SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------------------------
FORM 10-K
(mark one)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended October 3, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 1-13104
THERMOLASE CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 06-1360302
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2055-C Luna Road
Carrollton, Texas 75006
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
Common Stock, $.01 par value American Stock Exchange
Units (each unit consisting of
one share of common stock
and one redemption right) American Stock Exchange
Securities registered pursuant to Section 12(g) of theAct:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to the filing requirements for
at least the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of October 30, 1998, was approximately $47,302,000.
As of October 30, 1998, the Registrant had 39,319,296 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended October 3, 1998, are incorporated by reference into Parts I and II.
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on March 11, 1999, are incorporated by reference into
Part III.
<PAGE>
PART I
Introduction
You may notice some changes in this year's Form 10-K, compared with past
years. The Securities and Exchange Commission is encouraging companies to write
financial documents in plain English. We have rewritten our entire Form 10-K in
plain English. Our goal is to discuss our company in language that is more
easily understood.
Item 1. Business
(a) General Development of Business
ThermoLase Corporation, which we also refer to as "the company or the
registrant," developed SoftLight(R), a proprietary system to remove unwanted
hair. In April 1995, we received clearance from the U.S. Food and Drug
Administration (FDA) to commercially market hair-removal services using this
system. SoftLight uses a low-energy laser, similar to the lasers used in
dermatological applications such as tattoo and birthmark removal, in combination
with a specially formulated lotion, to disable hair follicles. In May 1998, the
FDA cleared our SoftLight laser for skin-resurfacing as well. We began marketing
our new SoftLight Laser Peel skin-resurfacing service in September 1998 through
our spas and licensees.
ThermoLase manufactures and markets skin-care and bath-and-body products
and markets dietary supplements through our Creative Beauty Innovations, Inc.
(CBI) subsidiary. CBI also manufactures the lotion we use in our SoftLight
hair-removal and skin-resurfacing processes.
SoftLight Distribution Channels
To provide our laser-based hair-removal services in the United States,
ThermoLase developed two distribution channels: a network of high-end,
company-owned spas called Spa Thira, and a physician-licensing program.
ThermoLase opened its first Spa Thira location in late 1995 and its fourteenth
spa was opened in October 1997. We have since closed three spas and currently
operate 11 domestic Spa Thira locations.
The company's spas currently offer a variety of pricing programs,
including a fixed fee for a single treatment as well as a fixed fee for multiple
treatments during specified time periods.
In June 1996, ThermoLase began a program to license our technology to
physicians and others who wanted to offer the SoftLight process as part of their
practices. We provide licensees with the lasers and lotion necessary to perform
the service, as well as training and marketing support. In the original program,
ThermoLase received a one-time fee and per-procedure royalty that varied
depending on the anatomical site treated and pricing plan selected by the
client. In response to feedback from licensees and customers, we have begun to
modify the terms of our physician-licensing program. More details on these
modifications are discussed below.
ThermoLase has also entered into a variety of joint ventures and licensing
agreements to bring the SoftLight technology to international markets,
including:
- Japan January 1996
- France and Saudi Arabia November 1996
- The United Arab Emirates and Oman March 1997
- Switzerland April 1997
- Brazil June 1997
- The United Kingdom and Ireland September 1997
- Australia, New Zealand, South Africa,
Germany, Spain, Greece, and Cyprus October 1997
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The first international spa opened in Paris, France, in May 1997; a Lugano,
Switzerland, spa opened in October 1997; and another opened in Dubai, in the
United Arab Emirates, in December 1997. The spa in France was subsequently
closed as discussed below.
Company Efforts to Improve Operations
Our revenues from hair-removal services decreased in fiscal 1998* from
fiscal 1997. When we introduced the SoftLight laser hair-removal process and
opened our first spa, we believed that our services would command a premium
price in the marketplace. However, market acceptance of the SoftLight laser
hair-removal process has been disappointing to date. We have examined our
premium pricing structure and our overall strategy. We have taken steps to
restructure our company and reposition our offerings to help improve the
profitability of our business.
In April 1998, we repositioned SoftLight as an effective hair-management
strategy, significantly reducing prices for SoftLight treatments at our spas in
an effort to find an optimal price point that would increase demand for our
services and produce higher revenues. To appeal to a broader scope of clients
and increase traffic at the spas, we also began offering traditional spa
services, such as massages and European facials.
An important part of our strategy was to acquire the management expertise
we needed to diversify the products and services we offer at the spas. In June
1998, ThermoLase acquired The Greenhouse Spa, Inc. for 1,000,000 shares of
ThermoLase common stock, valued at $7,975,000 at the time of the transaction,
and the repayment of $4,180,000 in Greenhouse debt. The Greenhouse Spa operates
a luxury destination spa in Arlington, Texas, well-known for its innovative spa
programs and services. Our goal is to apply The Greenhouse name to our network
of spas and provide traditional day spa, hair-removal, and skin-resurfacing
services. To this end, we evaluated each of our domestic Spa Thira locations to
determine which could be converted into full-service, luxury day spas and, in
September 1998, decided to close three of our fourteen domestic spas - our
original spa in La Jolla, California, which was too small to be economically
viable as a full-service facility, and the spas in Palm Beach, and Miami Beach,
Florida, markets that can be served by our spa in Boca Raton.
The 11 remaining domestic Spa Thira day spa locations are slated to open
as Greenhouse spas by the end of December 1998. We are transforming the existing
spa lobbies to include retail space, where we will feature Greenhouse products
designed by our CBI subsidiary, in addition to CBI's own line and other beauty
products as well. We are also converting excess office space into additional
treatment rooms. We plan to offer a full menu of Greenhouse beauty services and
restorative body treatments, along with our laser hair-removal and
skin-resurfacing technologies. We expect that product and gift certificate sales
will be critical in our efforts to improve the profitability of the spas.
Changes to the Physician-licensing Program
In addition, in response to the decrease in revenues and in an attempt to
establish price points and other conditions designed to increase demand and
revenues, we significantly reduced treatment prices at our Spa Thira locations
and have begun modifying the terms and conditions of our physician-licensing
program. Under the modified licenses, per-procedure royalties are reduced or
eliminated and a minimum royalty and/or flat periodic fee requirement has been
introduced. In addition, we began offering licensees the opportunity to purchase
or lease SoftLight lasers instead of paying ongoing royalties or periodic fees.
- --------------------
* Reference to fiscal 1998, 1997, and 1996, herein are for the years ended
October 3, 1998, September 27, 1997, and September 28, 1996, respectively.
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International SoftLight Distribution
We also faced a number of challenges internationally, as each country's
regulatory structure and business climate varies significantly. For example, in
1996, the company established a joint venture to commercialize the SoftLight
laser hair-removal process in Japan and since that time has been seeking the
approval of the Japanese Ministry of Health to commercialize the SoftLight
process in that country. We have submitted information requested by the Japanese
Ministry of Health, including the results of clinical trials performed in Japan,
and we continue to await a decision by Japanese Ministry of Health.
Our business in England, operating in a more flexible regulatory
environment, has been more successful. We have more than 25 licensees in
operation there, primarily electrologists and cosmetologists, and continue to
add licensees. Our business in England is operating ahead of budget.
We are cautiously moving ahead with plans to develop new distribution
channels for the SoftLight system in other international markets.
Stock Ownership
On October 3, 1998, our parent company, ThermoTrex Corporation owned
27,960,996 shares of our common stock. This amount represented 71% of
ThermoLase's outstanding shares on that date. During fiscal 1998 ThermoTrex
purchased 2,000,000 of ThermoLase's common stock in the open market for
$10,000,000. ThermoTrex is a majority-owned public subsidiary of Thermo Electron
Corporation. In addition to the products and services that ThermoLase offers,
ThermoTrex, through its majority-owned and wholly owned subsidiaries,
manufactures mammography and other specialized and general-purpose X-ray
equipment, as well as digital breast-biopsy systems. ThermoTrex also conducts
advanced-technology research in communications, avionics, X-ray detection,
signal processing, and lasers. On October 3, 1998, Thermo Electron owned
2,620,608 shares of ThermoLase's common stock, representing 7% of our
outstanding stock on that date. Thermo Electron purchased 1,839,400 shares of
ThermoLase's common stock in the open market during fiscal 1998 for $12,832,000.
Thermo Electron is a world leader in monitoring, analytical, and biomedical
instrumentation; biomedical products including heart-assist devices,
respiratory-care equipment, and mammography systems; and paper recycling and
papermaking equipment. Thermo Electron also develops alternative-energy systems
and clean fuels, provides a range of services including industrial outsourcing
and environmental-liability management, and conducts research and development in
advanced imaging, laser communications, and electronic information-management
technologies.
ThermoTrex intends to maintain at least 50% ownership of ThermoLase for
the foreseeable future. This may require ThermoTrex to purchase additional
shares of ThermoLase common stock from time to time if the number of outstanding
shares issued by ThermoLase increases. ThermoTrex or Thermo Electron may
purchase these shares either on the open market or directly from ThermoLase.
Please refer to Notes 6 and 9 to the Consolidated Financial Statements in our
Fiscal 1998 Annual Report to Shareholders for a description of outstanding stock
options and subordinated convertible debentures.
We purchased our SoftLight laser systems and components from Trex Medical
Corporation, another majority-owned ThermoTrex subsidiary, at an aggregate cost
of $2,902,000 in fiscal 1998, $11,390,000 in fiscal 1997, and $8,549,000 in
fiscal 1996.
