SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------------------------
AMENDMENT NO. 3 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 September 28, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 1-13104
THERMOLASE CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 06-1360302
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10455 Pacific Center Court
San Diego, California 92121-4339
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 646-5700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
---------------------------- ------------------------------------
Common Stock, $.01 par value 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 January 30, 1997, was approximately $193,453,496.
As of January 30, 1997, the Registrant had 40,700,310 shares of Common
Stock outstanding.
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ThermoLase Corporation Amendment No. 3
on Form 10-K/A to Annual Report on Form 10-K
for the fiscal year ended September 28, 1996
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Fiscal 1996 Annual Report to
Shareholders for the year ended September 28, 1996, are incorporated by
reference into Parts I and II.
Item 1 of Part I of the Registrant's Annual Report on Form 10-K for
the fiscal year ended September 28, 1996 is hereby amended and restated
in its entirety as contained in the following Attachment A, which is
included herein and made a part of this Annual Report on Form 10-K, as
amended. The Registrant's Fiscal 1996 Annual Report to Shareholders for
the year ended September 28, 1996 (only those portions incorporated by
reference into the Annual Report on Form 10-K, as amended) is hereby
amended and restated in its entirety as contained in Exhibit 13 filed
herewith and incorporated herein by reference.
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. 3 on Form 10-K/A to be signed by the undersigned, duly
authorized.
THERMOLASE CORPORATION
By: Paul F. Kelleher
----------------
Paul F. Kelleher
Chief Accounting
Officer
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ATTACHMENT A
PART I
Item 1. Business
(a) General Development of Business
ThermoLase Corporation (the Company or the Registrant) has developed
a proprietary system for the removal of unwanted hair (the SoftLight(SM)
system). In April 1995, the Company received clearance from the U.S. Food
and Drug Administration (FDA) to commercially market services using this
system.
The SoftLight system uses a low-energy, dermatology laser in
combination with a lotion to remove hair. The Company believes that its
system has significant advantages over electrolysis, which is a slow and
painful process in which an electrified needle is inserted directly into
each individual hair follicle.
The Company is marketing the SoftLight system in the U.S. through its
Spa Thira salons and through licensing agreements with doctors. The
Company is marketing the SoftLight system in foreign countries by
engaging in joint ventures and other licensing arrangements with
companies or individuals that are experienced in those locations.
In November 1995, the Company opened its first commercial salon, Spa
Thira, in La Jolla, California. The Company opened additional salons in
Dallas in June 1996, in Houston and Beverly Hills in September 1996, in
Denver in October 1996, and in Boca Raton in November 1996. The Company
also plans to open a spa in suburban Detroit in December 1996 and has
signed leases for four additional sites in Greenwich, Connecticut;
Manhasset, New York; suburban Minneapolis; and Palm Beach, Florida. Lease
negotiations are under way for additional sites.
In January 1996, the Company entered into a joint venture to market
the SoftLight process in Japan, as well as its laser-based skin-
rejuvenation process, if and when available. Before opening the first spa
in Japan, the joint venture must obtain Japanese regulatory clearance to
market the SoftLight process, for which it is presently conducting
clinical studies to obtain data to submit to the appropriate Japanese
regulatory authorities. The Company currently holds a 50% stake in the
joint venture, with an option to increase its ownership to 51% pursuant
to a fair-value purchase option.
In June 1996, the Company initiated a program to license its
SoftLight technology to doctors. In this program, the Company licenses
its technology to doctors and receives a per-procedure royalty that
varies depending on the location treated. The Company also provides the
doctors with the lasers and supplies that are necessary to perform the
service. A total of 55 doctors were licensees as of December 1, 1996.
In June 1996, the Company purchased $4,400,000 of convertible
preferred stock of AntiCancer Incorporated (AntiCancer), representing an
approximate 10% equity interest on a fully diluted basis. The Company
also has the option to purchase an additional 5% equity interest at any
time before the earlier of 2011 or AntiCancer's initial public offering
of common stock. San Diego-based AntiCancer is developing technology that
may have the potential to enhance the effectiveness of the SoftLight
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process. In this technology, liposomes, which have been proven to be
effective delivery agents in other applications, might provide a more
efficient method of delivering carbon, which is the primary ingredient in
the lotion used in the SoftLight process, to hair follicles. The Company
has signed an agreement to license this technology as it pertains not
only to hair removal, but also to stimulation of hair growth, suppression
of hair growth, and hair coloring. The agreement calls for up to
$1,500,000 in future payments by the Company upon the attainment by
AntiCancer of certain milestones relating to the satisfactory completion
of certain preliminary efficacy testing and regulatory matters. In
addition to such future payments, the Company will be substantially
responsible for development costs incurred after attainment of such
milestones. In the event that the funded development efforts result in
commercially viable products that the Company elects to market, the
Company will pay AntiCancer a royalty based on sales, subject to certain
minimum payments.
In November 1996, the Company entered into a joint venture to market
its SoftLight process in France, as well as its laser-based
skin-rejuvenation process, if and when available. The joint venture plans
to open Spa Thira salons in France and to sublicense to French physicians
and others the right to perform services using the SoftLight system. The
Company has committed to provide up to $5,000,000 to fund working capital
requirements of the joint venture in exchange for its 50% stake in the
joint venture. The Company's partner in the venture, an affiliate of
Groupe Jacques Dessange (a leading provider of premium hair- and
skin-care services in France), has also committed to fund up to
$5,000,000 in exchange for its 50% ownership. The Company has licensed
the technology to perform the SoftLight process to the joint venture, and
will receive a royalty based on the joint venture's revenues.
In November 1996, the Company entered into a license agreement with a
third party, which will market the SoftLight process through Spa Thira
salons and sublicensing arrangements in Saudi Arabia, as well as its
laser-based skin-rejuvenation process, if and when available.
The Company is investigating other applications for its laser-based
technology, and in June 1995 was granted a patent covering a laser-based
skin-rejuvenation system, which the Company believes may be used to
remove the outer layers of dead skin cells. In recent years, those
seeking younger-looking skin have embraced a variety of methods for
removing wrinkles, including dermabrasion (mechanically sanding the skin)
and chemical peels. More recently, carbon dioxide (CO2) lasers have been
used to remove wrinkles, but their use has been associated with long
healing times and, in some cases, undesirable side effects. The Company
believes that the skin-rejuvenation process that it is developing will
cause less skin damage than existing laser skin treatments that use a CO2
laser. Although the safety of using lasers for skin treatments has been
established by several systems that are already approved by the FDA for
the removal of birthmarks and tattoos, the Company may not commercially
sell its skin-rejuvenation system, or services using the system, until it
has received clearance from the FDA. The Company is currently conducting
clinical trials at two sites: the University of New Mexico and in
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Westwood, New Jersey, under the direction of Dr. David Goldberg. The
Company plans to submit a 510(k) application containing clinical data by
the end of the second quarter of fiscal 1997.
In December 1993, the Company acquired CBI Laboratories, Inc. (CBI),
a manufacturer of skin-care and bath and body products. CBI provides the
Company with expertise in the market for personal-care products and
manufactures the lotion used with the SoftLight system. In addition, CBI
has recently started manufacturing a line of Spa Thira products to be
sold at the spas and at doctors' offices where SoftLight services are
provided.
As of September 28, 1996, ThermoTrex Corporation (ThermoTrex) owned
25,960,996 shares of the common stock of the Company, representing 64% of
such stock then outstanding. A publicly traded, majority-owned subsidiary
of Thermo Electron Corporation (Thermo Electron), ThermoTrex, through its
publicly traded, majority-owned Trex Medical Corporation (Trex Medical)
subsidiary, is the world's leading manufacturer of mammography and
stereotactic breast-biopsy systems, and also supplies other specialized
and general-purpose X-ray equipment, in addition to the Company's
products and services. ThermoTrex also conducts advanced technology
research and is currently developing a laser communication system,
products for the medical imaging and avionics markets, and is pursuing
industrial applications for its advanced-materials technology. Thermo
Electron is a world leader in environmental monitoring and analysis
instruments, biomedical products such as heart-assist devices and
mammography systems, papermaking and paper-recycling equipment, biomass
electric power generation, and other specialized products and
technologies. Thermo Electron also provides a range of services related
to environmental quality.
In fiscal 1996*, the Company purchased SoftLight laser systems from
Trex Medical at an aggregate cost of $8,549,000. As of September 28,
1996, the Company has committed to purchase additional lasers at an
aggregate cost of $6,402,000.
Forward-looking Statements
Forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Annual Report
on Form 10-K. These statements involve a number of risks and
uncertainties, including those detailed under the caption
"Forward-looking Statements -- Risk Factors" in the Registrant's Fiscal
1996 Annual Report to Shareholders incorporated herein by reference.
(b) Financial Information About Industry Segments
The Company conducts business in one industry segment.
* In September 1995, the Company changed its fiscal year end from the
Saturday nearest December 31 to the Saturday nearest September 30.
References to "fiscal 1996," "fiscal 1995," and "1994" herein are for
the year ended September 28, 1996, the nine months ended September 30,
1995, and the year ended December 31, 1994, respectively.
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(c) Description of Business
(i) Principal Products and Services
Laser-based Hair Removal
The patented SoftLight system uses a low-energy, dermatology laser in
combination with a lotion that absorbs the laser's energy to disable hair
follicles. Unlike electrolysis, the SoftLight system can disable numerous
hair follicles at one time. As a result, the Company believes that it
will be able to address a larger market than electrolysis by offering
hair removal from large areas, such as the legs. The lasers, which are
similar to those used for tattoo and birthmark removal, are manufactured
for the Company by Trex Medical. The lotion is manufactured by the
Company's CBI Laboratories subsidiary.
In a typical treatment, the area from which hair is to be removed is
first waxed to open each hair duct. The lotion is then applied, and the
area is scanned with the laser beam. The laser energy passes through the
skin and is absorbed by the lotion that has penetrated the hair duct,
causing the temperature of the lotion to increase to a level that
disables the hair follicles. Each client typically has a series of
treatments, for which the Company's spas currently offer several pricing
programs, including fixed fees for one or more treatments and fixed fees
for treatments during specified time periods. The per treatment cost of
the SoftLight system to the customer is, in general, substantially higher
than the per treatment costs of alternative methods of hair removal,
including waxing, electrolysis, and shaving. The total cost of the
SoftLight system in comparison to these alternatives varies depending on
factors including customer preference, body part treated, and the
efficacy of the Company's process in comparison to such alternatives.
