued)
(In thousands except per share amounts) 1999 1998 1997
- ---------------------------------------------------------------- ------------- -------------- ------------
Diluted
Loss from Continuing Operations $(104,412) $ (41,989) $ (4,494)
Income (Loss) from Discontinued Operations (19,416) 36,367 12,935
Extraordinary Item - 3,009 -
--------- --------- --------
Net Income (Loss) (123,828) (2,613) 8,441
Effect of Majority-owned subsidiaries' dilutive - (96) (73)
--------- --------- --------
securities - discontinued operations
Income (Loss) Available to Common Shareholders, as $(123,828) $ (2,709) $ 8,368
--------- --------- --------
Adjusted
Weighted Average Shares 19,851 18,704 19,210
--------- --------- --------
Diluted Earnings (Loss) per Share:
Continuing operations $ (5.26) $ (2.24) $ (.24)
Discontinued operations (.98) 1.94 .67
Extraordinary item - .16 -
--------- --------- --------
$ (6.24) $ (.14) $ .44
========= ========= ========
Options to purchase 1,099,000, 1,135,000, and 1,374,000 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 Company's loss position from continuing operations
in each period. 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, due to the Company's loss position from
continuing operations.
An extraordinary gain recorded by the Company reduced basic and diluted
loss per share by $.16 in fiscal 1998 (Note 9).
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. The exchanges of common stock under
33
<PAGE>
16. Proposed Reorganization (continued)
both mergers will be taxable transactions to the shareholders. These proposals
are subject to certain conditions including filing with and 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, 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.
17. Unaudited Quarterly Information
(In thousands except per share amounts)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1999 First (a) Second (b) Third (c) Fourth
- ----------------------------------------------------------- ----------- ----------- ----------- ----------
Revenues $ 22,848 $ 27,232 $ 29,683 $ 28,234
Gross Profit 2,225 3,687 910 7,523
Loss from Continuing Operations (9,294) (8,509) (85,001) (1,608)
Net Loss (10,204) (11,375) (95,111) (7,138)
Basic and Diluted Loss per Share from Continuing Operations (.50) (.46) (4.31) (.07)
Basic and Diluted Loss per Share: (.55) (.61) (4.82) (.32)
1998 First Second Third Fourth (d)
- ----------------------------------------------------------- ----------- ----------- ----------- ----------
Revenues $ 21,875 $ 16,443 $ 17,711 $ 21,767
Gross Profit 6,925 1,969 4,098 4,267
Loss from Continuing Operations Before (1,964) (8,669) (8,508) (22,848)
Extraordinary Item
Net Income (Loss) 1,357 18,859 (4,843) (17,986)
Basic and Diluted Loss per Share from Continuing (.10) (.47) (.46) (1.22)
Operations Before Extraordinary Item
Basic and Diluted Earnings (Loss) per Share .07 1.02 (.26) (.96)
(a) Reflects the November 1998 acquisition of LNR.
(b) Reflects restructuring costs of $0.5 million.
(c) Reflects restructuring and nonrecurring costs of $75.9 million.
(d) 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.
34
<PAGE>
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 Subsidiaries
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. CCS was sold for approximately book value. The
sale is subject to a post-closing adjustment based on a determination of net
working capital of CCS at the date of sale.
In February 2000, the Company sold all of the stock of Trex Communications
for $48.7 million, subject to a post-closing adjustment based upon a
determination of the net book value of Trex Communications at the date of the
sale.
Discontinued Operations
In January 2000, Thermo Electron announced a plan under which it will
focus on its core measurement and detection business. As part of the plan, the
Company will sell its Trex Medical subsidiary, which represents its Medical
Products segment. In accordance with the provisions of APB No. 30 concerning
reporting the effect of disposal of a segment of a business, the Company
classified the fiscal 1999, 1998, and 1997 results of operations of the Medical
Products segment as discontinued in the accompanying statement of operations.
Summary operating results of the Medical Products segment were as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands except per share amounts) 1999 1998 1997
- ---------------------------------------------------------------------- ----------- ----------- ------------
Revenues $238,150 $264,062 $ 217,904
Costs and Expenses 277,723 210,814 192,281
-------- -------- ---------
Income (Loss) from Discontinued Operations Before Income (39,573) 53,248 25,623
Tax (Provision) Benefit and Minority Interest
Income Tax (Provision) Benefit 12,161 (11,853) (10,070)
Minority Interest Income (Expense) 7,996 (5,028) (2,618)
-------- -------- ---------
Income (Loss) from Discontinued Operations $(19,416) $ 36,367 $ 12,935
======== ======== =========
In addition, the net assets of the Medical Products segment were
classified as net assets of discontinued operations in the accompanying balance
sheet, and primarily consisted of inventories, accounts receivable, machinery
and equipment, and cost in excess of net assets of acquired companies, net of
certain current liabilities, principally accounts payable. The net assets of the
Medical Products segment at October 2, 1999 and October 3, 1998, totaled $157.5
million and $183.9 million, respectively. In fiscal 2000, the Company provided
$60.0 million for the estimated loss on disposal of Trex Medical. The Company
expects to complete the sale of Trex Medical during calendar 2000.