Forward-looking Statements
We make forward-looking statements throughout this document. We typically
use the words, "believe," "anticipate," "plan," "expect," "seek," "estimate,"
and similar expressions to identify forward-looking statements. Unless a passage
describes an historical event, you should consider it to be a forward-looking
statement. As you make
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decisions about your investments in ThermoLase, we caution you, in keeping with
the "Safe Harbor" provision of the Private Securities Litigation Reform Act of
1995, that forward-looking statements regarding the company's future
expectations and projections are not guarantees of future performance. They
involve risks, uncertainties, and assumptions, and many of the factors that will
determine the company's future results are beyond our ability to control or
predict. Therefore, our actual results may differ significantly from those
suggested by forward-looking statements. You can find these risk factors
detailed under the heading "Forward-looking Statements" immediately following
the Management's Discussion and Analysis of Financial Condition and Results of
Operations in our Fiscal 1998 Annual Report to Shareholders, which is
incorporated in this document by reference.
(b) Financial Information About Industry Segments
ThermoLase conducts business in one industry segment.
(c) Description of Business
(i) Principal Products and Services
ThermoLase operates 11 domestic day spas and a domestic destination spa
and offers the following products and services:
Laser-based Hair Removal
The patented SoftLight system uses a low-energy, dermatology laser in
combination with a specially developed lotion that directs and absorbs the
laser's energy to impact hair follicles. Unlike electrolysis, the SoftLight
system can disable numerous hair follicles at one time. As a result, we can
treat large areas, such as the legs or back. The lasers, which are similar to
those used for removing tattoos and birthmarks, are manufactured for us by Trex
Medical Corporation. Our CBI subsidiary manufactures the lotion used in the
hair-removal process.
During a typical treatment, the SoftLight technician gently cleanses the
area from which hair is to be removed, applies the lotion, which penetrates the
hair duct, and then scans the area several times with the laser beam. The laser
energy is absorbed by the lotion, causing the temperature of the lotion to
increase to a level that impacts the hair follicles. The laser treatment most
effectively impacts hair follicles in the active growing stage of development,
and at any given time, a certain percentage of hair follicles are in the resting
stage. Therefore, to obtain the maximum benefit, we recommend clients return for
multiple treatments. The number of follow-up sessions recommended and the time
interval between treatment varies depending on the particular characteristics of
the client and the anatomical site being treated.
Creative Beauty Innovations, Inc.
In December 1993, the company acquired CBI, Inc., (renamed Creative Beauty
Innovations, Inc. in 1998). CBI has built its reputation as a leading
manufacturer of private-label and custom-designed personal-care products by
combining European herbalist traditions with botanical-based technology. CBI
develops, manufactures, and packages most of its products, which include
shampoos, lotions, shower creams, bath salts, and facial treatments. CBI also
sells dietary supplements under its own brand name that it purchases from a
third party. It does not manufacture packaging materials, such as containers and
boxes, but contracts with third parties for these supplies. CBI sales accounted
for 57%, 53%, and 83% of our total revenue in fiscal 1998, 1997, and 1996,
respectively. During fiscal 1998, CBI began to diversify from being primarily a
private-label manufacturer to marketing products under its own brand names.
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(ii) New Products
SoftLight Laser Peel
In May, 1998, the FDA cleared our SoftLight laser for cosmetic skin
resurfacing. We began marketing this process under the name SoftLight Laser Peel
in September 1998. We began development of the process after many of our
hair-removal clients reported improvement in their skin's texture and
appearance. The process uses the same laser as our hair-removal process in
combination with a different formulation of the activating lotion. The laser's
energy passes through the skin's surface and reacts with the lotion, creating
heat and mechanical energy that remove the tough outer layer of dead skin to
reveal the younger skin beneath. We offer the SoftLight Laser Peel through our
spas and participating licensees.
Traditional Spa Services
With the transformation of our spas into Greenhouse spas, we are
introducing a wide range of traditional spa services, including a variety of
facials and massage treatments, as well as manicures and pedicures, makeup
application, and other beauty treatments.
Creative Beauty Innovations Product Lines
During the summer of 1998, CBI launched three major product lines under
its own brand name, two of them completely new: "I/O Inner Resources/Outer
Results," a line of vitamins, energy drinks, and topical skin-care products that
will be sold through dermatologists, plastic surgeons, and high-end salons; and
"State of Mind," a retail mass market product line designed to be sold through
drug stores and large discount chains. The third line, "Glycolique Options," is
a reformulated skin-care line marketed through the professional beauty industry.
CBI beauty and personal-care products will also be sold at our spas.
(iii) Raw Materials
The raw materials, components, and supplies we purchase are available from
a number of different suppliers. If necessary, we believe that we could develop
alternative sources without a material adverse effect on our results. To date,
we have not experienced any difficulty in obtaining materials, components, or
supplies.
(iv) Patents, Licenses, and Trademarks
Our policy is to protect our intellectual property rights relating to our
work on the SoftLight system, including, if appropriate, applying for patents in
the United States and in foreign countries. We have been issued one U.S. patent
and some foreign patents related to our hair-removal system, including a patent
issued by the European Patent Office. We also have various patents pending that
would extend the coverage of the issued patents in this country and in certain
foreign countries. In addition, we have reserved our rights to file further
corresponding patent applications in countries that are members of the Patent
Cooperation Treaty (PCT).
We have been issued one U.S. patent related to the SoftLight laser used in
our skin-resurfacing system. We have corresponding patent applications pending
in numerous foreign countries and have reserved our rights to file further
corresponding patent applications in PCT-member countries.
In addition, we have a patent application pending in the United States and
have reserved our rights to file patent applications in PCT-member countries
related to a laser-based drug-delivery system using a concept similar to our
laser-based hair-removal system.
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The technology underlying the SoftLight system, including all patents
issued relating to the system, belong to us by virtue of a license agreement
executed in February 1993 between ThermoLase and the inventor of the system.
This agreement grants us an irrevocable, exclusive, worldwide perpetual license
to the technology in exchange for a $100,000 commitment fee and a royalty equal
to .25 percent 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 its products. CBI generally retains the proprietary
rights to the formulations it develops, either for itself or for a specific
customer.
The company has registered trademarks and service marks in the United
States for "SoftLight." The company also has trademark and service mark
applications pending for "SoftLight" in various foreign countries. No assurance
can be given that any pending trademark or service mark application will be
granted.
(v) Seasonal Influences
Sales of CBI's products increase during the December holiday season, and
revenues from our hair-removal services are highest during the early spring.
(vi) Working Capital Requirements
There are no special inventory requirements or credit terms extended to
customers that would have a material adverse effect on our working capital.
(vii) Dependency on a Single Customer
No single customer accounted for more than 10% of our total revenues in
fiscal 1998.
(viii)Backlog
Our backlog of firm orders was $4,116,000 at October 3, 1998, compared
with $2,820,000 at September 27, 1997, which consisted exclusively of orders for
CBI's products. We anticipate that substantially all of our fiscal 1998 backlog
will be shipped or completed during fiscal 1999.
(ix) Government Contracts
ThermoLase does not have government contracts.
(x) Competition
When we first introduced our SoftLight laser hair-removal system, we were
the only company to have FDA clearance and thus, electrologists were our
principal competitors. Since then, a number of other companies have received FDA
clearance for laser hair removal. We believe additional companies are working to
develop similar technologies and products that may compete directly with the
SoftLight hair-removal system. We believe that the SoftLight hair-removal system
competes primarily on the basis of safety, effectiveness, and price. Because the
SoftLight system reacts with the lotion instead of the native structures of the
skin, we are able to use an energy level significantly lower than competing
products.
We expect that our principal competition for our skin-resurfacing
treatment will be providers of carbon dioxide and erbium laser skin resurfacing,
as well as chemical peels. We believe the SoftLight Laser Peel will compete
primarily based on effectiveness, safety, comfort, and price.
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The professional skin-care, bath-and-body product, and dietary supplement
markets are highly competitive and fragmented, with no single competitor
dominating the market. Many small manufacturers, as well as divisions of larger
companies, may have substantially greater financial, marketing, and research and
development resources than ThermoLase. CBI competes primarily on the basis of
quality and price.
(xi) Research and Development
During fiscal 1998, we spent approximately $3,028,000 on research and
development. Research and development funds also supported development of our
SoftLight Laser Peel and CBI's new product lines. We spent $5,704,000 on
research and development during fiscal 1997 and $3,470,000 during fiscal 1996.
(xii) Environmental Protection Regulations
We believe that compliance with federal, state, and local environmental
regulations will not have a material adverse effect on our capital expenditures,
earnings, or competitive position.
(xiii)Number of Employees
As of October 3, 1998, ThermoLase employed 486 people.
(d) Financial Information about Exports by Domestic Operations
We summarize financial information about exports by domestic operations in
Note 12 to Consolidated Financial Statements in ThermoLase's Fiscal 1998 Annual
Report to Shareholders, which is incorporated in this document by reference.
(e) Executive Officers of the Registrant
Name Age Present Title (Fiscal Year First
Became Executive Officer)
---------------------------- ------ -------------------------------------
Gerald Feldman 48 President and Chief Executive Officer
(1998)
John N. Hatsopoulos* 64 Chief Financial Officer and Senior
Vice President (1992)
Gina M. Goodrich 39 Vice President, Licensees (1998)
Silvia Carnini-Pulino 35 Vice President, International (1998)
Richard E. Weitzel 50 Vice President, Marketing (1998)
Wayne W. Wetterlund 44 Vice President, Finance (1998)
Paul F. Kelleher 56 Chief Accounting Officer (1992)
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* John N. Hatsopoulos will retire as chief financial officer and senior
vice president effective December 31, 1998. Theo Melas-Kyriazi has
been appointed to succeed Mr. Hatsopoulos as chief financial officer.