The Company has invested and continues to invest in research and
development to improve the efficacy of the system and increase the length
of time between treatments. In 1994, the Company conducted a clinical
trial using a SoftLight laser to collect data on the effectiveness of the
SoftLight hair-removal system under the clinical protocol established for
the Company's FDA submission. Results were based on a dermatologist's
visual observation of each subject's treatment area at various time
intervals after treatment and varied depending upon the anatomical site
treated. Of the 65 anatomical sites screened in 12 weeks after receiving
such treatment, 49 (75%) experienced a reduction in hair growth greater
than 30%, with the average reduction in hair growth equal to 46%. Of the
32 anatomical sites screened 24 weeks after receiving such treatment, 21
(66%) experienced a reduction in hair growth greater than 30%, with the
average reduction in hair growth equal to 39%.
The Company is marketing the SoftLight system in the U.S. through its
Spa Thira salons and through licensing agreements with doctors. The
Company is marketing the SoftLight system in foreign countries by
engaging in joint ventures or other licensing arrangements with companies
or individuals that are experienced in those locations.
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In November 1995, the Company opened its first commercial salon, Spa
Thira, in La Jolla, California. The Company opened additional salons in
Dallas in June 1996, in Houston and Beverly Hills in September 1996, in
Denver in October 1996, and in Boca Raton in November 1996. The Company
also plans to open a salon in suburban Detroit in December 1996 and has
signed leases for four additional sites in Greenwich, Connecticut;
Manhasset, New York; suburban Minneapolis; and Palm Beach, Florida. Lease
negotiations are under way for additional sites.
In June 1996, the Company initiated a program to license its
SoftLight technology to doctors. In this program, the Company licenses
its technology to doctors and receives a per-procedure royalty that
varies depending on the location treated. The Company also provides the
doctors with the lasers and supplies that are necessary to perform the
service. A total of 55 doctors were licensees as of December 1, 1996.
In January 1996, the Company entered into a joint venture to market
the SoftLight process in Japan, as well as its laser-based skin-
rejuvenation process, if and when available. The Company currently holds
a 50% stake in the joint venture, with an option to increase its
ownership to 51% pursuant to a fair-value purchase option. During fiscal
1996, the Company received $2.0 million in minimum guaranteed payments in
accordance with contractual terms. The Company will receive $1.0 million
in minimum guaranteed payments in fiscal 1997, subject to certain
exceptions in the event the joint venture is unable to obtain patent
protection in Japan on prescribed terms. The Company's primary partner in
the joint venture is the Fox River Investment Group, whose principals and
partners have extensive experience developing consumer products and
services in Japan. Before opening the first spa in Japan, the joint
venture must obtain Japanese regulatory clearance to market the SoftLight
process, for which it is presently conducting clinical studies to obtain
data to submit to the appropriate Japanese regulatory authorities.
In November 1996, the Company entered into a joint venture to market
its SoftLight process in France, as well as its laser-based
skin-rejuvenation process, if and when available. The joint venture plans
to open Spa Thira salons in France and to sublicense to French physicians
and others the right to perform services using the SoftLight system. The
Company has committed to provide up to $5,000,000 to fund working capital
requirements of the joint venture in exchange for its 50% stake in the
joint venture. The Company's partner in the venture, an affiliate of
Groupe Jacques Dessange (a leading provider of premium hair- and
skin-care services in France), has also committed to fund up to
$5,000,000 in exchange for its 50% ownership. The Company has licensed
the technology to perform the SoftLight process to the joint venture, and
will receive a royalty based on the joint venture's revenues.
In November 1996, the Company entered into a license agreement with a
third party, which will market the SoftLight process through Spa Thira
salons and sublicensing arrangements in Saudi Arabia, as well as its
laser-based skin-rejuvenation process, if and when available. Pursuant to
the agreement, the Company will receive up-front fees totaling $1,000,000
over a two-year period and a fee based on revenues derived from SoftLight
services.
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The Company's existing and planned spas are designed to reflect the
environment of a luxurious day spa. The Company believes that the
uniformity of its centers will foster brand recognition and facilitate
the opening of new spas. The Company currently utilizes medical staff,
including physicians, nurses, and other medical personnel, to operate the
SoftLight system at its centers.
The Company advertises the SoftLight system through an advertising
and public relations campaign focused on Company exposure in fashion and
health magazines as well as the national news media.
During fiscal 1996, the Company derived revenues of $4,647,000 from
laser-based hair removal services.
Personal-care Products
In December 1993, the Company acquired CBI, a designer, developer,
manufacturer, and packager of high-quality personal-care products for
sale to retailers under its own brand names and as a contract
manufacturer under arrangements with third parties. CBI develops and
manufactures most of its products, which include shampoos, lotions,
shower creams, bath salts, and facial treatments, using botanicals and
herbal extracts, with no animal fats, chemical dyes, or artificial
aromas. CBI has the facilities and personnel to develop new product
formulations, design packaging layouts, mix and fill formulations, and
package final products for distribution. CBI does not manufacture
packaging such as containers and boxes, but contracts with third parties
for these supplies. CBI has a portfolio of approximately 3,000
formulations, and may manufacture up to 300 different products in a
quarter. Through fiscal 1995, CBI's sales accounted for all of the
Company's revenues.
CBI divides its business into three primary groups: Salon, Custom
Design, and Store Brands. The Salon group, which represents CBI's
original business, develops and manufactures a line of products primarily
sold directly by CBI to professional estheticians in skin-care salons and
spas. The Custom Design group markets CBI's manufacturing and design
services primarily to major retailers and multilevel marketing groups for
custom design of private-label product lines. The Store Brands group
markets complete proprietary product lines created by CBI, including
product formulations, packaging, brand name, and promotional materials,
which can be purchased by a customer for sale in its retail outlets as an
exclusive product line.
CBI's marketing and sales strategy varies by product line. Sales in
the Salon group are made by phone solicitations and by sales
representatives. Sales in the Custom Design and Store Brands groups are
managed by the president of CBI and a group of account executives working
exclusively in this area. In addition, the Company expects its network of
Spa Thira salons and physicians' offices where SoftLight services are
offered to provide a retail outlet for CBI's salon products. To support
its marketing activities, CBI attends industry trade shows and advertises
in major trade publications.
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During fiscal 1996, fiscal 1995, and 1994, the Company derived
revenues of $23,165,000, $17,544,000, and $18,682,000 from the sale of
personal-care products.
(ii) New Products
In June 1995, the Company was issued a U.S. patent covering a
laser-based exfoliation system, which the Company believes may be used to
remove the outer layers of dead skin cells. In this skin-rejuvenation
system, a lotion, which is applied to the area to be treated, is absorbed
by the outer layers of dead skin cells, which are more loosely connected
than the new skin below. When the treatment area is scanned with the
laser, the laser's energy is absorbed by the lotion causing the dead skin
cells to break free. The Company is currently performing studies at two
sites: the University of New Mexico and in Westwood, New Jersey, under
the direction of Dr. David Goldberg, to determine the safety and efficacy
of this system. The Company is required to perform clinical trials and to
obtain FDA clearance before it can commercially market its skin-
rejuvenation system. The Company plans to submit a 510(k) application
containing clinical data by the end of the second quarter of fiscal 1997.
If the skin-rejuvenation system is commercially viable and the Company
receives FDA clearance to market it, the Company currently intends to
offer its skin-rejuvenation system at its Spa Thira salons.
(iii) Raw Materials
Raw materials, components, and supplies purchased by the Company are
either available from a number of different suppliers or from alternative
sources that could be developed without a material adverse effect on the
Company. To date, the Company has experienced no difficulties in
obtaining these materials.
(iv) Patents, Licenses, and Trademarks
The Company's policy is to protect its intellectual property rights
relating to its work on the SoftLight system including, if appropriate,
applying for patents in the U.S. and foreign countries. The Company has
been issued two U.S. patents and certain foreign patents related to its
hair-removal system, and has various patents pending to extend the
coverage of the U.S. patents in the U.S. and in foreign countries. The
Company has corresponding patent applications pending in numerous foreign
countries and in the European Community (EC) and has reserved its rights
to file further corresponding patent applications in countries which are
members of the Patent Cooperation Treaty (PCT). The Company's issued U.S.
patents cover a hair-removal system that incorporates a substance that
penetrates the hair duct and absorbs the energy from an illuminating
light source that penetrates the skin.
The Company has been issued one U.S. patent related to its
skin-rejuvenation system. The Company has corresponding patent
applications pending in numerous foreign countries and has reserved its
rights to file further corresponding patent applications in countries
which are members of the PCT.
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The Company has patent applications pending in the United States and
has reserved its rights to file patent applications in countries that are
members of the PCT, related to a laser-based drug-delivery system using a
concept similar to its laser-based hair-removal system.
The Company intends to aggressively pursue any person or company that
offers services that the Company believes infringe on one or more of its
patents.
The technology underlying the SoftLight system, including all patents
issued thereon, belongs to the Company by virtue of a license agreement
executed in February 1993 between the Company and the inventor of the
system, which grants the Company an irrevocable, exclusive, worldwide,
perpetual license to the technology in exchange for a $100,000 commitment
fee and a royalty equal to 0.25% of revenues generated from the sale or
use of the SoftLight system through February 10, 2010.
CBI relies primarily on trade secret protection for the proprietary
formulations that form the basis of its products. CBI generally retains
the proprietary rights to the formulations it develops, either for itself
or for a specific customer.
(v) Seasonal Influences
Due to the recent growth of CBI's sales to stores, the Company
experienced an increase in revenues in the first quarter of fiscal 1996
and the fourth quarter of calendar 1994 as a result of holiday demand, a
seasonal trend that the Company expects will continue.
(vi) Working Capital Requirements
There are no special inventory requirements or credit terms extended
to customers that would have a material adverse effect on the Company's
working capital.
(vii) Dependency on a Single Customer
No single customer accounted for more than 10% of the Company's total
revenues in fiscal 1996.
(viii) Backlog
The Company's backlog of firm orders at September 28, 1996 and
September 30, 1995, which consisted exclusively of orders for CBI's
products, was $5,466,000 and $4,600,000, respectively. The Company
anticipates that substantially all of its backlog will be shipped or
completed during fiscal 1997.
(ix) Government Contracts
Not applicable.
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(x) Competition
The Company expects that, in the near term, the principal competitors
relative to treatment using the SoftLight system will be electrolysis
providers. The electrolysis market is characterized by many small
practitioners. Although the Company believes that it has a significant
competitive advantage over electrolysis, it does not have the
well-established network of client relationships that many electrologists
have. In addition, a number of laser manufacturers have announced that
they have filed applications with the FDA seeking to obtain clearance to
market a laser for hair removal. Although, to date, none of these
companies has been successful in obtaining such clearance, a number of
them are currently marketing substantially similar devices for
indications other than hair removal. The Company believes that certain of
these devices are being used "off-label" for hair removal by some
physicians in the U.S. and are being marketed for hair removal in some
foreign jurisdictions where regulatory clearance is not as stringent as
it is in the United States. The Company's products and services will also
compete with other hair-removal products. If the Company's technology is
accepted by the general public, the Company expects that others will seek
to develop similar technologies and products that may compete directly
with the SoftLight system.