In October 1995, the Company and Trex Medical entered into a license
agreement under which Trex Medical undertook to fund approximately $6.0 million
of the Company's research and development efforts related to direct-detection
digital imaging technology in certain medical imaging fields. In fiscal 1998 and
1997, the Company's continuing operations recorded $2,200,000 and $2,000,000,
respectively, of revenue under this agreement, which concluded in fiscal 1998.
In fiscal 1999, Trex Medical paid $500,000 to the Company for certain research
and development efforts related to digital mammography technology, which has
also been recorded as revenue by the Company's continuing operations.
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 February 11, 2000)
36
<PAGE>
ThermoTrex Corporation 1999 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 two business segments: 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. 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) and the Company plans to
seek a buyer for Trex Medical Corporation (Note 18). Trex Medical previously
represented the Company's Medical Products segment.
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 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
37
<PAGE>
Overview (continued)
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. In February 2000, the
Company sold its Trex Communications subsidiary (Note 18).
Results of Operations
Fiscal 1999 Compared With Fiscal 1998
Continuing Operations
Total revenues increased to $108.0 million in fiscal 1999 from $77.8
million in fiscal 1998. 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.
38
<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 13% in fiscal 1999, compared with 22% in
fiscal 1998. 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
decreased to 32% in fiscal 1999 from 46% in fiscal 1998. 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 to 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 $7.3 million in fiscal
1999 and $7.4 million in fiscal 1998. Research and development spending
decreased primarily due to 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, offset in part by the inclusion of $0.6
million of expenses at acquired companies.
During fiscal 1999, the Company undertook broad-scale restructuring
actions. As a result, the Company recorded restructuring and nonrecurring costs
of $66.7 million (Note 8). The Company expects to complete its restructuring
actions by the middle of fiscal 2000.
Interest income decreased to $5.2 million in fiscal 1999 from $10.4
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 $8.4 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.
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
during fiscal 1999 and 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.
39
<PAGE>
Fiscal 1999 Compared With Fiscal 1998 (continued)
The Company recorded minority interest expense of $0.1 million in fiscal
1999, compared with minority interest income of $0.3 million in fiscal 1998. 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.
Discontinued Operations
The Company's discontinued operations incurred a loss of $19.4 million in
fiscal 1999 and had income of $36.4 million in fiscal 1998. The amounts in both
periods are net of taxes and minority interest. The decrease resulted primarily
from a decrease in gain on issuance of stock by subsidiary in fiscal 1999. In
addition, Trex Medical incurred losses in fiscal 1999, compared with profitable
operations in fiscal 1998. Trex Medical lost a significant customer in the
fourth quarter of fiscal 1998 and had lower demand for general purpose X-ray and
radiographic/fluoroscopic systems.
Fiscal 1998 Compared With Fiscal 1997
Continuing Operations
The Company's 21% to $77.8 million in fiscal 1998 from $64.2 million in
fiscal 1997. Personal-care Products and Services segment revenues decreased to
$40.1 million in fiscal 1998 from $45.2 million in fiscal 1997. ThermoLase
earned revenues from hair-removal services and related activities of $17.3
million in fiscal 1998, compared with $21.0 million in fiscal 1997. The decrease
in revenues resulted in part from reduced demand and price reductions at
ThermoLase's Spa Thira locations in fiscal 1998 compared with fiscal 1997,
offset in part by an increase in the number of U.S. spas to 14, compared with 13
spas 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 22% in fiscal 1998, compared with 25% in
fiscal 1997. 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
40
<PAGE>
Fiscal 1998 Compared With Fiscal 1997 (continued)
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
was 46% in fiscal 1998 and 1997.
Research and development expenses were $7.4 million in fiscal 1998 and
1997. Research and development costs increased primarily due to the inclusion of
$2.5 million of expenses at acquired companies offset by decreased spending at
ThermoLase. 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).
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).
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 $10.4 million in fiscal 1998 from $2.9
million in fiscal 1997, primarily due to interest income earned on the invested
proceeds from the Company's November 1997 issuance of $124.5 million principal
amount of 3 1/4% subordinated convertible debentures and ThermoLase's August
1997 issuance of $115.0 million principal amount of 4 3/8% subordinated
convertible debentures (Note 8), offset in part by cash used to fund the loss at
ThermoLase. Interest expense increased to $9.5 million in fiscal 1998 from $0.8
million in fiscal 1997, primarily due to the issuance of subordinated
convertible debentures.