Each executive officer serves until his or her successor is chosen or
appointed by the board of directors and qualified, or until earlier resignation,
death, or removal. Mr. Hatsopoulos and Mr. Kelleher have held comparable
positions for at least five years with Thermo Electron. Mr. Feldman has been
president and chief executive officer of the company since August 1998. He came
to ThermoLase from International Technidyne Corporation (ITC), a maker of
near-patient, whole-blood coagulation testing equipment and related disposables,
where he served as president since 1987. ITC has been a Thermo Electron company
since 1991. Ms. Goodrich has been ThermoLase's vice president, licensees since
August 1998, and has worked for the company since 1996. Prior to joining the
company, Ms. Goodrich held various positions with Nutri/System, a national chain
of weight loss centers. Ms. Carnini-Pulino was appointed vice president,
international in August 1998 and has worked for the company since 1997. Prior to
joining the company Ms. Carnini-Pulino was the founder and chief executive
officer of GAMMATel, Inc., a telecommunications company. Mr. Weitzel was
appointed vice president, marketing in 1998. Prior to joining ThermoLase, Mr.
Weitzel was
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employed at Arthur Andersen LLP, where he served as the director of business
development. Mr. Wetterlund was appointed vice president, finance in 1998. He
came to ThermoLase from Urban Outfitter, Inc., where he served as controller
since 1993. Mr. Melas-Kyriazi joined Thermo Electron in 1986 as assistant
treasurer, and became treasurer in 1988. He was named president and chief
executive officer of ThermoSpectra Corporation, a public subsidiary of Thermo
Instrument Systems Inc., in 1994. In 1997, he became vice president of corporate
strategy for Thermo Electron. Mr. Melas-Kyriazi will remain a full-time employee
of Thermo Electron, and, when he succeeds Mr. Hatsopoulos as chief financial
officer, will also devote such time to the affairs of the company as the
company's needs reasonably require.
Item 2. Properties
ThermoLase occupies approximately 213,000 square feet of office and
manufacturing space in Carrollton, Texas, under a lease expiring in 2004,
through its CBI subsidiary. ThermoLase also leases approximately 77,000 square
feet of retail space for its Spa Thira salons, under leases expiring from 2000
through 2013. In addition, we own a 60,000 square foot building in Arlington,
Texas, which is used for the Greenhouse Spa operations. We believe that these
facilities are in good condition and are suitable and adequate to meet our
current needs.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information concerning the market and market price for the Registrant's
Common Stock, $.01 par value, and dividend policy is included under the sections
labeled "Common Stock Market Information" and "Dividend Policy" in the
Registrant's Fiscal 1998 Annual Report to Shareholders and is incorporated in
this document by reference.
Item 6. Selected Financial Data
The information required under this item is included under the sections
labeled "Selected Financial Information" and "Dividend Policy" in the
Registrant's Fiscal 1998 Annual Report to Shareholders and is incorporated in
this document by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required under this item is included under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Registrant's Fiscal 1998 Annual Report to Shareholders and is
incorporated in this document by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required under this item is included under the caption
"Market Risk" in the Registrant's Fiscal 1998 Annual Report to Shareholders and
is incorporated in this document by reference.
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Item 8. Financial Statements and Supplementary Data
The Registrant's Consolidated Financial Statements and Supplementary Data
are included in the Registrant's Fiscal 1998 Annual Report to Shareholders and
are incorporated in this document by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information concerning directors required under this item is
incorporated in this document by reference from the material contained under the
heading "Election of Directors" in the Registrant's definitive proxy statement
to be filed with the Securities and Exchange Commission pursuant to Regulation
14A, not later than 120 days after the close of the fiscal year. The information
concerning delinquent filers pursuant to Item 405 of Regulation S-K is
incorporated in this document by reference from the material contained under the
heading "Section 16(a) Beneficial Ownership Reporting Compliance" under the
caption "Stock Ownership" in the Registrant's definitive proxy statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A,
not later than 120 days after the close of the fiscal year.
Item 11. Executive Compensation
The information required under this item is incorporated in this document
by reference from the material contained under the caption "Executive
Compensation" in the Registrant's definitive proxy statement to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A, not later
than 120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this item is incorporated in this document
by reference from the material contained under the caption "Stock Ownership" in
the Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
The information required under this item is incorporated in this document
by reference from the material contained under the caption "Relationship with
Affiliates" in the Registrant's definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the close of the fiscal year.
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PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
(a, d) Financial Statements and Schedules
(1) The consolidated financial statements set forth in the list below
are filed as part of this Report.
(2) The consolidated financial statement schedule set forth in the
list below is filed as part of this Report.
(3) Exhibits filed herewith or incorporated in this document by
reference are set forth in Item 14(c) below.
List of Financial Statements and Schedules Referenced in this Item 14
Information incorporated by reference from Exhibit 13 filed herewith:
Consolidated Statement of Operations
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Shareholders' Investment
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Financial Statement Schedules filed herewith:
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or not
required, or because the required information is shown either in the
financial statements or in the notes thereto.
(b) Reports on Form 8-K
On September 30, 1998, ThermoLase filed a Current Report on Form 8-K,
dated September 29, 1998, with respect to restructuring and other
charges recorded during the fourth quarter of fiscal 1998.
(c) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed by
the undersigned, thereunto duly authorized.
Date: December 14, 1998 THERMOLASE CORPORATION
By:/s/ Gerald Feldman
Gerald Feldman
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated, as of December 14, 1998.
Signature Title
By: /s/ Gerald Feldman President, Chief Executive Officer, and
Gerald Feldman Director
By: /s/ John N. Hatsopoulos Senior Vice President and Chief
John N. Hatsopoulos Financial Officer
By: /s/ Paul F. Kelleher Chief Accounting Officer and Director
Paul F. Kelleher
By: /s/ Gary S. Weinstein Chairman of the Board and Director
Gary S. Weinstein
By: /s/ Carliss Y. Baldwin Director
Carliss Y. Baldwin
By: /s/ Elias P. Gyftopoulos Director
Elias P. Gyftopoulos
By: /s/ John T. Keiser Director
John T. Keiser
By: /s/ Melissa F. Riordan Director
Melissa F. Riordan
By: /s/ Nicholas T. Zervas Director
Nicholas T. Zervas
12
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Board of Directors of ThermoLase Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in ThermoLase Corporation's
Annual Report to Shareholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated November 9, 1998, (except with respect to
the matter discussed in Note 15 as to which the date is November 24, 1998). Our
audits were made for the purpose of forming an opinion on those statements taken
as a whole. The schedule listed in Item 14 on page 11 is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states, in all material respects, the
consolidated financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
November 9, 1998
13
<PAGE>
SCHEDULE II
THERMOLASE CORPORATION
Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Balance at Provision Accounts Other Balance
Beginning Charged Written at End
of Year to Off of Year
Description Expense
- -------------------------------------------------------------------------------------------------------------
Allowance for Doubtful Accounts
Year Ended October 3, 1998 $ 402 $ 88 $ - $ - $ 490
Year Ended September 27, 1997 $ 319 $ 83 $ - $ - $ 402
Year Ended September 28, 1996 $ 256 $ 63 $ - $ - $ 319
Balance at Restructuring Assets Cash Balance
Beginning Costs Written Payments at End
of Year Charged to Off of Year
Description Expense
- -------------------------------------------------------------------------------------------------------------
Accrued Restructuring Costs (a)
Year Ended October 3, 1998 $ - $10,155 $(4,193) $ (809) $ 5,153
</TABLE>
(a) The nature of activity in this account is described in Note 13 to
Consolidated Financial Statements in the Registrant's Fiscal 1998 Annual
Report to Shareholders.
14
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
3.1 Certificate of Incorporation of the Registrant (filed as Exhibit
3.1 to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-78052] and incorporated herein by reference).
3.2 By-Laws of the Registrant, as amended and restated (filed as
Exhibit 3.2 to the Registrant's Transition Report on Form 10-K
for the transition period January 1, 1995, through September 30,
1995 [File No. 1-13104] and incorporated herein by reference).
4.1 Form of Unit Certificate (filed as Exhibit 4.1 to the
Registrant's Registration Statement on Form S-4 [Reg. No.
333-19633] and incorporated herein by reference).
4.2 Guaranty Agreement between the Registrant and Thermo Electron
Corporation dated March 5, 1997 (filed as Exhibit 4.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 29, 1997, and incorporated herein by reference).
4.3 Fiscal Agency Agreement dated as of August 12, 1997, among the
Registrant, Thermo Electron Corporation, and Bankers Trust
Company as Fiscal Agent, relating to $115,000,000 principal
amount of 4 3/8% Convertible Subordinated Debentures due 2004
(filed as Exhibit 4.3 to the Registrants Annual Report on Form
10-K for the fiscal year ended September 27, 1997 [File No.
1-13104] and incorporated herein by reference).
10.1 Corporate Services Agreement dated as of January 13, 1993,
between Thermo Electron Corporation and the Registrant (filed as
Exhibit 10.1 to the Registrant's Registration Statement on Form
S-1 [Reg. No. 33-78052] and incorporated herein by reference).