The professional skin-care and bath-and-body products markets are
highly competitive. In selling its Salon product line, CBI competes with
a number of small manufacturers and divisions of larger companies. The
competition in this market is fragmented with no one competitor
dominating the market. In the Custom Design and Store Brands groups, CBI
competes with numerous contract packaging companies that can prepare and
package custom formulations for customers. Some of these competitors have
substantially greater financial, marketing, and research and development
resources than those of the Company. CBI competes in these markets by
offering its customers exclusive product lines that the Company believes
can generally be sold at a lower price but with higher margins than CBI's
competitors.
(xi) Research and Development
During fiscal 1996, fiscal 1995, and 1994, the Company incurred
approximately $3,470,000, $3,151,000, and $2,324,000, respectively, of
internally sponsored research and development programs. Approximately 21
professional employees were engaged full-time in research and development
activities at September 28, 1996.
(xii) Environmental Protection Regulations
The Company believes that compliance with federal, state, and local
environmental regulations will not have a material adverse effect on its
capital expenditures, earnings, or competitive position.
(xiii) Number of Employees
As of September 28, 1996, the Company employed 280 people.
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(d) Financial Information about Exports by Domestic Operations
Financial information about exports by domestic operations is
summarized in Note 11 to Consolidated Financial Statements in the
Registrant's Fiscal 1996 Annual Report to Shareholders and is
incorporated herein by reference.
(e) Executive Officers of the Registrant
Present Title (Fiscal Year First Became
Name Age Executive Officer)
------------------- --- ---------------------------------------
John C. Hansen 37 President and Chief Executive Officer
(1995)
John N. Hatsopoulos 62 Vice President and Chief Financial
Officer (1992)
Dr. Paul E. Cain 48 Vice President (1993)
Mark H. Wurth 44 Vice President, Operations (1995)
Charles K. Wittenberg 33 Vice President, Business Development
(1996)
Raymond D. Sphire 37 Vice President, Real Estate Design and
Construction (1996)
Paul F. Kelleher 54 Chief Accounting Officer (1992)
Each executive officer serves until his successor is chosen or
appointed by the Board of Directors and qualified or until earlier
resignation, death, or removal. Messrs. Hatsopoulos and Kelleher have
held comparable positions for at least five years with Thermo Electron.
Mr. Hansen has been President and Chief Executive Officer of the Company
since May 1995. From 1990 until joining the Company, Mr. Hansen was
President of Dolphin Acquisition Corp., which sells beauty products
through a chain of retail outlets. Dr. Cain has been an officer of the
Company since its acquisition of CBI in December 1993, president of CBI
since its inception in 1982, and from 1982 until CBI's acquisition by the
Company, Dr. Cain was a Director of CBI. Mr. Wurth has been Vice
President, Operations, of the Company since June 1995. From February 1994
until joining the Company, Mr. Wurth was Vice President, International
and Southern California Operations, of Jenny Craig, Inc. From September
1993 to February 1994, Mr. Wurth was Vice President/General Manager of
Paging Network of Los Angeles, Inc. From 1990 to June 1993, Mr. Wurth
held various positions at Nutri/System, Inc., most recently, as Chief
Executive Officer, Australian Nutri/System Pty. Ltd. Mr. Wittenberg has
been Vice President, Business Development of the Company since March
1996. From January 1994 until joining the Company, Mr. Wittenberg was
Associate General Counsel at Thermo Electron. From September 1990 until
December 1993, Mr. Wittenberg was an attorney with Hale and Dorr. Mr.
Sphire has been Vice President, Real Estate Development and Design, of
the Company since June 1996. From September 1995 until June 1996, Mr.
Sphire was Director of Real Estate and Design at the Company. From 1984
until joining the Company, Mr. Sphire was a partner in The Holt Company,
a real estate development company in California. Messrs. Hatsopoulos and
Kelleher are full-time employees of Thermo Electron, but devote such time
to the affairs of the Company as the Company's needs reasonably require.
ThermoLase Corporation
Consolidated Financial Statements
Fiscal Year 1996
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ThermoLase Corporation
Consolidated Statement of Operations
Nine Months Year
Year Ended Ended Ended
--------------------- ----------- -------
(In thousands except Sept. 28, Sept. 30, Sept. 30, Dec. 31,
per share amounts) 1996 1995 1995 1994
-----------------------------------------------------------------------------
(Unaudited)
Revenues (Note 11)
Product revenues $23,165 $23,348 $17,544 $18,682
Service revenues 4,647 - - -
------- ------- ------- -------
27,812 23,348 17,544 18,682
------- ------- ------- -------
Costs and Operating Expenses:
Cost of product revenues 15,063 14,714 11,424 10,785
Cost of service revenues 4,964 - - -
Selling, general and admin-
istrative expenses (Note 9) 9,761 8,128 6,158 5,744
Research and development
expenses 3,470 3,774 3,151 2,324
------- ------- ------- -------
33,258 26,616 20,733 18,853
------- ------- ------- -------
Operating Loss (5,446) (3,268) (3,189) (171)
Interest Income 3,482 971 789 595
Interest Expense, Related Party
(Note 9) - - - (116)
Gain (Loss) on Sale of
Investments (Note 3) 115 (41) - (42)
------- ------- ------- -------
Income (Loss) Before Income
Taxes and Cumulative Effect
of Change in Accounting
Principle (1,849) (2,338) (2,400) 266
Income Tax (Provision) Benefit
(Note 8) 463 663 721 (260)
------- ------- ------- -------
Income (Loss) Before
Cumulative Effect of Change
in Accounting Principle (1,386) (1,675) (1,679) 6
Cumulative Effect of Change in
Accounting Principle, Net of
Tax (Note 3) - - - 9
------- ------- ------- -------
Net Income (Loss) $(1,386) $(1,675) $(1,679) $ 15
======= ======= ======= =======
Earnings (Loss) per Share
Before Cumulative Effect of
Change in Accounting Principle $ (.03) $ (.04) $ (.04) $ -
======= ======= ======= =======
Earnings (Loss) per Share $ (.03) $ (.04) $ (.04) $ -
======= ======= ======= =======
Weighted Average Shares 40,353 37,880 38,005 35,767
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
2PAGE
<PAGE>
ThermoLase Corporation
Consolidated Balance Sheet
September 28, September 30,
(In thousands except share amounts) 1996 1995
--------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 7,923 $13,146
Available-for-sale investments, at quoted
market value (amortized cost of $44,205
and $52,281) (Note 3) 44,132 52,294
Accounts receivable, less allowances of
$319 and $256 4,572 4,255
Inventories 4,269 5,203
Prepaid expenses 408 186
Prepaid income taxes (Note 8) 1,882 852
------- -------
63,186 75,936
------- -------
Property and Equipment, at Cost, Net 19,323 4,168
------- -------
Other Assets 4,679 319
------- -------
Cost in Excess of Net Assets of Acquired
Company 8,332 9,040
------- -------
$95,520 $89,463
======= =======
Liabilities and Shareholders' Investment
Current Liabilities:
Accounts payable $ 5,179 $ 3,405
Accrued payroll and employee benefits 1,008 538
Accrued income taxes 245 412
Deferred revenue 913 -
Other accrued expenses 1,546 1,818
Due to parent company and affiliated companies 7,098 1,072
------- -------
15,989 7,245
------- -------
Deferred Lease Liability 494 -
------- -------
Commitments and Contingencies (Notes 9 and 10)
Shareholders' Investment (Notes 5 and 6):
Common stock, $.01 par value, 50,000,000
shares authorized; 40,803,932 and
40,109,772 shares issued 408 401
Capital in excess of par value 85,813 84,354
Accumulated deficit (3,516) (2,130)
Treasury stock at cost, 116,570 and
21,944 shares (3,621) (415)
Net unrealized gain (loss) on available-for-
sale investments (Note 3) (47) 8
------- -------
79,037 82,218
------- -------
$95,520 $89,463
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
3PAGE
<PAGE>
ThermoLase Corporation
Consolidated Statement of Cash Flows
Nine Months Year
Year Ended Ended Ended
--------------------- ----------- -------
Sept. 28, Sept. 30, Sept. 30, Dec. 31,
(In thousands) 1996 1995 1995 1994
-----------------------------------------------------------------------------
(Unaudited)
Operating Activities:
Net income (loss) $ (1,386) $ (1,675) $ (1,679) $ 15
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Cumulative effect of
change in accounting
principle (Note 3) - - - (9)
Depreciation and
amortization 1,482 836 640 741
Provision for losses on
accounts receivable 63 153 153 40
(Gain) loss on sale of
investments (Note 3) (115) 41 - 42
Loss on disposal of
property and equipment - 125 125 -
Deferred lease liability 494 - - -
Changes in current
accounts, excluding the
effects of acquisition:
Accounts receivable (380) (1,132) (540) (1,093)
Inventories 934 (2,402) (1,101) (1,743)
Other current assets (1,221) (586) (846) 182
Accounts payable 1,774 1,859 1,355 796
Other current
liabilities 2,205 2,138 1,317 (648)
-------- -------- -------- --------
Net cash provided by (used
in) operating activities 3,850 (643) (576) (1,677)
-------- -------- -------- --------
Investing Activities:
Acquisition, net of cash
acquired (Note 4) - (197) - (197)
Investment in other assets
(Note 1) (4,400) - - -
Purchases of available-for-
sale investments (49,500) (49,793) (49,793) (9,700)
Proceeds from maturities of
available-for-sale
investments 56,525 10,700 6,000 3,700
Proceeds from sale of
available-for-sale
investments 615 959 - 3,958
Purchases of property and
equipment (13,230) (2,975) (1,584) (2,736)
Other 553 256 101 460
-------- -------- -------- --------
Net cash used in investing
activities $ (9,437) $(41,050) $(45,276) $ (4,515)
-------- -------- -------- --------
4PAGE
<PAGE>
ThermoLase Corporation
Consolidated Statement of Cash Flows (continued)
Nine Months Year
Year Ended Ended Ended
--------------------- ----------- -------
Sept. 28, Sept. 30, Sept. 30, Dec. 31,
(In thousands) 1996 1995 1995 1994
-----------------------------------------------------------------------------
(Unaudited)
Financing Activities:
Net proceeds from issuance
of Company common stock
(Note 5) $ 2,591 $ 55,544 $ 55,544 $ 14,784
Payment of withholding taxes
related to stock option
exercises (2,227) (776) (776) -
Repayment of promissory note
to parent company (Note 9) - - - (5,000)
-------- -------- -------- --------
Net cash provided by
financing activities 364 54,768 54,768 9,784
-------- -------- -------- --------
Increase (Decrease) in Cash
and Cash Equivalents (5,223) 13,075 8,916 3,592
Cash and Cash Equivalents at
Beginning of Period 13,146 71 4,230 638
-------- -------- -------- --------
Cash and Cash Equivalents at
End of Period $ 7,923 $ 13,146 $ 13,146 $ 4,230
======== ======== ======== ========
Cash Paid (Refunded) For:
Interest $ - $ - $ - $ 116
Income taxes $ 12 $ 42 $ 124 $ (82)
Noncash Activities:
Fair value of assets of
acquired company $ - $ 479 $ - $ 479
Cash paid for acquired
company - (197) - (197)
-------- -------- -------- --------
Liabilities assumed of
acquired company $ - $ 282 $ - $ 282
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5PAGE
<PAGE>
ThermoLase Corporation
Consolidated Statement of Shareholders' Investment and Common Stock Subject
to Redemption
Common Common
Stock Stock, Capital in
Subject to $.01 Par Excess of
(In thousands) Redemption Value Par Value
--------------------------------------------------------------------------
Balance January 1, 1994 $ 14,511 $ 130 $ -