The Company 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 a subsidiary,
the Company recorded a gain of $5.9 million in fiscal 1997 (Note 11). This gain
represents an increase in the Company's net investment in the subsidiary and is
classified as "Gain on issuance of stock by subsidiary" 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, 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. 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 income was $0.3 million in fiscal 1998, compared with
minority interest income of $3.9 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.
Discontinued Operations
The Company's discontinued operations had income of $36.4 million and
$12.9 million in fiscal 1998 and 1997, respectively, net of taxes and minority
interest. The increase resulted primarily from an increase in gain on issuance
of stock by subsidiary in fiscal 1998.
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Liquidity and Capital Resources
Consolidated working capital was $168.9 million at October 2, 1999,
compared with $253.1 million at October 3, 1998. Included in working capital are
cash, cash equivalents, and available-for-sale investments of $75.7 million at
October 2, 1999, compared with $122.5 million at October 3, 1998. Of the $75.7
million balance at October 2, 1999, $1.4 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
$30.2 million invested in an advance to Thermo Electron. Of the $30.2 million
balance, $20.1 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, which consisted of $34.5 million used by continuing operations and $4.3
million provided by discontinued operations. Cash was primarily used to fund the
Company's loss, excluding noncash items. Cash of $12.0 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
$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.
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 $10.6 million for
property, plant, and equipment during fiscal 1999. The Company expects to make
capital expenditures of approximately $2.4 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. In February 2000, the Company sold its Trex Communications
subsidiary for $48.7 million, subject to a post-closing adjustment based upon a
determination of the net book value of Trex Communications at the date of the
sale (Note 18). 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 of continuing operations provided $41.8
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.
42
<PAGE>
Liquidity and Capital Resources (continued)
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 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 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 and
interest 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.
43
<PAGE>
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.
44
<PAGE>
Year 2000 (continued)
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.
45
<PAGE>
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. The Company
and ThermoLase have had difficulty in retaining personnel, due in part to
uncertainties relating to their businesses, and with respect to ThermoLase, the
relocation of ThermoLase headquarters to Carrollton, Texas. The future success
of the Company and ThermoLase depend in part on whether they can attract and
retain highly qualified personnel. The Company and ThermoLase face significant
competition for the services of such personnel. There can be no assurance that
they will attract and retain personnel with the background and expertise
necessary to support continuing businesses. The failure to hire and retain such
personnel could materially adversely affect the financial position and results
of operations of the Company and ThermoLase.
Risks Associated with Government Contracts. Funding for the Company's
federal contracts is appropriated by Congress annually, and there can be no
assurance that the Company's existing contracts will be renewed or that funding
for programs under which the Company's contracts are funded will continue at
present levels or at all. Decreases in appropriations may result in delay,
reduction, or termination of the Company's government contracts. Decreases or
uncertainties in appropriations for programs under which the Company's
government contracts are funded could have a material adverse effect on the
results of operations, financial condition, and business of the Company. The
Company's federal government contracts may be terminated, in whole or in part,
at the discretion of the government. In addition, the Company's federal
government contract costs and fees are subject to adjustment based on audits by
the Defense Contract Audit Agency. Furthermore, the Company's eligibility to
perform under its federal government contracts requires the Company to maintain
adequate security measures. The termination of a federal government contract or
the reduction of fees under such a contract could have a material adverse effect
on the results of operations, financial condition, and business of the Company.
46
<PAGE>
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. Certain of
the Company's products are subject to regulation by the United States Food and
Drug Administration (FDA). 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 imposes various requirements on manufacturers and sellers
of products under its jurisdiction such as labeling, manufacturing practices,
record keeping, and reporting, and may also require post-market testing and
surveillance programs of drugs or devices to monitor a product's effects.
Obtaining regulatory approvals is a lengthy, expensive, and uncertain process.
There can be no assurance that regulatory agencies will grant the necessary
clearances or that the process to obtain such clearances will not be excessively
expensive or lengthy. 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.
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.
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.
47
<PAGE>
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.
48
<PAGE>
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.