10.2 Thermo Electron Corporate Charter, as amended and restated
effective January 3, 1993 (filed as Exhibit 10.1 to Thermo
Electron's Annual Report on Form 10-K for the fiscal year ended
January 1, 1994 [File No. 1-8002] and incorporated herein by
reference).
10.3 Tax Allocation Agreement dated as of January 13, 1994, between
ThermoTrex Corporation and the Registrant (filed as Exhibit 10.3
to the Registrant's Registration Statement on Form S-1 [Reg. No.
33-78052] and incorporated herein by reference).
10.4 License Agreement dated as of February 10, 1993, between the
Registrant and Nicolai I. Tankovich (filed as Exhibit 10.4 to the
Registrant's Registration Statement on Form S-1 [Reg. No.
33-78052] and incorporated herein by reference).
10.5 Amended and restated Master Repurchase Agreement dated as of
December 12, 1997, between the Registrant and Thermo Electron
Corporation (filed as Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended January 3, 1998 [File
No. 1-13104] and incorporated herein by reference).
10.6 Amended and restated Master Guarantee Reimbursement Agreement
dated as of December 12, 1997, among Thermo Electron Corporation,
ThermoTrex Corporation, and the Registrant (filed as Exhibit 10.3
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended January 3, 1998 [File No. 1-13104] and incorporated herein
by reference).
15
<PAGE>
Exhibit
Number Description of Exhibit
10.7 Lease Agreement dated March 11, 1994, between Lincoln Property
Company Acquisition Fund Limited Partnership and CBI
Laboratories, Inc. (filed as Exhibit 10.7 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 33-78052] and
incorporated herein by reference).
10.8 Form of Indemnification Agreement for Officers and Directors
(filed as Exhibit 10.12 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-78052] and incorporated
herein by reference).
10.9 Nonqualified Stock Option Plan of the Registrant (filed as
Exhibit 10.8 to the Registrant's Registration Statement on Form
S-1 [Reg. No. 33-78052] and incorporated herein by reference).
(Maximum number of shares issuable in the aggregate under this
plan and the Registrant's Incentive Stock Option plan is
2,800,000 shares, after adjustment to reflect share increase
approved in 1993 and 2-for-1 stock splits effected in March 1994
and June 1995.)
10.10 Incentive Stock Option Plan of the Registrant (filed as Exhibit
10.9 to the Registrant's Registration Statement on Form S-1 [Reg.
No. 33-78052] and incorporated herein by reference). (Maximum
number of shares issuable in the aggregate under this plan and
the Registrant's Nonqualified Stock Option Plan is 2,800,000
shares, after adjustment to reflect share increase approved in
1993 and 2-for-1 stock splits effected in March 1994 and June
1995.)
10.11 Equity Incentive Plan of the Registrant (filed as Exhibit 10.81
to Thermo TerraTech Inc.'s (formerly Thermo Process Systems Inc.)
Annual Report on Form 10-K for the fiscal year ended April 1,
1995 [File No. 1-9549] and incorporated herein by reference).
10.12 Deferred Compensation Plan for Directors of the Registrant (filed
as Exhibit 10.10 to the Registrant's Registration Statement on
Form S-1 [Reg. No. 33-78052] and incorporated
herein by reference).
10.13 Directors' Stock Option Plan of the Registrant (filed as Exhibit
10.14 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994 [File No. 1-13104] and
incorporated herein by reference).
In addition to the stock-based compensation plans of the
Registrant, the executive officers of the Registrant may be
granted awards under stock-based compensation plans of Thermo
Electron for services rendered to the Registrant. The terms of
such plans are substantially the same as those of the
Registrant's Equity Incentive Plan.
10.14 Amended and Restated Stock Holding Assistance Plan and Form of
Promissory Note (filed as Exhibit 10.14 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended September
27, 1997 [File No. 1-13104] and incorporated herein by
reference).
10.15 Operating Agreement of ThermoLase Japan L.L.C. dated as of
January 22, 1996, between the Registrant and Fox River Japan
Partners, L.P. (filed as Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 30,
1995 [File No. 1-13104] and incorporated herein by reference).
10.16 License Agreement dated as of January 22, 1996, between the
Registrant and ThermoLase Japan L.L.C. (filed as Exhibit 10.2 to
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 30, 1995 [File No. 1-13104] and incorporated
herein by reference).
16
<PAGE>
Exhibit
Number Description of Exhibit
10.17 Option Agreement dated as of January 22, 1996, between the
Registrant and Fox River Japan Partners, L.P. (filed as Exhibit
10.3 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended December 30, 1995 [File No. 1-13104] and
incorporated herein by reference).
10.18 License Agreement dated as of October 30, 1995, between the
Registrant and Ronald G. Wheeland, M.D., Professional Corporation
(filed as Exhibit 10.4 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 30, 1995 [File No.
1-13104] and incorporated herein by reference).
10.19 Management Agreement dated as of October 30, 1995, between the
Registrant and Ronald G. Wheeland, M.D., Professional Corporation
(filed as Exhibit 10.5 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 30, 1995 [File No.
1-13104] and incorporated herein by reference).
10.20 Sublease Agreement dated as of October 30, 1995, between the
Registrant and Ronald G. Wheeland, M.D., Professional Corporation
(filed as Exhibit 10.6 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 30, 1995 [File No.
1-13104] and incorporated herein by reference).
10.21 Lease dated as of April 12, 1995, between the Registrant and The
Goldberg Family Trust (filed as Exhibit 10.7 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 30,
1995 [File No. 1-13104] and incorporated herein by reference).
10.22 Lease dated as of December 8, 1995, between the Registrant and
Canon Properties (filed as Exhibit 10.8 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 30,
1995 [File No. 1-13104] and incorporated herein by reference).
10.23 Lease dated as of January 17, 1996, between the Registrant and
Trammell Crow Equity Partners (filed as Exhibit 10.9 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 30, 1995 [File No. 1-13104] and incorporated herein by
reference).
10.24 Master Joint Venture Agreement dated as of October 30, 1996,
among the Registrant, Franklin Holdings, S.A. and Yves Micheli
(filed as Exhibit No. 26 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended September 28, 1996, and
incorporated herein by reference).
10.25 SoftLight and Spa Thira Franchise and License Agreement dated as
of November 8, 1996, between the Registrant and Medical Supply &
Service Co. (filed as Exhibit No. 27 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 28, 1996,
and incorporated herein by reference).
10.26 Equipment Lease Agreement for SoftLight Lasers dated as of
November 8, 1996, between the Registrant and Medical Supply &
Service Co. (filed as Exhibit No. 28 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 28, 1996,
and incorporated herein by reference).
10.27 Loan Agreement between the Registrant and Thermo Electron
Corporation dated July 30, 1997 (filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 28, 1997, and incorporated herein by reference).
17
<PAGE>
Exhibit
Number Description of Exhibit
10.28 Franchise Agreement with the Effective Date of December 31, 1996,
between the Company and Yves Micheli (filed as Exhibit 10.1 to
the Registrant's Annual Report on Form 10-Q for the quarter ended
December 28, 1996, and incorporated herein by reference).
10.29 Amendment to Operating Agreement of ThermoLase Japan L.L.C. dated
as of May 1, 1996, by and among the Registrant, Fox River
Partners L.P., and ThermoLase Japan L.L.C (filed as Exhibit 10.29
to the Registrant's Annual Report on Form 10-K for the fiscal
year ended September 27, 1997 [File No. 1-13104] and incorporated
herein by reference).
10.30 Form of Terms and Conditions for Purchases of Lasers from Trex
Medical Corporation (filed as Exhibit 10.30 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended September
27, 1997[File No. 1-13104] and incorporated herein by reference).
10.31 Agreement between the Registrant and John C. Hansen (filed as
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended January 3, 1998 [File No. 1-13104] and
incorporated herein by reference).
10.32 Agreement and Plan of Merger dated June 12, 1998, by and among
the company, G Acquisition Corp., a Pennsylvania corporation and
wholly owned subsidiary of the company, The Greenhouse Spa, Inc.,
a Pennsylvania corporation, SMK Group LLC, a Delaware limited
liability company, The Stuart Katzoff Trust, a Pennsylvania
trust, and Lydia Katzoff (filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
July 4, 1998 [File No. 1-13104] and incorporated herein by
reference).
13 Annual Report to Shareholders for the fiscal year ended October
3, 1998 (only those portions incorporated herein by reference).