Net income - - -
Net proceeds from initial
public offering of common
stock (Note 5) - 27 14,757
Accretion related to common
stock subject to redemption 254 - (107)
Expiration of redemption
rights (Note 1) (14,765) 31 14,734
Cumulative effect of change
in accounting principle
(Note 3) - - -
Change in net unrealized gain
(loss) on available-for-
sale investments (Note 3) - - -
-------- -------- --------
Balance December 31, 1994 - 188 29,384
Net loss - - -
Effect of two-for-one stock
split - 188 (188)
Net proceeds from sale of
common stock (Note 5) - 24 55,311
Issuance of stock under
employees' and directors'
stock plans - 1 (153)
Change in net unrealized gain
(loss) on available-for-
sale investments (Note 3) - - -
-------- -------- --------
Balance September 30, 1995 - 401 84,354
Net loss - - -
Issuance of stock under
employees' and directors'
stock plans - 7 1,459
Change in net unrealized gain
(loss) on available-for-
sale investments (Note 3) - - -
-------- -------- --------
Balance September 28, 1996 $ - $ 408 $ 85,813
======== ======== ========
6PAGE
<PAGE>
ThermoLase Corporation
Consolidated Statement of Shareholders' Investment and Common Stock Subject
to Redemption (continued)
Net
Unrealized
Gain (Loss) on
Available-
Accumulated Treasury for-sale
(In thousands) Deficit Stock Investments
--------------------------------------------------------------------------
Balance January 1, 1994 $ (319) $ - $ -
Net income 15 - -
Net proceeds from initial
public offering of common
stock (Note 5) - - -
Accretion related to common
stock subject to redemption (147) - -
Expiration of redemption
rights (Note 1) - - -
Cumulative effect of change
in accounting principle
(Note 3) - - (9)
Change in net unrealized gain
(loss) on available-for-
sale investments (Note 3) - - (115)
-------- -------- --------
Balance December 31, 1994 (451) - (124)
Net loss (1,679) - -
Effect of two-for-one stock
split - - -
Net proceeds from sale of
common stock (Note 5) - - -
Issuance of stock under
employees' and directors'
stock plans - (415) -
Change in net unrealized gain
(loss) on available-for-
sale investments (Note 3) - - 132
-------- -------- --------
Balance September 30, 1995 (2,130) (415) 8
Net loss (1,386) - -
Issuance of stock under
employees' and directors'
stock plans - (3,206) -
Change in net unrealized gain
(loss) on available-for-
sale investments (Note 3) - - (55)
-------- -------- --------
Balance September 28, 1996 $ (3,516) $ (3,621) $ (47)
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
7PAGE
<PAGE>
ThermoLase Corporation
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
ThermoLase Corporation (the Company) has developed a laser-based
system called SoftLight(SM) 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. The
Company markets the SoftLight hair-removal service in the U.S. through
its Spa Thira salons and through a network of independent doctors, who
pay the Company a per-procedure fee, and internationally through joint
ventures and other licensing arrangements. The Company also manufactures
and markets skin-care, bath, and body products through its CBI
Laboratories, Inc. (CBI) subsidiary, which manufactures the lotion used
in the SoftLight hair-removal process.
Relationship with ThermoTrex Corporation and Thermo Electron Corporation
The Company was incorporated in January 1993 as a wholly owned
subsidiary of ThermoTrex Corporation (ThermoTrex). As of September 28,
1996, ThermoTrex owned 25,960,996 shares of the Company's common stock,
representing 64% of such stock outstanding. ThermoTrex is a 51%-owned
public subsidiary of Thermo Electron Corporation (Thermo Electron).
Principles of Consolidation
The accompanying financial statements include the accounts of the
Company and its wholly owned subsidiary. All significant intercompany
accounts and transactions have been eliminated.
The Company accounts for investments in joint ventures in which it
owns between 20% and 50% using the equity method. Under the equity
method, the Company records its initial investment in joint ventures at
cost, and adjusts the carrying value of the investment to recognize its
share of earnings or losses of the joint venture. 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
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 transition period, which ended on September
30, 1995, was the 39-week period from January 1, 1995 to September 30,
1995, referenced as "fiscal 1995." References to "fiscal 1996" and "1994"
are for the years ended September 28, 1996 and December 31, 1994,
respectively. Fiscal 1996 and 1994 each included 52 weeks. The unaudited
consolidated statements of operations and cash flows for the 52-week
period ended September 30, 1995 are presented for comparative purposes
only.
8PAGE
<PAGE>
ThermoLase Corporation
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Revenue Recognition
The Company generally recognizes product revenues upon shipment.
The Company offers a variety of treatment plans for its spa-based
hair-removal services which include one-time services and multiple
treatment plans that provide for varying numbers of treatments or
treatment periods. The Company recognizes revenue from the one-time
treatment plan upon performance of the related service. Revenues from
multiple treatment plans are recognized over the anticipated treatment
period which, in fiscal 1996, was six months based upon the average
service pattern for customers treated during the year. Deferred revenue
in the accompanying fiscal 1996 balance sheet represents unearned revenue
from hair-removal treatments at the Company's Spa Thira salons which will
be recognized in fiscal 1997.
The Company earns an initial technology licensing fee and ongoing
royalties from licensing its SoftLight technology to a network of
independent physicians. Initial nonrefundable technology license fees are
recorded as revenue at the time the technology is transferred to the
practitioner. Fees arising from hair-removal procedures performed by
these physicians are recognized when such procedures are performed.
Pre-opening Spa Costs
The Company expenses all pre-opening costs associated with the
establishment and startup of its Spa Thira salons as such costs are
incurred.
Concentration of Credit Risk
The Company sells its skin-care and other personal-care products
primarily to regional and national stores and salons. As a result, a
majority of the Company's receivables are with these customers.
Management does not believe that this concentration of credit risk has,
or will have, a significant negative impact on the Company. The Company
does not typically require collateral on its credit sales.
Income Taxes
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes," the Company recognizes
deferred income taxes based on the expected future tax consequences of
differences between the financial statement basis and the tax basis of
assets and liabilities calculated using enacted tax rates in effect for
the year in which the differences are expected to be reflected in the tax
return.
Earnings (Loss) per Share
Earnings (loss) per share have been computed based on the weighted
average number of shares outstanding during the period. Weighted average
shares in 1994 include the effect of the exercise of stock options that
were computed using the treasury stock method. Because the effect of the
9PAGE
<PAGE>
ThermoLase Corporation
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
exercise of stock options would be anti-dilutive in fiscal 1996 and
fiscal 1995, such options were not included in weighted average shares.
Cash and Cash Equivalents
As of September 28, 1996, $6,001,000 of the Company's cash
equivalents were invested in a repurchase agreement with Thermo Electron.
Under this agreement, the Company in effect lends excess cash to Thermo
Electron, which Thermo Electron collateralizes with investments
principally consisting of corporate notes, U.S. government agency
securities, money market funds, commercial paper, and other marketable
securities, in the amount of at least 103% of such obligation. The
Company's funds subject to the repurchase agreement are readily
convertible into cash by the Company. The repurchase agreement earns a
rate based on the 90-day Commercial Paper Composite Rate plus 25 basis
points, set at the beginning of each quarter. As of September 28, 1996,
the Company's cash equivalents also included money market fund
investments. Cash equivalents are carried at cost, which approximates
market value.
Available-for-sale Investments
Pursuant to SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the Company's debt and marketable equity
securities are accounted for at market value (Note 3).
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:
(In thousands) 1996 1995
----------------------------------------------------------------------
Raw materials and supplies $ 1,521 $ 2,864
Work in process and finished goods 2,748 2,339
------- -------
$ 4,269 $ 5,203
======= =======
10PAGE
<PAGE>
ThermoLase Corporation
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Property 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 using the straight-line method
over the estimated useful lives of the property as follows: machinery and
equipment -- three to ten years, and leasehold improvements -- the
shorter of the term of the lease or the life of the asset. Property and
equipment consist of the following:
(In thousands) 1996 1995
----------------------------------------------------------------------
Machinery and equipment $14,384 $ 3,382
Leasehold improvements 6,001 1,325
Construction in process 958 268
------- ------
21,343 4,975
Less: Accumulated depreciation and amortization 2,020 807
------- ------
$19,323 $ 4,168
======= =======
Other Assets
In June 1996, ThermoLase purchased $4,400,000 of convertible
preferred stock of AntiCancer, representing an approximate 10% equity
interest in AntiCancer on a fully diluted basis. AntiCancer is a San
Diego-based company that is developing a new chemotherapeutic drug for
cancer patients, and that is also developing certain technologies that
may be relevant to the SoftLight hair-removal process and other
personal-care applications. The Company has the option to purchase for
$2,500,000 an additional 5% equity interest in AntiCancer on a fully
diluted basis, exercisable at any time before the earlier of June 19,
2011, or AntiCancer's initial public offering of stock. This investment
is being accounted for under the cost method of accounting. In addition,
the Company has licensed certain technology from AntiCancer (Note 10).
Cost in Excess of Net Assets of Acquired Company
The excess of cost over the fair value of net assets of the
acquired company is amortized using the straight-line method over 40
years. Accumulated amortization was $658,000 and $422,000 at September
28, 1996 and September 30, 1995, 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
business in assessing the recoverability of this asset.
Deferred Lease Liability
Deferred lease liability in the accompanying balance sheet
represents facilities rent which is being recognized ratably over the
respective lease terms.
11PAGE
<PAGE>
ThermoLase Corporation
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Common Stock Subject to Redemption
Common stock subject to redemption in the accompanying statement of
shareholders' investment and common stock subject to redemption
represents amounts associated with redemption rights that were issued in
March 1993. These redemption rights expired in November 1994, and as a
result, the Company transferred $14,765,000 of common stock subject to
redemption to common stock and capital in excess of par value.