48
<PAGE>
ThermoTrex Corporation 1999 Financial Statements
Selected Financial Information
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Nine
Months
Year Ended Ended (d)
--------------------------------------------------------------------
(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 1995 1995
- ------------------------------------- ---------- ----------- ----------- ----------- ---------- ----------
(Unaudited)
Statement of Operations Data
Revenues $ 107,997 $ 77,796 $ 64,217 $ 40,383 $ 41,455 $ 31,589
Income (Loss) from Continuing (104,412) (41,989) (4,494) (2,240) 29,307 30,216
Operations Before
Extraordinary Item
Net Income (Loss) (123,828) (2,613) 8,441 42,575 36,658 36,341
Earnings (Loss) per Share from
Continuing Operations Before
Extraordinary Item:
Basic (5.26) (2.24) (.23) (.12) 1.55 1.60
Diluted (5.26) (2.24) (.23) (.12) 1.52 1.56
Earnings (Loss) per Share:
Basic (6.24) (.14) .44 2.23 1.94 1.92
Diluted (6.24) (.14) .44 2.23 1.90 1.87
Balance Sheet Data
Working Capital $ 168,863 $ 253,085 $ 186,362 $ 121,331 $ 100,707
Total Assets 369,578 437,129 371,504 250,511 210,228
Long-term Obligations 203,993 204,014 115,000 - -
Common Stock of Subsidiary 40,500 40,500 40,500 - -
Subject to Redemption
Shareholders' Investment 59,558 147,523 176,135 205,079 162,388
(a) Reflects restructuring and related costs of $76.4 million and the November 1998 acquisition of LNR.
(b) 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 $5.9 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) 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.
49
<PAGE>
ThermoTrex Corporation 1999 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>
<S> <C> <C> <C> <C>
Fiscal 1999 Fiscal 1998
--------------------- --------------------
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 6 1/4 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 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 February 11,
2000), included in or incorporated by reference into ThermoTrex Corporation's
Form 10-K/A for the fiscal year ended October 2, 1999, into the Company's
previously filed Registration Statement No. 333-94685 on Form S-8, 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
May 8, 2000
<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> 11,483
<SECURITIES> 64,174
<RECEIVABLES> 17,625
<ALLOWANCES> 2,444
<INVENTORY> 12,363
<CURRENT-ASSETS> 223,724
<PP&E> 22,100
<DEPRECIATION> 7,341
<TOTAL-ASSETS> 369,578
<CURRENT-LIABILITIES> 54,861
<BONDS> 185,768
0
0
<COMMON> 233
<OTHER-SE> 59,325
<TOTAL-LIABILITY-AND-EQUITY> 369,578
<SALES> 65,759
<TOTAL-REVENUES> 107,997
<CGS> 47,054
<TOTAL-COSTS> 93,652
<OTHER-EXPENSES> 74,041
<LOSS-PROVISION> 1,900
<INTEREST-EXPENSE> 8,449
<INCOME-PRETAX> (102,848)
<INCOME-TAX> 1,474
<INCOME-CONTINUING> (104,412)
<DISCONTINUED> (19,416)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (123,828)
<EPS-BASIC> (6.24)
<EPS-DILUTED> (6.24)
</TABLE>
<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 3, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-END> OCT-03-1998
<CASH> 114,398
<SECURITIES> 8,076
<RECEIVABLES> 15,748
<ALLOWANCES> 1,004
<INVENTORY> 9,955
<CURRENT-ASSETS> 284,895
<PP&E> 53,097
<DEPRECIATION> 11,685
<TOTAL-ASSETS> 437,129
<CURRENT-LIABILITIES> 31,810
<BONDS> 189,514
0
0
<COMMON> 196
<OTHER-SE> 147,327
<TOTAL-LIABILITY-AND-EQUITY> 437,129
<SALES> 30,248
<TOTAL-REVENUES> 77,796
<CGS> 15,909
<TOTAL-COSTS> 60,537
<OTHER-EXPENSES> 17,564
<LOSS-PROVISION> 273
<INTEREST-EXPENSE> 9,479
<INCOME-PRETAX> (36,657)
<INCOME-TAX> 5,610
<INCOME-CONTINUING> (41,989)
<DISCONTINUED> 36,367
<EXTRAORDINARY> 3,009
<CHANGES> 0
<NET-INCOME> (2,613)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
<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 SEPTEMBER 27, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-END> SEP-27-1997
<CASH> 99,230
<SECURITIES> 17,499
<RECEIVABLES> 14,635
<ALLOWANCES> 670
<INVENTORY> 4,863
<CURRENT-ASSETS> 219,974
<PP&E> 45,270
<DEPRECIATION> 9,296
<TOTAL-ASSETS> 371,504
<CURRENT-LIABILITIES> 33,612
<BONDS> 115,000
0
0
<COMMON> 193
<OTHER-SE> 175,942
<TOTAL-LIABILITY-AND-EQUITY> 371,504
<SALES> 19,725
<TOTAL-REVENUES> 64,217
<CGS> 9,710
<TOTAL-COSTS> 48,290
<OTHER-EXPENSES> 8,762
<LOSS-PROVISION> 81
<INTEREST-EXPENSE> 835
<INCOME-PRETAX> (15,005)
<INCOME-TAX> (6,596)
<INCOME-CONTINUING> (4,494)
<DISCONTINUED> 12,935
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,441
<EPS-BASIC> 0.44
<EPS-DILUTED> 0.44
</TABLE>