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
18
Exhibit 13
ThermoLase Corporation
Consolidated Financial Statements
Fiscal Year 1998
<PAGE>
<TABLE>
<CAPTION>
ThermoLase Corporation 1998 Financial Statements
Consolidated Statement of Operations
<S> <C> <C> <C>
Year Ended
-------------------------------
(In thousands except per share amounts) Oct. 3, Sept. 27, Sept. 28,
1998 1997 1996
- -------------------------------------------------------------------------- ---------- ---------- ---------
Revenues (Note 12)
Product revenues $ 22,765 $ 24,196 $ 23,165
Service revenues 17,326 21,037 4,647
--------- --------- ---------
40,091 45,233 27,812
--------- --------- ---------
Costs and Operating Expenses:
Cost of product revenues 15,590 16,499 15,063
Cost of service revenues 22,285 19,628 4,964
Selling, general, and administrative expenses (Note 8) 22,306 22,972 9,761
Research and development expenses 3,028 5,704 3,470
Restructuring costs (Note 13) 10,155 - -
--------- --------- ---------
73,364 64,803 33,258
--------- --------- ---------
Operating Loss (33,273) (19,570) (5,446)
Interest Income 4,512 2,110 3,482
Interest Expense (Note 9) (5,343) (637) -
Equity in Losses of Joint Ventures (Note 4) (1,203) (700) -
Gain on Sale of Investments (Note 2) - - 115
--------- --------- ---------
Loss Before Income Taxes (35,307) (18,797) (1,849)
Income Tax (Provision) Benefit (Note 7) (5,879) 6,392 463
--------- --------- ---------
Net Loss $ (41,186) $ (12,405) $ (1,386)
========= ========= =========
Basic and Diluted Loss per Share $ (1.07) $ (.31) $ (.03)
========= ========= =========
Basic and Diluted Weighted Average Shares 38,528 40,075 40,353
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
<TABLE>
<CAPTION>
ThermoLase Corporation 1998 Financial Statements
Consolidated Balance Sheet
<S> <C> <C>
(In thousands) Oct. 3, Sept. 27,
1998 1997
- -------------------------------------------------------------------------------------- ---------- ----------
Assets
Current Assets:
Cash and cash equivalents (includes $51,246 and $49,291 under repurchase $ 52,831 $ 87,843
agreement with affiliated company)
Available-for-sale investments, at quoted market value (amortized cost 3,072 12,493
of $3,072 and $12,509; Note 2)
Accounts receivable, less allowances of $490 and $402 4,339 5,863
Inventories 6,825 3,248
Prepaid expenses 698 1,718
Prepaid income taxes (Note 7) - 1,687
--------- ---------
67,765 112,852
--------- ---------
Property, Plant, and Equipment, at Cost, Net 43,430 39,737
--------- ---------
Long-term Prepaid Income Taxes (Note 7) - 6,412
--------- ---------
Other Assets (includes note receivable from joint venture of $1,667 in 7,531 7,498
fiscal 1998; Note 8)
--------- ---------
Cost in Excess of Net Assets of Acquired Companies (Note 3) 15,489 8,096
--------- ---------
$ 134,215 $ 174,595
========= =========
3
<PAGE>
ThermoLase Corporation 1998 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) Oct. 3, Sept. 27,
1998 1997
- -------------------------------------------------------------------------------------- ---------- ----------
Liabilities and Shareholders' Investment
Current Liabilities:
Accounts payable $ 3,221 $ 5,163
Accrued payroll and employee benefits 1,633 2,590
Deferred revenue 659 1,355
Accrued restructuring costs (Note 13) 5,153 -
Other accrued expenses 5,302 5,722
Due to parent company and affiliated companies 3,200 2,553
--------- ---------
19,168 17,383
--------- ---------
Long-term Obligations:
4 3/8% Subordinated Convertible Debentures (includes $4,500 of 115,000 115,000
related-party debt in fiscal 1998; Note 9)
Other 66 -
--------- ---------
115,066 115,000
--------- ---------
Deferred Lease Liability 1,172 1,379
--------- ---------
Common Stock Subject to Redemption (Note 1) 40,500 40,500
--------- ---------
Commitments and Contingencies (Notes 4, 8, and 10)
Shareholders' Investment (Notes 5 and 6):
Common stock, $.01 par value, 100,000,000 shares authorized; 40,829,132 408 408
and 40,807,932 shares issued
Capital in excess of par value 36,279 46,379
Accumulated deficit (57,107) (15,921)
Treasury stock at cost, 1,531,025 and 2,129,549 shares (21,271) (30,523)
Net unrealized loss on available-for-sale investments (Note 2) - (10)
--------- ---------
(41,691) 333
--------- ---------
$ 134,215 $ 174,595
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
<TABLE>
<CAPTION>
ThermoLase Corporation 1998 Financial Statements
Consolidated Statement of Cash Flows
<S> <C> <C> <C>
Year Ended
-------------------------------
(In thousands) Oct. 3, Sept. 27, Sept. 28,
1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ----------
Operating Activities
Net loss $ (41,186) $ (12,405) $ (1,386)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization 7,234 4,345 1,482
Provision for losses on accounts receivable 88 83 63
Decrease (increase) in prepaid income taxes 5,567 (6,236) (999)
Increase in deferred lease liability 71 885 494
Equity in losses of joint ventures (Note 4) 1,203 700 -
Noncash restructuring costs (Note 13) 4,193 - -
Gain on sale of investments (Note 2) - - (115)
Changes in current accounts, excluding the effects of acquisition:
Accounts receivable 1,275 (1,374) (380)
Inventories (3,450) 1,021 934
Other current assets 1,158 (714) 331
Accounts payable (2,426) (16) 1,774
Other current liabilities 1,804 3,767 2,205
--------- --------- ---------
Net cash provided by (used in) operating activities (24,469) (9,944) 4,403
--------- --------- ---------
Investing Activities
Acquisition, net of cash acquired (Note 3) (4,180) - -
Purchases of available-for-sale investments (4,000) (10,400) (49,500)
Proceeds from maturities of available-for-sale investments 13,400 41,500 56,525
Proceeds from sale of available-for-sale investments - - 615
Purchases of property, plant, and equipment (4,513) (26,807) (13,230)
Investment in other assets (Notes 1 and 4) (983) (1,144) (4,400)
Advance under a note receivable from related party (Note 8) (1,667) - -
Other 230 - -
--------- --------- ---------
Net cash provided by (used in) investing activities (1,713) 3,149 (9,990)
--------- --------- ---------
Financing Activities
Net proceeds from issuance of subordinated convertible - 112,551 -
debentures (Note 9)
Purchases of Company common stock (8,806) (26,072) -
Net proceeds from issuance of Company common stock and sale of 776 625 2,591
put options (Note 5)
Payment of withholding taxes related to stock option exercises (792) (891) (2,227)
Net proceeds from common stock exchange offer (Notes 1 and 5) - 502 -
Other (8) - -
--------- --------- ---------
Net cash provided by (used in) financing activities $ (8,830) $ 86,715 $ 364
--------- --------- ---------
5
<PAGE>
ThermoLase Corporation 1998 Financial Statements
Consolidated Statement of Cash Flows (continued)
Year Ended
-------------------------------
(In thousands) Oct. 3, Sept. 27, Sept. 28,
1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ----------
Increase (Decrease) in Cash and Cash Equivalents $ (35,012) $ 79,920 $ (5,223)
Cash and Cash Equivalents at Beginning of Year 87,843 7,923 13,146
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 52,831 $ 87,843 $ 7,923
========= ========= =========
Cash Paid For
Income taxes $ - $ 70 $ 12
Interest $ 5,074 $ - $ -
Noncash Activities
Fair value of assets of acquired company $ 17,128 $ - $ -
Cash paid for acquired company (4,180) - -
Issuance of Company common stock for acquired company (7,975) - -
--------- --------- ---------
Liabilities assumed of acquired company $ 4,973 $ - $ -
========= ========= =========
Exchange of common stock for common stock subject to redemption $ - $ 40,500 $ -
(Notes 1 and 5) ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
<TABLE>
<CAPTION>
ThermoLase Corporation 1998 Financial Statements
Consolidated Statement of Shareholders' Investment
<S> <C> <C> <C>
Year Ended
-------------------------------
(In thousands) Oct. 3, Sept. 27, Sept. 28,
1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ----------
Common Stock, $.01 Par Value
Balance at beginning of year $ 408 $ 408 $ 401
Issuance of stock under employees' and directors' stock plans - - 7
--------- --------- ---------
Balance at end of year 408 408 408
--------- --------- ---------
Capital in Excess of Par Value
Balance at beginning of year 46,379 85,813 84,354
Activity under employees' and directors' stock plans (3,986) (2,969) 1,459
Issuance of Company common stock for acquisition (Note 3) (6,114) - -
Effect of common stock exchange offer (Notes 1 and 5) - (36,759) -
Net proceeds from sale of common stock and put options (Note 5) - 294 -
--------- --------- ---------
Balance at end of year 36,279 46,379 85,813
--------- --------- ---------
Accumulated Deficit
Balance at beginning of year (15,921) (3,516) (2,130)
Net loss (41,186) (12,405) (1,386)
--------- --------- ---------
Balance at end of year (57,107) (15,921) (3,516)
--------- --------- ---------
Treasury Stock
Balance at beginning of year (30,523) (3,621) (415)
Activity under employees' and directors' stock plans 3,969 2,409 (3,206)
Issuance of Company common stock for acquisition (Note 3) 14,089 - -
Purchases of Company common stock (8,806) (26,072) -
Effect of common stock exchange offer (Notes 1 and 5) - (3,239) -
--------- --------- ---------
Balance at end of year (21,271) (30,523) (3,621)
--------- --------- ---------
Net Unrealized Gain (Loss) on Available-for-sale Investments
Balance at beginning of year (10) (47) 8
Change in net unrealized gain (loss) on available-for-sale 10 37 (55)
investments (Note 2)
--------- --------- ---------
Balance at end of year - (10) (47)
--------- --------- ---------
Total Shareholders' Investment $ (41,691) $ 333 $ 79,037
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
ThermoLase Corporation 1998 Financial Statements
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(R) for the removal of unwanted hair. The SoftLight system uses
a low-energy, dermatology laser in combination with a lotion that absorbs the
laser's energy to impact hair follicles. In May 1998, the Company received
clearance from the U.S. Food and Drug Administration to market laser-based
skin-resurfacing services. The Company markets the SoftLight hair-removal and
the SoftLight Laser Peel skin-resurfacing services in the United States through
its Spa Thira locations and through a network of independent doctors who pay the
Company a one-time licensing fee and a per-procedure or minimum royalty, as well
as internationally through joint ventures and other licensing arrangements.