Stock Split
All weighted average share and per share information has been
restated to reflect a two-for-one stock split, effected in the form of a
100% stock dividend, which was distributed in June 1995.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and
cash equivalents, available-for-sale investments, accounts receivable,
accounts payable, and due to parent company and affiliated companies. The
carrying amounts of the Company's cash and cash equivalents, accounts
receivable, accounts payable, and due to parent company and affiliated
companies 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 3 for information pertaining to the fair
value of available-for-sale investments.
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.
12PAGE
<PAGE>
ThermoLase Corporation
Notes to Consolidated Financial Statements
2. Unaudited Comparative Results
The following unaudited financial information for the nine months
ended October 1, 1994 is presented to provide comparative results for
fiscal 1995, included in the accompanying statement of operations.
Nine
Months Ended
(In thousands except per share amounts) October 1,1994
------------------------------------------------------------------------
Revenues $12,878
-------
Costs and Operating Expenses:
Cost of revenues 7,495
Selling, general and administrative expenses 3,774
Research and development expenses 1,701
-------
12,970
-------
Operating Loss (92)
Interest Income 413
Interest Expense, Related Party (116)
Loss on Sale of Investments (1)
-------
Income Before Income Taxes and Cumulative
Effect of Change in Accounting Principle 204
Income Tax Provision (202)
-------
Income Before Cumulative Effect of Change
in Accounting Principle 2
Cumulative Effect of Change in Accounting
Principle, Net of Tax 9
-------
Net Income $ 11
=======
Earnings per Share Before Cumulative
Effect of Change in Accounting Principle $ -
=======
Earnings per Share $ -
=======
Weighted Average Shares 34,759
=======
13PAGE
<PAGE>
ThermoLase Corporation
Notes to Consolidated Financial Statements
3. Available-for-sale Investments
Effective January 2, 1994, the Company adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." In
accordance with SFAS No. 115, the Company's debt and marketable equity
securities are classified as 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 currently as a component of shareholders' investment titled "Net
unrealized gain (loss) on available-for-sale investments." Cumulative
effect of change in accounting principle in the accompanying 1994
statement of operations represents the reversal of an unrealized loss,
net of related tax effects, recorded as other expense in the 1993
statement of operations. This amount was recorded as a reduction of
shareholders' investment in the accompanying 1994 financial statements.
The aggregate market value, cost basis, and gross unrealized gains
and losses of available-for-sale investments by major security type, as
of September 28, 1996 and September 30, 1995, are as follows:
1996
Gross Gross
Market Cost Unrealized Unrealized
(In thousands) Value Basis Gains Losses
-----------------------------------------------------------------------
Government agency
securities $43,458 $43,531 $ - $ (73)
Other 674 674 - -
------- ------- ------- -------
$44,132 $44,205 $ - $ (73)
======= ======= ======= =======
1995
Gross Gross
Market Cost Unrealized Unrealized
(In thousands) Value Basis Gains Losses
-----------------------------------------------------------------------
Government agency
securities $50,647 $50,671 $ - $ (24)
Corporate bonds 540 503 37 -
Other 1,107 1,107 - -
------- ------- ------- -------
$52,294 $52,281 $ 37 $ (24)
======= ======= ======= =======
14PAGE
<PAGE>
ThermoLase Corporation
Notes to Consolidated Financial Statements
3. Available-for-sale Investments (continued)
Available-for-sale investments in the accompanying 1996 balance
sheet include $34,051,000 with contractual maturities of one year or less
and $10,081,000 with contractual maturities of more than one year through
five years. Actual maturities may differ from contractual maturities as a
result of the Company's intent to sell these securities prior to maturity
and as a result of put and call options that enable the Company and/or
the issuer to redeem these securities at an earlier date.
The cost of available-for-sale investments that were sold was based
on specific identification in determining realized gains and losses
recorded in the accompanying statement of operations. Gain on the sale of
investments in the accompanying fiscal 1996 statement of operations
represents the gross realized gains relating to the sale of
available-for-sale investments. Loss on sale of investments in the
accompanying 1994 statement of operations resulted from gross realized
gains of $29,000 and gross realized losses of $71,000 relating to the
sale of available-for-sale investments.
4. Joint Venture and Acquisition
Joint Venture
In January 1996, the Company entered into a joint venture agreement
and a technology license agreement to market its SoftLight system in
Japan. The Company currently holds a 50% stake in the joint venture but
may increase its ownership to 51% pursuant to a fair-value purchase
option. Under the terms of the joint venture agreement, the Company will
receive payments for the use of the SoftLight system equal to 2% of the
joint venture's revenues through calendar year 2010, with a minimum
guaranteed payment of $2,000,000 for fiscal 1996, which was recorded in
fiscal 1996. An additional payment of $1,000,000 is guaranteed for fiscal
1997, should the formula-derived amount total less than $1,000,000 in
fiscal 1997. The fiscal 1997 amount is subject to certain exceptions in
the event the joint venture is unable to obtain patent protection in
Japan on certain prescribed terms, although as amounts are paid, they
become nonrefundable without regard to the status of patents in Japan. If
cumulative licensing fees paid to the Company exceed $50,000,000, the
rate will decrease to .25% through calendar year 2010. Starting in
calendar year 2011, the rate will be 1%.
Acquisition
On November 14, 1994, CBI acquired substantially all of the assets,
subject to certain liabilities, of Marcor Laboratories, Inc. (Marcor) for
$136,000 in cash and the repayment of $61,000 of existing indebtedness of
Marcor. Marcor distributes skin-care products. This acquisition has been
accounted for using the purchase method of accounting, and its results of
operations have been included in the accompanying financial statements
from the date of acquisition. Allocation of the purchase price for this
acquisition was based on estimates of the fair value of the net assets
acquired.
15PAGE
<PAGE>
ThermoLase Corporation
Notes to Consolidated Financial Statements
5. Common Stock
In June 1995, the Company sold 200,000 shares of its common stock
in private placements for net proceeds of $2,563,000. In August 1995, the
Company sold 2,250,000 shares of its common stock in a public offering
for net proceeds of $52,772,000.
In July 1994, the Company sold 5,349,572 shares of its common stock
in connection with its initial public offering, pursuant to a rights
offering, for net proceeds of $14,784,000.
At September 28, 1996, the Company had reserved 3,420,940 unissued
shares of its common stock for possible issuance under stock-based
compensation plans.
6. Stock-based Compensation Plans
The Company has stock-based compensation plans for its key
employees, directors, and others. Two of these plans, adopted in 1993,
permit the grant of nonqualified and incentive stock options. A third
plan, adopted in fiscal 1995, permits the grant of a variety of stock and
stock-based awards as determined by the human resources committee of the
Company's Board of Directors (the Board Committee), including restricted
stock, stock options, stock bonus shares, or performance-based shares. To
date, only nonqualified stock options have been awarded under these
plans. The option recipients and the terms of options granted under these
plans are determined by 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
periods ranging from four to ten years after the first anniversary of the
grant date, depending on the term of the option, which may range from
five to twelve years. Nonqualified stock options may be granted at any
price determined by the Board Committee, although incentive stock options
must be granted at not less than the fair market value of the Company's
stock on the date of grant. To date, all options have been granted at
fair market value. The Company also has a directors' stock option plan
that 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 participate in the stock-based
compensation plans of Thermo Electron or its majority-owned subsidiaries.
16PAGE
<PAGE>
ThermoLase Corporation
Notes to Consolidated Financial Statements
6. Stock-based Compensation Plans (continued)
No accounting recognition is given to options granted at fair market value
until they are exercised. Upon exercise, net proceeds, including tax benefits
realized, are credited to equity. A summary of the Company's stock option
information for fiscal 1996, fiscal 1995, and 1994 is as follows:
1996 1995 1994
----------------- ----------------- ----------------
Range of Range of Range of
Option Option Option
Number Prices Number Prices Number Prices
(In thousands except of per of per of per
per share amounts) Shares Share Shares Share Shares Share
- ------------------------------------------------------------------------------
Options outstanding, $ 1.75- $ 1.75- $ 1.75-
beginning of year 3,341 $20.53 2,707 $ 4.68 2,477 $ 2.50
23.48- 11.74- 3.00-
Granted 339 29.55 872 20.53 236 4.68
1.75- 1.75-
Exercised (746) 11.74 (184) 2.50 - -
2.50- 1.75-
Lapsed or cancelled (114) 20.53 (54) 2.50 (6) 2.50
----- ----- -----
Options outstanding, $ 1.75- $ 1.75- $ 1.75-
end of year 2,820 $29.55 3,341 $20.53 2,707 $ 4.68
===== ===== =====
$ 1.75- $ 1.75-
Options exercisable 2,820 $29.55 3,341 $20.53 - $ -
===== ===== =====
Options available
for grant 451 676 493
===== ===== =====
17PAGE
<PAGE>
ThermoLase Corporation
Notes to Consolidated Financial Statements
7. Employee Benefit Plans
Employee Stock Purchase Plan
Prior to November 1, 1996, substantially all of the Company's
full-time employees could participate in an employee stock purchase plan
sponsored by ThermoTrex, under which employees could purchase shares of
ThermoTrex's and Thermo Electron's common stock. Effective November 1,
1996, substantially all of the Company's full-time employees may
participate in employee stock purchase plans sponsored by the Company and
Thermo Electron, under which employees can purchase shares of the
Company's and Thermo Electron's common stock. Under these plans, shares
of common stock may be purchased at the end of a 12-month plan year at
95% of the fair market value at the beginning of the plan year, and the
shares purchased are subject to a six-month resale restriction. Prior to
November 1, 1995, the applicable shares of common stock could be
purchased at 85% of the fair market value at the beginning of the plan
year, and the shares purchased were subject to a one-year resale
restriction. Shares are purchased through payroll deductions of up to 10%
of each participating employee's gross wages.
401(k) Savings Plan
Effective January 1, 1995, the majority of the Company's full-time
employees are eligible to participate in Thermo Electron's 401(k) savings
plan. Contributions to the Thermo Electron 401(k) savings plan are made
by both the employee and the Company. Company contributions are based
upon the level of employee contributions. The Company contributed and
charged to expense for this plan $144,000 and $108,000 in fiscal 1996 and
fiscal 1995, respectively.
8. Income Taxes
The components of the income tax (provision) benefit for fiscal
1996, fiscal 1995, and 1994 are as follows:
(In thousands) 1996 1995 1994
-----------------------------------------------------------------------
Currently refundable (payable):
Federal $ 80 $ 154 $(177)
State 25 (82) (116)
----- ----- -----
105 72 (293)
----- ----- -----
Deferred:
Federal 328 609 28
State 30 40 5
----- ----- -----
358 649 33
----- ----- -----
$ 463 $ 721 $(260)
===== ===== =====
18PAGE
<PAGE>
ThermoLase Corporation
Notes to Consolidated Financial Statements
8. Income Taxes (continued)
The income tax (provision) benefit in the accompanying statement of
operations differs from the amounts calculated by applying the statutory
federal income tax rate of 34% to income (loss) before income taxes and
cumulative effect of change in accounting principle due to the following:
(In thousands) 1996 1995 1994
-----------------------------------------------------------------------
Income tax (provision) benefit
at statutory rate $ 629 $ 816 $ (90)
Differences resulting from:
State income taxes, net of federal tax 36 (28) (73)
Nondeductible expenses (202) (67) (97)
------ ------ -----
$ 463 $ 721 $(260)
====== ====== =====
Prepaid income taxes in the accompanying balance sheet consist of
the following:
(In thousands) 1996 1995
--------------------------------------------------------------
Prepaid income taxes:
Net operating loss $2,226 $ 660
Inventory basis differences 714 431
Accruals and other reserves 207 133
Accrued compensation 212 129
Allowance for doubtful accounts 121 96
Other, net 65 104
------ ------
3,545 1,553
Less: Valuation allowance 1,663 701
------ ------
$1,882 $ 852
====== ======
The year-end 1996 valuation allowance relates to employee exercises
of stock options for which no tax benefit was recognized, and will be
used to increase capital in excess of par value when the net operating
loss is realized. The year-end 1995 valuation allowance related primarily
to the uncertainty surrounding the realization of future tax benefits
associated with acquisition reserves related to CBI, and was used to
reduce cost in excess of net assets of acquired company during fiscal
1996, when such uncertainty was reduced. As of September 28, 1996, the
Company had federal tax net operating loss carryforwards of $6,184,000
that begin to expire in fiscal 2009.
19PAGE
<PAGE>
ThermoLase Corporation
Notes to Consolidated Financial Statements
9. 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 pays Thermo Electron
annually an amount equal to 1.0% of the Company's revenues. The Company
paid an annual fee equal to 1.20% and 1.25% of the Company's revenues in
calendar year 1995 and 1994, respectively. The annual fee is reviewed and
adjusted annually by mutual agreement of the parties. For these services,
the Company was charged $293,000, $211,000, and $234,000 in fiscal 1996,
fiscal 1995, and 1994, respectively. 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 relationship among Thermo
Electron and its majority-owned subsidiaries). For additional items such
as employee benefit plans, insurance coverage, and other identifiable
costs, Thermo Electron charges the Company based upon costs attributable
to the Company.
Other Related Party Services
ThermoTrex provides certain services to the Company, which are
charged to the Company based on actual usage. These services include
personnel administration, accounting, data processing, and general
administrative management. For these services, the Company was charged
$327,000, $175,000, and $101,000 in fiscal 1996, fiscal 1995, and 1994,
respectively.
Operating Leases
The Company subleases office and research facilities from
ThermoTrex and is charged for the actual square footage occupied at
approximately the same cost-per-square-foot paid by ThermoTrex under its
prime lease. The accompanying statement of operations includes expenses
from this sublease of $125,000, $22,000, and $16,000 in fiscal 1996,
fiscal 1995, and 1994, respectively. Currently, the cost of the area
occupied by the Company is $223,000 per year.
Repurchase Agreement
The Company invests excess cash in a repurchase agreement with
Thermo Electron as discussed in Note 1.
20PAGE
<PAGE>
ThermoLase Corporation
Notes to Consolidated Financial Statements
9. Related Party Transactions (continued)
Short-term Borrowings
To help finance the acquisition of CBI in December 1993, the
Company borrowed $5,000,000 from ThermoTrex, pursuant to a promissory
note due December 1994 and bearing interest at the 90-day Commercial
Paper Composite Rate plus 25 basis points. The weighted average interest
rate of the promissory note was 4.16% in 1994. This note was repaid in
July 1994 with proceeds from the Company's initial public offering of
common stock.
Laser Manufacturing Arrangement
During fiscal 1996 and fiscal 1995, the Company purchased laser
systems at an aggregate cost of $8,549,000 and $350,000, respectively,
from Trex Medical Corporation, a publicly traded, majority-owned
subsidiary of ThermoTrex. The Company has committed to purchase
additional lasers at an aggregate cost of $6,402,000.
10. Commitments and Contingencies
Operating Leases
In addition to the leases described in Note 9, the Company occupies
office, manufacturing, warehouse, and service facilities under
noncancellable operating lease arrangements that expire at various dates
through 2006. The accompanying statement of operations includes expenses
from operating leases of $915,000, $316,000, and $534,000 in fiscal 1996,
fiscal 1995, and 1994, respectively. Future minimum payments due under
noncancellable operating leases as of September 28, 1996, are $1,604,000
in fiscal 1997; $1,812,000 in fiscal 1998; $1,829,000 in fiscal 1999;
$1,912,000 in fiscal 2000; $2,145,000 in fiscal 2001; and $7,968,000 in
fiscal 2002 and thereafter. Total future minimum lease payments are
$17,270,000.
Technology License Agreements
In June 1996, the Company purchased an approximate 10% equity
interest in AntiCancer (Note 1). In addition, the Company has licensed
from AntiCancer certain technology related to hair removal, stimulation
of hair growth, suppression of hair growth, and hair coloring under an
agreement that calls for up to $1,500,000 in future payments by the
Company upon the attainment of certain milestones by AntiCancer. In
addition to such future payments, the Company will be substantially
responsible for development costs incurred after attainment of such
milestones. In the event that the funded development efforts result in
commercially viable products that the Company elects to market, the
Company will pay AntiCancer a royalty based on sales, subject to certain
minimum payments.
21PAGE
<PAGE>
ThermoLase Corporation
Notes to Consolidated Financial Statements
10. Commitments and Contingencies (continued)
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.
Contingencies
The Company has from time to time received allegations that its
SoftLight laser-based system infringes the intellectual property rights
of others, and the Company may continue to receive such allegations in
the future. In general, an owner of intellectual property can prevent
others from using such property without a license and is entitled to
damages for unauthorized past usage. The Company has investigated the
bases of the allegations it has received to date and, based on opinions
of its counsel, believes that if it were sued on these bases it would
have meritorious defenses.
11. Export Sales
Export sales were $2,820,000 in fiscal 1996, and were less than 10%
of the Company's total revenues in fiscal 1995 and 1994. In general,
export sales are denominated in U.S. dollars.
12. Unaudited Quarterly Information
(In thousands except per share amounts)
Three Months Ended
--------------------------------------------
Dec. 30, March 30, June 29, Sept. 28,
Fiscal 1996 1995 1996 1996 1996
Revenues $ 7,400 $ 7,020 $ 6,314 $ 7,078
Gross profit 2,240 2,617 1,813 1,115
Net loss (82) (77) (22) (1,205)
Loss per share - - - (.03)
April 1, July 1, Sept. 30,
Fiscal 1995 (a) 1995 1995 1995
Revenues $ 6,109 $ 5,642 $ 5,793
Gross profit 2,515 2,115 1,490
Net loss (46) (499) (1,134)
Loss per share - (.01) (.03)
(a) In September 1995, the Company changed its fiscal year end from the
Saturday nearest December 31 to the Saturday nearest September 30.
Accordingly, the Company's 39-week transition period ended September
30, 1995 is presented.
22PAGE
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Board of Directors of ThermoLase Corporation:
We have audited the accompanying consolidated balance sheet of
ThermoLase Corporation (a Delaware corporation and 64%-owned subsidiary of
ThermoTrex Corporation) and subsidiary as of September 28, 1996 and
September 30, 1995, and the related consolidated statements of operations,
shareholders' investment and common stock subject to redemption, and cash
flows for the year ended September 28, 1996, the nine months ended
September 30, 1995, and the year ended December 31, 1994. 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
ThermoLase Corporation and subsidiary as of September 28, 1996 and
September 30, 1995, and the results of their operations and their cash
flows for the year ended September 28, 1996, the nine months ended
September 30, 1995, and the year ended December 31, 1994, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
November 1, 1996
23PAGE
<PAGE>
ThermoLase Corporation
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.
These statements involve a number of risks and uncertainties, including
those detailed immediately after this Management's Discussion and
Analysis of Financial Conditions and Results of Operations under the
caption "Forward-looking Statements."
Overview
The Company has developed a laser-based system called SoftLight(SM)
for the removal of unwanted hair. The SoftLight system uses a low-energy,
dermatology laser in combination with a lotion that absorbs the laser's
energy to disable hair follicles. In April 1995, the Company received
clearance from the U.S. Food and Drug Administration (FDA) to
commercially market services using the SoftLight system. The Company
began earning revenue from the SoftLight system in the first quarter of
fiscal 1996 as a result of opening its first commercial salon (Spa Thira)
in La Jolla, California, in November 1995. The Company opened additional
salons in Dallas in June 1996, in Houston and Beverly Hills in September
1996, in Denver in October 1996, and in Boca Raton in November 1996. The
Company also plans to open a salon in suburban Detroit in December 1996
and has signed leases for four additional sites in Greenwich,
Connecticut; Manhasset, New York; suburban Minneapolis, and Palm Beach,
Florida. In June 1996, the Company initiated a program to license to
doctors the right to perform the Company's patented SoftLight
hair-removal procedure. In this program, the Company licenses its
technology to physicians and receives a per-procedure royalty that varies
depending on the location treated. The Company also provides the doctors
with the lasers and supplies that are necessary to perform the service.
The Company is marketing the SoftLight system internationally through
joint ventures and other licensing arrangements, including separate joint
ventures established in Japan in January 1996 and in France in November
1996, and a licensing arrangement established in Saudi Arabia in November
1996. The Company also manufactures and markets skin-care, bath, and body
products through its CBI Laboratories, Inc. (CBI) subsidiary, which
manufactures the lotion used in the SoftLight hair-removal process.
Results of Operations
In September 1995, the Company changed its fiscal year end from the
Saturday nearest December 31 to the Saturday nearest September 30.
Accordingly, the results of operations for 1996 compares the year ended
September 28, 1996 (fiscal 1996) with the unaudited year ended September
30, 1995 (1995). The results of operations for 1995 compares the nine
months ended September 30, 1995 (fiscal 1995) with the unaudited nine
months ended October 1, 1994 (fiscal 1994).
24PAGE
<PAGE>
ThermoLase Corporation
Fiscal 1996 Compared With 1995
Revenues increased 19% to $27,812,000 in fiscal 1996 from
$23,348,000 in 1995, primarily due to the inclusion of $2,647,000 of
revenues from the Company's Spa Thira salons and doctors' licensing
program, as well as $2,000,000 in SoftLight licensing fees from the joint
venture established in Japan in January 1996. Revenues at CBI were
$23,165,000 in fiscal 1996, compared with $23,348,000 in 1995. The
Company estimates that CBI will continue to represent a smaller portion
of total revenues as revenues from hair-removal services increase.