During fiscal 1998, the Company acquired The Greenhouse Spa, Inc. (Note 3), a
luxury, destination spa located in Texas. In connection with this acquisition,
ThermoLase is converting all of its domestic Spa Thira locations into facilities
that provide both traditional day spa and hair-removal and skin-resurfacing
services. The converted spas will be operated under The Greenhouse Spa name. The
Company also manufactures and markets skin-care and bath-and-body products and
markets dietary supplements through its Creative Beauty Innovations, Inc. (CBI)
subsidiary. CBI also manufactures the lotion used in the SoftLight hair-removal
process.
Principles of Consolidation and Relationship with ThermoTrex Corporation
The Company was incorporated in January 1993 as a wholly owned subsidiary
of ThermoTrex Corporation. As of October 3, 1998, ThermoTrex owned 27,960,996
shares of the Company's common stock, representing 71% of such stock
outstanding. ThermoTrex is a 62%-owned subsidiary of Thermo Electron
Corporation. As of October 3, 1998, Thermo Electron owned 2,620,608 shares of
the Company's common stock, representing 7% of such stock outstanding.
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
The Company accounts for investments in joint ventures in which it owns
between 20% and 50% using the equity method. Under the equity method, the
Company records its initial investment in each joint venture at cost, and
adjusts the carrying value of the investment to recognize its proportionate
share of the joint venture's earnings or losses. In instances where the Company
has no obligation to provide additional funding to a joint venture, the Company
discontinues applying the equity method when its investment has been reduced to
zero.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest
September 30. References to fiscal 1998, 1997, and 1996 are for the years ended
October 3, 1998, September 27, 1997, and September 28, 1996, respectively.
Fiscal 1998 included 53 weeks; 1997 and 1996 each included 52 weeks.
Revenue Recognition
The Company generally recognizes product revenues upon shipment of its
products. The Company offers a variety of treatment plans for its spa-based
services, which include one-time services and multiple treatment plans that
provide for varying numbers of treatments or treatment periods. 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 was six months in each period based upon the
average service pattern for customers treated. Deferred revenue in the
accompanying balance sheet represents unearned revenue from treatments that will
be recognized in the subsequent fiscal year.
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 licensing fees are recorded as
revenue at the time the technology is transferred to the practitioner. Royalties
arising from hair-removal and skin-resurfacing procedures performed by these
physicians are recognized when such procedures are performed.
8
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
The Company has initiated the process of modifying the terms of its
physician-licensing program under which per-procedure royalties have been
reduced or eliminated and a minimum royalty and/or flat periodic fee is
required. Minimum royalties and flat fees are recognized monthly.
The Company earns an initial technology licensing fee and ongoing
technology licensing royalties from its international arrangements. Initial
nonrefundable technology licensing fees are recorded as revenue at the time the
technology is transferred. Ongoing technology licensing royalties are recorded
when earned in accordance with contractual terms. The accompanying statement of
operations includes international licensing fees of $2,760,000, $4,195,000, and
$2,000,000 in fiscal 1998, 1997, and 1996, respectively.
Pre-opening Spa Costs
The Company expensed all pre-opening costs associated with the
establishment and startup of its Spa Thira salons as such costs were 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.
Stock-based Compensation Plans
The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock-based compensation plans (Note 6). Accordingly, no
accounting recognition is given to stock options granted at fair market value
until they are exercised. Upon exercise, net proceeds, including tax benefits
realized, are credited to equity.
Income Taxes
In accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," the Company recognizes deferred income taxes
based on the expected future tax consequences of differences between the
financial statement basis and the tax basis of assets and liabilities calculated
using enacted tax rates in effect for the year in which the differences are
expected to be reflected in the tax return, subject to determination of the need
for a valuation allowance for any deferred tax assets.
Loss per Share
During the first quarter of fiscal 1998, the Company adopted SFAS No. 128,
"Earnings per Share." As a result, all previously reported losses per share have
been restated; however, basic loss per share equals the Company's previously
reported loss per share for the fiscal 1997 and 1996 periods. Basic loss per
share has been computed by dividing net loss by the weighted average number of
shares outstanding during the period. Diluted loss per share does not differ
from basic loss per share because the effect of assuming the conversion of
convertible obligations and the elimination of the related interest expense, the
exercise of stock options, and the effect of redeemable common stock would be
antidilutive, due to the Company's net loss in the periods presented. As of
October 3, 1998, there were outstanding options to purchase 2,545,910 shares of
Company common stock at prices ranging from $1.75 to $29.55 per share, and the
Company had outstanding $115,000,000 principal amount of 4 3/8% subordinated
convertible debentures, convertible at $17.385 per share.
9
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Cash and Cash Equivalents
At fiscal year-end 1998 and 1997, $51,246,000 and $49,291,000,
respectively, of the Company's cash equivalents were invested in a repurchase
agreement with Thermo Electron. Under this agreement, the Company in effect
lends excess cash to Thermo Electron, which Thermo Electron collateralizes with
investments principally consisting of corporate notes, U.S. government-agency
securities, commercial paper, money market funds, and other marketable
securities, in the amount of at least 103% of such obligation. The Company's
funds subject to the repurchase agreement are readily convertible into cash by
the Company. The repurchase agreement earns a rate based on the 90-day
Commercial Paper Composite Rate plus 25 basis points, set at the beginning of
each quarter. Cash equivalents at September 27, 1997, included government-agency
securities purchased with an original maturity of three months or less. These
investments are carried at cost, which approximates market value.
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out
basis) or market value and include materials, labor, and manufacturing overhead.
The components of inventories are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------- ----------- -----------
Raw Materials and Supplies $2,771 $1,343
Work in Process 759 430
Finished Goods 3,295 1,475
------ ------
$6,825 $3,248
====== ======
Property, Plant, and Equipment
The costs of additions and improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. The Company provides for
depreciation and amortization using the straight-line method over the estimated
useful lives of the property as follows: building, 40 years; machinery and
equipment, 3 to 10 years; and leasehold improvements, the shorter of the term of
the lease or the life of the asset. Property, plant, and equipment consist of
the following:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------- ----------- -----------
Land $ 730 $ -
Building 7,494 -
Machinery and Equipment 30,773 28,641
Leasehold Improvements 15,709 17,151
------- -------
54,706 45,792
Less: Accumulated depreciation and amortization 11,276 6,055
------- -------
$43,430 $39,737
======= =======
</TABLE>
Other Assets
In June 1996, the Company purchased $4,400,000 of convertible preferred
stock of AntiCancer Inc., representing an approximate 10% equity interest in
AntiCancer on a diluted basis. AntiCancer is a San Diego-based company that is
developing a new chemotherapeutic drug for cancer patients, and is also
developing certain
10
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
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 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 Companies
The excess of cost over the fair value of net assets of the acquired
companies is amortized using the straight-line method over 40 years. Accumulated
amortization was $1,187,000 and $894,000 at fiscal year-end 1998 and 1997,
respectively. The Company assesses the future useful life of this asset whenever
events or changes in circumstances indicate that the current useful life has
diminished. The Company considers the future undiscounted cash flows of the
acquired businesses in assessing the recoverability of this asset. If impairment
has occurred, any excess of carrying value over fair value is recorded as a
loss.
Deferred Lease Liability
Deferred lease liability in the accompanying balance sheet represents
facilities rent that is being recognized ratably over the respective lease
terms.
Common Stock Subject to Redemption
In April 1997, the Company completed an exchange offer whereby its
shareholders had the opportunity to exchange one share of existing Company
common stock and $3.00 (in cash or Company common stock) for a new unit
consisting of one share of Company common stock and one redemption right. The
redemption right entitles the holder to sell the related share of common stock
to the Company for $20.25 during the period from April 3, 2001, through April
30, 2001. The redemption right will expire and become worthless if the closing
price of Company common stock is at least $26.00 for 20 of any 30 consecutive
trading days. The redemption rights are guaranteed on a subordinated basis by
Thermo Electron. ThermoTrex has agreed to reimburse Thermo Electron in the event
Thermo Electron is required to make a payment under the guarantee. In connection
with this offer, in April 1997, the Company issued 2,000,000 units in exchange
for 2,261,706 shares of Company common stock and $502,000 in cash, net of
expenses. As a result of these transactions, the Company reclassified
$40,500,000 from "Shareholders' investment" to "Common stock subject to
redemption," based on the issuance of 2,000,000 redemption rights, each carrying
a maximum liability to the Company of $20.25.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. Available-for-sale Investments
In accordance with SFAS No. 115 "Accounting for Certain Investments in
Debt and Equity Securities," the Company's debt securities are considered
available-for-sale investments in the accompanying balance sheet and are carried
at market value, with the difference between cost and market value, net of
related tax effects, recorded as a component of shareholders' investment titled
"Net unrealized loss on available-for-sale investments."
11
<PAGE>
2. Available-for-sale Investments (continued)
Available-for-sale investments in the accompanying balance sheet
represents investments in government-agency securities. At October 3, 1998, the
cost of available-for-sale investments approximated market value. At September
27, 1997, the difference between the market value and the cost basis of
available-for-sale investments was $16,000, which represents gross unrealized
losses on those investments. Available-for-sale investments in the accompanying
fiscal 1998 balance sheet have a contractual maturity of less than one year.