During fiscal 1996, the Company opened its first four Spa Thira
salons, including two which opened in September 1996. Under the current
pricing structure, the majority of spa clients pay a fixed fee in advance
to receive a series of treatments, as necessary. Consequently, the
Company defers revenue related to such payments, which is recognized over
the anticipated treatment period. As the Company collects further data
concerning the number of treatments required and duration of the
treatment period, the period of revenue recognition may be affected.
In January 1996, the Company entered into a joint venture agreement
to market the SoftLight process in Japan, as well as its laser-based
skin-rejuvenation process, if and when available. The Company currently
holds a 50% stake in the joint venture with an option to increase its
ownership to 51% pursuant to a fair-value purchase option. The agreement
calls for the Company to receive minimum guaranteed payments of
$1,000,000 in fiscal 1997, subject to certain exceptions in the event the
joint venture is unable to obtain patent protection in Japan on
prescribed terms.
The gross profit margin in fiscal 1996 was 28%, compared with 37%
in 1995. The gross profit margin from the Company's hair-removal business
was negative 7% in fiscal 1996 due to the early operations of the Spa
Thira business, which has been operating below maximum capacity as the
Company develops a client base, continues refining its operating
procedures, and incurs pre-opening costs in connection with new spa
openings, offset in part by the effect of revenues from the joint venture
in Japan and doctors' licensing program. As the Company opens additional
Spa Thira locations in fiscal 1997, the effect of operating each spa
below maximum capacity as the Company develops its client base, as well
as pre-opening costs, will have a negative impact on the consolidated
gross profit margin. The gross profit margin from the sale of skin care
and other personal care products at CBI was 35% in fiscal 1996, compared
with 37% in 1995. The decline in the gross profit margin was the result
of a shift at CBI to lower-margin products sold to high volume retailers
in fiscal 1996.
Selling, general and administrative expenses as a percentage of
revenues was 35% in both periods, with an increase to $9,761,000 in
fiscal 1996 from $8,128,000 in 1995. The increase was primarily due to
costs related to setting up a personal-care service organization for Spa
Thira, including the hiring of senior management and administrative
25PAGE
<PAGE>
ThermoLase Corporation
Fiscal 1996 Compared With 1995 (continued)
staff, as well as legal costs associated with expanding the Company's
hair-removal business domestically and internationally, offset in part by
lower spending at CBI.
Research and development expenses decreased to $3,470,000 in fiscal
1996 from $3,774,000 in 1995. The Company expects to increase its
research and development expenses in fiscal 1997, as it increases
pre-clinical and clinical research related to improving the effectiveness
of the Company's hair-removal process and developing its skin-
rejuvenation process and investigates other health and beauty
applications for its proprietary laser technology.
Interest income increased to $3,482,000 in fiscal 1996 from
$971,000 in 1995, primarily as a result of interest income earned on
invested proceeds from the Company's August 1995 public offering of
common stock and June 1995 private placement of common stock.
The effective tax rates in both periods differ from the statutory
federal income tax rate due to nondeductible amortization of cost in
excess of net assets of acquired company, incurred in connection with the
acquisition of CBI, and the impact of CBI's state income taxes.
Fiscal 1995 Compared With Fiscal 1994
Revenues increased 36% to $17,544,000 in fiscal 1995 from
$12,878,000 in fiscal 1994, primarily due to an increase in demand as a
result of the Company's focus on designing and selling custom brands of
its skin-care and other personal-care products to large retailers and, to
a lesser extent, the inclusion of $1,025,000 in additional revenues from
Marcor, which was acquired in November 1994.
The gross profit margin was 35% in fiscal 1995, compared with 42%
in fiscal 1994. The decline in the gross profit margin in fiscal 1995 was
due to lower margins on the sale of skin-care and other personal-care
products as a result of an increase in the price of raw materials and a
shift in product mix. In addition, the decline in the gross profit margin
resulted from pre-opening costs of the first Spa Thira salon. These
decreases were offset in part by the inclusion in fiscal 1994 of a
nonrecurring adjustment to expense $250,000 of inventory revalued at the
time of CBI's acquisition by the Company.
Selling, general and administrative expenses increased to
$6,158,000 in fiscal 1995 from $3,774,000 in fiscal 1994, primarily due
to increased selling efforts to expand the market for the Company's
skin-care and other personal-care products. In addition, during the third
quarter of fiscal 1995, the Company hired a chief executive officer and a
vice president of operations, which resulted in an increase in the
Company's administrative expenses.
Research and development expenses increased to $3,151,000 in fiscal
1995 from $1,701,000 in fiscal 1994, due to the acceleration of the
26PAGE
<PAGE>
ThermoLase Corporation
Fiscal 1995 Compared With Fiscal 1994 (continued)
Company's research and development efforts associated with the SoftLight
system, including process optimization studies.
Interest income increased to $789,000 in fiscal 1995 from $413,000
in fiscal 1994, as a result of interest income earned on invested
proceeds from the Company's August 1995 public offering of common stock,
June 1995 private placement of common stock, and July 1994 initial public
offering of common stock. Interest expense, related party in 1994
represents interest associated with a $5,000,000 promissory note issued
to ThermoTrex Corporation (ThermoTrex) in connection with the acquisition
of CBI. This note was repaid in full in July 1994.
The effective tax rates in fiscal 1995 and fiscal 1994 differ from
the statutory federal income tax rate due to nondeductible amortization
of cost in excess of net assets of acquired company, incurred in
connection with the acquisition of CBI, and the impact of CBI's state
income taxes.
Liquidity and Capital Resources
Working capital was $47,197,000 at September 28, 1996, compared
with $68,691,000 at September 30, 1995. Included in working capital are
cash, cash equivalents, and available-for-sale investments of $52,055,000
at September 28, 1996, compared with $65,440,000 at September 30, 1995.
Operating activities provided cash of $3,850,000 during fiscal 1996,
primarily due to an increase in accounts payable and other accrued
expenses, including an increase in deferred revenue of $913,000 related
to the Company's Spa Thira salons.
During fiscal 1996, the Company expended $13,230,000 for purchases
of property and equipment. The Company purchased laser systems from Trex
Medical Corporation, a publicly traded, majority-owned subsidiary of
ThermoTrex, for an aggregate cost of $8,549,000, including $3,132,000 of
purchases made during the fourth quarter, which are included in due to
parent company and affiliated companies in the accompanying 1996 balance
sheet. The Company has committed to purchase additional lasers at an
aggregate cost of $6,402,000.
During fiscal 1996, the Company expended $4,400,000 for an
approximate 10% equity interest in AntiCancer Incorporated (AntiCancer).
Pursuant to a licensing agreement entered into with AntiCancer, the
Company will pay up to $1,500,000 upon the attainment of certain
milestones by AntiCancer, and is substantially responsible for
development costs incurred after the attainment of such milestones
(Note 10).
In November 1996, the Company entered into a joint venture
agreement, which is subject to certain conditions, to market its
SoftLight system in France, as well as its laser-based skin-rejuvenation
process, if and when available. The Company has committed to provide up
27PAGE
<PAGE>
ThermoLase Corporation
Liquidity and Capital Resources (continued)
to $5,000,000 to fund working capital requirements of the joint venture
in exchange for its 50% stake in the joint venture.
In September 1996, the Company's Board of Directors authorized the
repurchase by the Company of up to $10,000,000 of Company common stock
through August 28, 1997, in market transactions or pursuant to the
exercise by investors of standardized put options written on the
Company's common stock. As of December 1, 1996, no shares had been
repurchased, however the Company had contingent obligations under
outstanding put options to purchase up to 80,000 shares for $1,500,000.
In addition to the Denver, Boca Raton, and suburban Detroit spas
which were being completed as of September 28, 1996, the Company has
signed leases in Greenwich, Connecticut; Manhasset, New York; suburban
Minneapolis; and Palm Beach, Florida, where it plans to open additional
Spa Thira salons. The Company plans to open between 10 and 20 additional
spas in various parts of the United States during fiscal 1997. Depending
on the size of the salon, each facility will require approximately
$1,500,000 to $2,500,000 for such items as leasehold improvements and
laser systems. In addition, the Company expects to expend between
$8,000,000 and $10,000,000 during fiscal 1997 for equipment related to
its program to license doctors the right to perform hair-removal
services. Although the Company has no material commitments for capital
expenditures, except as noted above, such expenditures will largely be
affected by the number of Spa Thira locations that can be developed and
the number of doctors engaged in the licensing program. The Company
believes its existing resources will be sufficient to meet the capital
requirements of its existing businesses for the foreseeable future.
Forward-looking Statements - Risk Factors
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 1997 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. The Company continues to
study the SoftLight system to better understand the effects of the system
and to develop the system in order to increase its effectiveness and the
length of time between treatments. These studies will also be used to
further clarify the duration for which hair can be removed, the number of
treatments required to effectively remove hair from a given area, and the
effectiveness of the process across a broad range of skin types and
anatomical sites. In addition, the Company is continuing to monitor
subjects and customers for the development of possible side effects.
Failure to further improve the SoftLight process, including extending the
duration for which hair can be removed, may limit the Company's ability
to successfully commercialize the SoftLight process.
28PAGE
<PAGE>
ThermoLase Corporation
Forward-looking Statements - Risk Factors (continued)
Uncertain Market Acceptance. The SoftLight process is significantly
different from current commercially available hair-removal technologies.
With any new cosmetic technology, there is a risk that the marketplace
may not accept, or be receptive to, the potential benefits of such
technology. Market acceptance of the SoftLight process will depend, in
large part, upon the ability of the Company to demonstrate to consumers
the safety and effectiveness of the SoftLight process and its advantages
over other types of hair-removal treatment. There can be no assurance
that the SoftLight process will be accepted by the general public. The
Company's skin-rejuvenation system is also different from current
skin-rejuvenation treatments and, if successfully developed, will be
subject to similar market acceptance risks.
Need to Manage Growth and to Attract Qualified Personnel. The
Company presently intends to commercialize the SoftLight process in the
United States primarily through affiliated spas and a network of
physicians using the process as part of their practices. The Company will
be required to recruit and train a large number of personnel for its
spas, including medical staff such as physicians, registered nurses,
physician assistants, or other personnel. There may be only a limited
number of such persons with the requisite skills, and it may become
increasingly difficult for the Company to hire such personnel over time.
The Company will also be required to recruit qualified physicians for its
network of physician practices that offer the SoftLight process. Such
qualified physicians may not be available or interested in offering the
SoftLight process in their private practices. The Company's
commercialization strategy may also significantly strain operational,
management, financial, sales and marketing, and other resources. To
manage growth effectively, the Company must continue to enhance its
systems and controls and successfully expand, train, and manage its
employee base and physician network. There can be no assurance that the
Company will be able to manage this expansion effectively.
Dependence Upon Proprietary Technology. There can be no assurance
that other companies are not investigating or developing other
technologies that are similar to the ThermoLase technology, that any
additional patents will be issued to the Company, or that the Company's
patents or any additional patents, if issued, will afford the Company
sufficiently broad patent coverage to provide any significant deterrent
to competitive products or services. In the event the Company becomes
involved in a patent infringement claim, the expense of litigating such
claim may be costly. In addition, there may be patents or intellectual
property rights owned by others, which, if infringed by the Company,
would permit the owner to prevent the Company from using the SoftLight
process without a license and to be entitled to damages for past
infringement. The Company has from time to time received allegations that
the SoftLight process infringes the intellectual property rights of
others, and the Company may continue to receive such allegations in the
future. There can be no assurance that litigation relating to such a
claim will not be brought against the Company. If the Company is
obligated to devote substantial financial or management resources to
patent litigation, its ability to fund its operations and to pursue its
29PAGE
<PAGE>
ThermoLase Corporation
Forward-looking Statements - Risk Factors (continued)
business goals may be impaired. The issuance of additional patents to the
Company and the validity and enforceability of such patents may be
essential to the success of the Company
Uncertainty of Development of Skin-rejuvenation System. The
Company's skin-rejuvenation system is at an early stage of development.
The Company received a United States patent covering this system in June
1995 and, in late 1995, began clinical trials at a Westwood, New Jersey,
clinical site and at the University of New Mexico to determine the safety
and efficacy of the system. The Company is required to complete its
clinical trials and to obtain FDA clearance before it can commercially
market its skin-rejuvenation system. There can be no assurance that the
clinical studies will support the Company's belief as to the
effectiveness of the skin-rejuvenation system.
Need to Comply with FDA Regulations. The SoftLight process is
subject to FDA regulations governing the use and marketing of medical
devices. The Company's hair-removal system received FDA clearance in
April 1995; however, its skin-rejuvenation system must receive FDA
clearance before it can be commercially used in the United States. In
addition, the Company will be subject to requirements in certain foreign
countries where the SoftLight process may be marketed. The process of
obtaining regulatory approvals is lengthy, expensive, and inherently
uncertain. No assurance can be given that the FDA will not require the
Company to perform substantial clinical trials before clearance is
granted. There can be no assurance that the appropriate clearances from
the FDA will be granted or that the process to obtain such clearances
will not be excessively expensive or lengthy.
Most of CBI's products are classified as cosmetics, are regulated
by the FDA, and are subject to inspection. Furthermore, CBI manufactures
a few preparations, principally sun blocks and skin-fading agents, which
are classified as pharmaceuticals, and CBI has a FDA license for this
purpose. This license requires, among other things, that CBI adheres to
the FDA's Good Manufacturing Practices procedures for pharmaceuticals,
and CBI is subject to facilities inspection by the FDA.
The FDA also imposes various requirements on manufacturers and
sellers of products under its jurisdiction such as labeling,
manufacturing practices, record keeping, and reporting. The FDA also may
require post-market testing and surveillance programs to monitor a
product's effects. Failure to comply with applicable regulatory
requirements can result in, among other things, civil and criminal fines,
suspensions of approvals, recalls of products, seizures, injunctions and
criminal prosecutions.
Need to Comply with State Regulations. The Company recognizes, for
purposes of commercializing its centers, that the operation of the
SoftLight process may be deemed by certain regulators to constitute the
practice of medicine. If operation of the SoftLight process is determined
to involve the practice of medicine, the degree of physician involvement
required under applicable laws and regulations in delivering the process
is unclear. In addition, many states prohibit business corporations from
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ThermoLase Corporation
Forward-looking Statements - Risk Factors (continued)
engaging in the practice of medicine, employing physicians, or entering
into certain financial arrangements with physicians, including fee
splitting.
The Company believes there are several possible structures it can
employ to provide for physician involvement where required, including,
where possible, direct employment and independent contractor status. In
some states, including California, however, the Company will be required
to license the right to use the SoftLight process to an independent
medical corporation. However, no formal ruling regarding the Company's
various structures and relationships has been obtained from any
government agency and there can be no assurance that any such ruling
would deem such structures and relationships in compliance with
applicable laws and regulations. There can be no assurance that review of
the Company's business by courts or healthcare, tax, labor, and other
regulatory authorities that have jurisdiction over matters including,
without limitation, the corporate practice of medicine, licensure of
facilities and equipment, and franchising will not result in
determinations that could adversely affect the operations of the Company
or that the healthcare regulatory environment will not change in a manner
that would restrict the Company's proposed operations or limit the
expansion of the Company's business or otherwise adversely affect the
Company.
Limited Operating History. To date, the Company has made only
limited commercial sales of services using the SoftLight process through
its spas currently in operation and through its physician network. The
members of the Company's current senior management, substantially all of
whom have joined the Company within the last eighteen months, continue to
develop the marketing and commercialization strategy for the Company.
However, because the Company has opened only six spas and has only
recently had sales through its physician network, it has only a limited
operating history on which to base such strategy. No assurance can be
given that the Company will be able to devise a successful marketing and
commercialization strategy or attract the personnel necessary to
effectively implement such strategy.
Intense Competition. Competition in the market for personal-care
products and services is very intense. The SoftLight process will compete
with electrolysis and other methods of hair removal, including persons
who may attempt to infringe the Company's patents. In addition, a number
of laser manufacturers have recently announced that they have filed
applications with the FDA seeking to obtain clearance to market a laser
for hair removal. Competition from these sources could limit the
Company's ability to charge premium prices for its hair-removal services.
In addition, the Company's services could be rendered obsolete or
uneconomical by the introduction of new hair-removal products or
processes.
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ThermoLase Corporation
Selected Financial Information
Nine Months
(In thousands Year Ended Ended (a) Year Ended
-------------------- --------- ---------------------------
except per Sept. 28, Sept. 30, Sept. 30, Dec. 31, Jan. 1, Jan. 2,
share amounts) 1996 1995 1995 (b) 1994 (c) 1994 (d) 1993
------------------------------------------------------------------------------
(Unaudited)
Statement of
Operations Data:
Revenues $27,812 $23,348 $17,544 $18,682 $ 625 $ -
Income (loss)
before cumul-
ative effect
of change in
accounting
principle (1,386) (1,675) (1,679) 6 (16) (215)
Net income
(loss) (1,386) (1,675) (1,679) 15 (16) (215)
Earnings (loss)
per share
before cumula-
tive effect
of change in
accounting
principle (.03) (.04) (.04) - - (.01)
Earnings (loss)
per share (.03) (.04) (.04) - - (.01)
Balance Sheet Data:
Working capital $47,197 $68,691 $16,325 $ 3,610 $ -
Total assets 95,520 89,463 33,570 23,551 71
Long-term
obligations - - - - -
Common stock
subject to
redemption - - - 14,511 -
Shareholders'
investment 79,037 82,218 28,997 (189) 71
(a) In September 1995, the Company changed its fiscal year end from the
Saturday nearest December 31 to the Saturday nearest September 30.
Accordingly, the Company's 39-week transition period ended September 30,
1995 is presented.
(b) Reflects the net proceeds of the Company's private placements and public
offering of common stock.
(c) Reflects the net proceeds of the Company's initial public offering and the
adoption of Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
(d) Reflects the net proceeds of the Company's private placement and the
December 1993 acquisition of CBI Laboratories.
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ThermoLase Corporation
Common Stock Market Information
The following table shows the market range for the Company's common
stock based on reported sales prices on the American Stock Exchange
(symbol TLZ) for fiscal 1996 and fiscal 1995. Prices have been restated
to reflect a two-for-one stock split distributed in June 1995.
Fiscal 1996 Fiscal 1995
--------------------- ---------------------
Quarter High Low High Low
--------------------------------------------------------------------
First $27 5/8 $17 1/4 $ 6 15/16 $ 3 5/8
Second 31 20 7/8 22 3/8 5 15/16
Third 36 1/2 24 1/4 25 1/2 19 1/2
Fourth 30 3/4 19 7/8
As of November 22, 1996, the Company had 503 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 November 22, 1996, was $20 1/8 per share.
Stock Transfer Agent
American Stock Transfer & Trust Company is the stock transfer agent
and maintains shareholder activity records. The agent will respond to
questions on issuances of stock certificates, changes of ownership, lost
stock certificates, and changes of address. For these and similar
matters, please direct inquiries to:
American Stock Transfer & Trust Company
Shareholder Services Department
40 Wall Street, 46th Floor
New York, New York 10005
(718) 921-8200
Shareholder Services
Shareholders of ThermoLase Corporation who desire information about
the Company are invited to contact John N. Hatsopoulos, Vice President
and Chief Financial Officer, ThermoLase Corporation, 81 Wyman Street,
P.O. Box 9046, Waltham, Massachusetts 02254-9046, (617) 622-1111. A
mailing list is maintained to enable shareholders whose stock is held in
street name, and other interested individuals, to receive quarterly
reports, annual reports, and press releases as quickly as possible.
Beginning with the 1997 fiscal year, quarterly distributions will be
limited to the second quarter report only. All quarterly reports and
press releases are also available through the Internet at the Company's
home page on the World Wide Web (http://www.thermo.com/subsid/tlz.html).
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ThermoLase Corporation
Dividend Policy
The Company has never paid cash dividends and does not expect to
pay cash dividends in the foreseeable future because its policy has been
to use earnings to finance expansion and growth. Payment of dividends
will rest within the discretion of the Board of Directors and will depend
upon, among other factors, the Company's earnings, capital requirements,
and financial condition.
Form 10-K Report
A copy of the Annual Report on Form 10-K for the year ended
September 28, 1996, as filed with the Securities and Exchange Commission,
may be obtained at no charge by writing to John N. Hatsopoulos, Vice
President and Chief Financial Officer, ThermoLase Corporation, 81 Wyman
Street, P.O. Box 9046, Waltham, Massachusetts 02254-9046.
Annual Meeting
The annual meeting of shareholders will be held on Wednesday, March
12, 1997, at 10:00 a.m. at the Westin Hotel, 70 Third Avenue, Waltham,
Massachusetts.
Exhibit 23
Consent of Independent Public Accountants
-----------------------------------------
As independent public accountants, we hereby consent to the
incorporation by reference of our reports dated November 1, 1996,
included in or incorporated by reference into ThermoLase Corporation's
Annual Report on Form 10-K/A for the year ended September 28, 1996, into
the Company's previously filed Registration Statements as follows:
Registration Statement No. 33-88396 on Form S-8, Registration Statement
No. 33-88398 on Form S-8, Registration Statement No. 33-88394 on Form
S-8, Registration Statement No. 33-88400 on Form S-8, Registration
Statement No. 33-80749 on Form S-8, Registration Statement No. 33-84516
on Form S-3, Registration Statement No. 33-94658 on Form S-3, and
Registration Statement No. 333-19633 on Form S-4.
Arthur Andersen LLP
Boston, Massachusetts
February 27, 1997