The cost of available-for-sale investments that were sold was based on
specific identification in determining realized gains and losses recorded in the
accompanying statement of operations. Gain on sale of investments in the
accompanying fiscal 1996 statement of operations represents the gross realized
gains relating to the sale of available- for-sale investments.
3. Acquisition
In June 1998, a wholly owned subsidiary of the Company merged with The
Greenhouse Spa, Inc., exchanging 1,000,000 shares of Company common stock,
valued at $7,975,000 at the time of the transaction, and the repayment of
$4,180,000 of debt for all of the outstanding stock of The Greenhouse Spa. The
Greenhouse Spa operates a luxury, destination spa in Arlington, Texas.
The acquisition has been accounted for using the purchase method of
accounting, and results of its operations have been included in the accompanying
financial statements from the date of acquisition. The cost of this acquisition
exceeded the estimated fair value of the acquired net assets by $7,686,000,
which is being amortized over 40 years. Allocation of the purchase price was
based on an estimate of the fair value of the net assets acquired. Pro forma
data is not presented as this acquisition was not material to the Company's
results of operations.
4. Joint Ventures
The Company has entered into joint venture arrangements to market its
SoftLight system internationally. The Company currently holds between a 35% and
50% stake in each joint venture, but may increase its ownership to above 50%
pursuant to fair-value purchase options included in each agreement. Certain of
the joint venture agreements provide that the Company's joint venture partners
may, under certain conditions, elect to sell all or part of their ownership
interest back to the Company at the fair value of such interest at the time the
election is made. Amounts advanced under such arrangements totaled $2,650,000 in
fiscal 1998, including funding pursuant to a $1,667,000 note receivable to
ThermoLase U.K. (Note 8), and $1,144,000 in fiscal 1997. As of October 3, 1998,
the Company had no material obligation for further funding of such arrangements.
The accompanying fiscal 1998 and 1997 statement of operations includes
$1,203,000 and $700,000, respectively, of equity in losses of joint ventures,
reflecting the Company's share of losses from joint venture operations. During
fiscal 1998, the Company closed its spa in France, liquidated its French joint
venture, and wrote-off its remaining investment. The Company recorded costs of
$3,600,000 associated with terminating this arrangement, which are included in
restructuring costs in the accompanying statement of operations (Note 13).
5. Common Stock
In April 1997, the Company completed an exchange offer whereby the Company
received 2,261,706 shares of its common stock and $502,000 in cash, net of
expenses, from its shareholders in exchange for 2,000,000 units of common stock
subject to redemption (Note 1).
At October 3, 1998, the Company had reserved 11,854,104 unissued shares of
its common stock for possible issuance under stock-based compensation plans and
possible issuance upon conversion of its subordinated convertible debentures.
12
<PAGE>
6. Employee Benefit Plans
Stock-based Compensation Plans
Stock Option Plans
The Company has stock-based compensation plans for its key employees,
directors, and others. Two of these plans, adopted in 1993, permit the grant of
nonqualified and incentive stock options. Two other plans, adopted in fiscal
1997 and 1995, permit 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 lapse over various periods
ranging from one 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
and ThermoTrex.
A summary of the Company's stock option information is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Price Price
Number Number Number
of of of
(Shares in thousands) Shares Shares Shares
- ----------------------------------------------- --------- ---------- -------- ---------- --------- ---------
Options Outstanding, Beginning of Year 2,888 $ 8.72 2,820 $ 7.50 3,341 $5.16
Granted 972 7.51 341 14.97 339 25.46
Exercised (358) 2.12 (173) 1.91 (746) 3.48
Forfeited (1,010) 12.74 (100) 7.33 (114) 20.53
------ ----- -----
Options Outstanding, End of Year 2,492 $ 7.56 2,888 $ 8.72 2,820 $7.50
===== ====== ===== ====== ===== =====
Options Exercisable 2,492 $ 7.56 2,888 $ 8.72 2,820 $7.50
===== ====== ===== ====== ===== =====
Options Available for Grant 548 410 451
===== ===== =====
</TABLE>
13
<PAGE>
6. Employee Benefit Plans (continued)
A summary of the status of the Company's stock options at October 3, 1998,
is as follows:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
----------------------------------------------
<S> <C> <C> <C>
Range of Exercise Prices Number Weighted Weighted
of Average Average
Shares Remaining Exercise
(In thousands) Contractual Life Price
- ------------------------------------------------------------- -------------- ---------------- --------------
$ 1.75 - $ 8.66 1,912 5.1 years $ 3.97
8.67 - 15.56 254 6.4 years 12.98
15.57 - 22.47 37 5.4 years 16.34
22.48 - 29.38 289 7.2 years 25.46
-----
$ 1.75 - $29.38 2,492 5.5 years $ 7.56
=====
</TABLE>
Employee Stock Purchase Program
Substantially all of the Company's full-time employees are eligible to
participate in an employee stock purchase program sponsored by the Company and
Thermo Electron, under which employees can purchase shares of the Company's and
Thermo Electron's common stock. Prior to November 1, 1996, the program was
sponsored by ThermoTrex and Thermo Electron. Under this program, the applicable
shares of common stock can be purchased at the end of a 12-month period at 95%
of the fair market value at the beginning of the period, and the shares
purchased are subject to a six-month resale restriction. Beginning November
1998, the applicable shares of common stock can be purchased at 85% of the lower
of the fair market value at the beginning or end of the period, and the shares
purchased are subject to a one-year resale restriction. Shares are purchased
through payroll deductions of up to 10% of each participating employee's gross
wages.
Pro Forma Stock-based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-based Compensation," which sets forth a fair-value
based method of recognizing stock-based compensation expense. As permitted by
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account
for its stock-based compensation plans. Had compensation cost for awards granted
after fiscal 1995 under the Company's stock-based compensation plans been
determined based on the fair value at the grant dates consistent with the method
set forth under SFAS No. 123, the effect on the Company's net loss and loss per
share would have been as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands except per share amounts) 1998 1997 1996
- -------------------------------------------------------------------------- ----------- ---------- ----------
Net Loss:
As reported $(41,186) $(12,405) $ (1,386)
Pro forma (41,910) (12,848) (1,534)
Basic and Diluted Loss per Share:
As reported (1.07) (.31) (.03)
Pro forma (1.09) (.32) (.04)
</TABLE>
14
<PAGE>
6. Employee Benefit Plans (continued)
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to October 1, 1995, the resulting pro forma compensation
expense may not be representative of the amount to be expected in future years.
Pro forma compensation expense for options granted is reflected over the vesting
period; therefore, future pro forma compensation expense may be greater as
additional options are granted.
The weighted average fair value per share of options granted was $3.84,
$8.34, and $14.83 in fiscal 1998, 1997, and 1996, respectively. The fair value
of each option grant was estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- ------------
Volatility 51% 50% 50%
Risk-free Interest Rate 5.6% 6.3% 6.3%
Expected Life of Options 5.1 years 6.1 years 6.8 years
</TABLE>
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the input of highly
subjective assumptions including expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
401(k) Savings Plan
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 $220,000, $207,000, and $144,000 in fiscal 1998, 1997, and 1996,
respectively.
7. Income Taxes
The components of the income tax (provision) benefit are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- ------------
Currently (Payable) Refundable:
Federal $ - $ - $ 80
State - (27) 25
------- ------- -------
- (27) 105
------- ------- -------
(Deferred) Prepaid:
Federal (5,879) 6,226 328
State - 193 30
------- ------- -------
(5,879) 6,419 358
------- ------- -------
$(5,879) $ 6,392 $ 463
======= ======= =======
15
<PAGE>
7. 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 loss before income taxes due to the following:
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- -----------
Income Tax Benefit at Statutory Rate $ 12,004 $ 6,391 $ 629
Differences Resulting From:
State income taxes, net of federal tax - 110 36
Nondeductible expenses (120) (109) (202)
Increase in valuation allowance (17,763) - -
========= ======== ========
$ (5,879) $ 6,392 $ 463
========= ======== ========
</TABLE>
Prepaid income taxes in the accompanying balance sheet consist of the
following:
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1998 1997
- ----------------------------------------------------------------------- ----------- -----------
Prepaid Income Taxes:
Net operating loss carryforward $ 19,634 $ 8,232
Inventory basis differences 409 534
Accruals and other reserves 2,598 411
Accrued compensation 280 647
Fixed assets (3,609) -
Other, net 511 95
------- -------
19,823 9,919
Less: Valuation allowance 19,823 1,820
------- -------
$ - $ 8,099
======= =======
</TABLE>
The fiscal 1998 valuation allowance relates primarily to previously
benefited loss carryforwards and the tax loss arising in fiscal 1998. The
increase in the valuation allowance in fiscal 1998 is a result of the Company's
increased operating losses, uncertainty concerning the Company's ability to
successfully convert its existing spas to Greenhouse spas (Note 1), and
resulting uncertainty concerning realization of the tax asset. The allowance
also includes the tax effect of employee exercises of stock options of
$2,059,000 for which no tax benefit was recognized, and will be used to increase
capital in excess of par value when the tax benefit is realized. As of October
3, 1998, the Company had federal tax net operating loss carryforwards of
approximately $59,000,000 that will begin to expire in fiscal 2009.
8. Related-party Transactions
Corporate Services Agreement
The Company and Thermo Electron have a corporate services agreement under
which Thermo Electron's corporate staff provides certain administrative
services, including certain legal advice and services, risk management, certain
employee benefit administration, tax advice and preparation of tax returns,
centralized cash management, and certain financial and other services, for which
the Company currently pays Thermo Electron annually an amount equal to 0.8% of
the Company's revenues. In calendar years 1997 and 1996, the Company paid an
amount equal to 1.0% of
16
<PAGE>
8. Related-party Transactions (continued)
the Company's revenues. Prior to January 1996, the Company paid an annual fee
equal to 1.2% of the Company's revenues. For these services, the Company was
charged $348,000, $452,000, and $293,000 in fiscal 1998, 1997, and 1996,
respectively. The annual fee is reviewed and adjusted annually by mutual
agreement of the parties. Management believes that the service fee charged by
Thermo Electron is reasonable and that such fees are representative of the
expenses the Company would have incurred on a stand-alone basis. The corporate
services agreement is renewed annually but can be terminated upon 30 days' prior
notice by the Company or upon the Company's withdrawal from the Thermo Electron
Corporate Charter (the Thermo Electron Corporate Charter defines the
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 provided personnel administration, accounting, data processing,
and general administrative management services to the Company, which were
charged to the Company based on actual usage. This agreement was terminated
during fiscal 1997 and services are no longer being provided. For these
services, the Company was charged $144,000 and $327,000 in fiscal 1997 and 1996,
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 $306,000,
$296,000, and $125,000 in fiscal 1998, 1997, and 1996, respectively. During
fiscal 1998, the Company relocated its operations and will not be paying for
this space after October 3, 1998.
Laser Manufacturing Arrangement
During fiscal 1998, 1997, and 1996, the Company purchased laser systems
and components at an aggregate cost of $2,902,000, $11,390,000, and $8,549,000,
respectively, from Trex Medical Corporation, a majority-owned subsidiary of
ThermoTrex.
Other Related-party Purchases
During fiscal 1998, the Company purchased products totaling $241,000 from
Bird Products Corporation, a wholly owned subsidiary of Thermo Electron.
Note Receivable
In October 1997, the Company advanced $1,667,000 to ThermoLase U.K. under
a note receivable, due December 31, 2003, and bearing interest at 8.0%, payable
annually. ThermoLase U.K., a subsidiary of a joint venture that is 50%-owned by
the Company, is marketing the Company's SoftLight system in England. The note
receivable is included in other assets in the accompanying fiscal 1998 balance
sheet.
Subordinated Convertible Debentures
See Note 9 for subordinated convertible debentures of the Company that are
held by Thermo Electron.
Repurchase Agreement
The Company invests excess cash in a repurchase agreement with Thermo
Electron as discussed in Note 1.
17
<PAGE>
9. Subordinated Convertible Debentures
In August 1997, the Company issued and sold at par value $115,000,000
principal amount of 4 3/8% subordinated convertible debentures due 2004. The
debentures are convertible into shares of the Company's common stock at a
conversion price of $17.385 per share and are guaranteed on a subordinated basis
by Thermo Electron. ThermoTrex has agreed to reimburse Thermo Electron in the
event Thermo Electron is required to make a payment under the guarantee. During
fiscal 1998, Thermo Electron purchased $4,500,000 principal amount of such
debentures in the open market.
See Note 11 for fair value information pertaining to these debentures.
10. Commitments and Contingencies
Operating Leases
In addition to the leases described in Note 8, the Company occupies
office, manufacturing, warehouse, and service facilities under various operating
lease arrangements. The accompanying statement of operations includes expenses
from operating leases of $4,867,000, $3,806,000, and $915,000 in fiscal 1998,
1997, and 1996, respectively. Future minimum payments due under noncancellable
operating leases as of October 3, 1998, are $3,588,000 in fiscal 1999;
$3,681,000 in fiscal 2000; $3,674,000 in fiscal 2001; $3,731,000 in fiscal 2002;
$3,802,000 in fiscal 2003; and $14,963,000 in fiscal 2004 and thereafter. Total
future minimum lease payments are $33,439,000, of which $2,121,000 relates to
lease payments for the three Spa Thira facilities that have been closed, net of
assumed sublease receipts, and which amount is included in accrued restructuring
costs in the accompanying fiscal 1998 balance sheet (Note 13).
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
the 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 February 1993, the Company entered into an irrevocable exclusive
technology license agreement for the use of the laser-based hair-removal system
technology. Under the terms of the agreement, the Company will pay a royalty
equal to 0.25% of the revenues recorded from the sale or use of the laser-based
hair-removal system through February 10, 2010. No material amounts have been
incurred under this agreement.
Contingencies
The Company has from time to time received allegations that its SoftLight
laser-based hair-removal 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 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.
The Company is contingently liable with respect to lawsuits and other
matters that arose in the ordinary course of business. In the opinion of
management, these contingencies will not have a material adverse effect upon the
financial position of the Company or its results of operations.
18
<PAGE>
11. 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, amounts due to parent company and affiliated companies, subordinated
convertible debentures, and common stock subject to redemption. The carrying
amounts of the Company's cash and cash equivalents, accounts receivable,
accounts payable, and amounts 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 2 for information pertaining to the fair value of
available-for-sale investments.
The fair value of the Company's subordinated convertible debentures, based
on quoted market prices, was $95,519,000 and $123,165,000 at October 3, 1998,
and September 27, 1997, respectively. The fair value is less than the carrying
amount in fiscal 1998 primarily due to a decrease in the market price of the
Company's common stock relative to the conversion price of the debentures.
The fair value of the Company's common stock subject to redemption, based
upon quoted market prices was $30,750,000 and $37,000,000 at October 3, 1998,
and September 27, 1997, respectively.
12. Export Sales
Export sales, including revenues earned from the Company's international
licensing arrangements, were less than 10% of the Company's total revenues in
fiscal 1998 and 1997, and were $2,820,000 in fiscal 1996. In general, export
sales are denominated in U.S. dollars.
13. Restructuring Costs and Related Uncertainties
Restructuring costs totaled $10,155,000 in fiscal 1998. These costs
consist of $4,638,000 related to the closure of three domestic Spa Thira
locations, including $2,429,000 for the write-off of leasehold improvements and
related spa assets and $2,209,000 primarily for abandoned-facility payments, net
of assumed sublease receipts. In addition, in connection with the closure of its
spa in France, operated under a joint venture agreement, the Company recorded
costs of $3,600,000, primarily to liquidate the joint venture and to write-off
its remaining investment. Restructuring costs also include $1,917,000 related to
certain actions including the relocation of the Company's corporate office to
its CBI subsidiary in Carrollton, Texas. This amount primarily represents
severance of $1,080,000 for 40 terminated employees and the write-off of fixed
assets no longer of use. During fiscal 1998, the Company expended $809,000 for
restructuring activities and the remaining obligation of $5,153,000 associated
with these actions is included in accrued restructuring costs in the
accompanying fiscal 1998 balance sheet.
The Company's investment in leasehold improvements and related equipment
at its remaining spas totaled $16,677,000 at October 3, 1998. The realizability
of these assets is dependent on future cash flows from spa operations. The
Company's future cash flows from operating its spas are dependent on the degree
of success it experiences following the transition of the spas to Greenhouse
spas as discussed in Note 1. It is reasonably possible that actual cash flows
from spa operations will vary significantly from the Company's estimates of such
cash flows. As a result, the carrying amount of spa assets could change
significantly in the near term. Additionally, at October 3, 1998, the Company
has operating lease commitments of $28,641,000 related to these spas. Were any
additional spas to close in the future, the amount of lease obligation related
to such spas in excess of income from subleasing the facilities would be
recorded as a loss.
19
<PAGE>
14. Unaudited Quarterly Information
(In thousands except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1998 First Second Third Fourth(a)
- ---------------------------------------------------------------- ---------- ---------- ---------- ----------
Revenues $13,449 $ 8,092 $ 8,943 $ 9,607
Gross Profit 3,430 (1,339) 119 6
Net Loss (2,035) (8,535) (8,349) (22,267)
Basic and Diluted Loss per Share (.05) (.22) (.22) (.57)
1997 First Second Third Fourth
- ---------------------------------------------------------------- ---------- ---------- ---------- ----------
Revenues $ 8,610 $11,666 $12,900 $ 12,057
Gross Profit 1,783 2,022 2,935 2,366
Net Loss (1,389) (3,699) (3,733) (3,584)
Basic and Diluted Loss per Share (.03) (.09) (.09) (.09)
</TABLE>
(a) Reflects restructuring costs (Note 13) and establishment of a tax valuation
allowance (Note 7).
15. Subsequent Event
In November 1998, the Company's employees, excluding its officers and
directors, were offered the opportunity to exchange previously granted options
to purchase shares of Company common stock for an amount of options equal to
half of the number of options previously held, exercisable at a price equal to
the fair market value at the time of the exchange offer. Holders of options to
acquire 465,000 shares at a weighted average exercise price of $13.62 elected to
participate in this exchange and, as a result, received options to purchase
232,000 shares of Company common stock at $4.66 per share. The other terms of
the new options are the same as the exchanged options except that the holders
may not sell shares pursuant to such new options for six months from the
exchange date.
20
<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 71%-owned subsidiary of ThermoTrex
Corporation) and subsidiaries as of October 3, 1998, and September 27, 1997, and
the related consolidated statements of operations, shareholders' investment, and
cash flows for each of the three years in the period ended October 3, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ThermoLase
Corporation and subsidiaries as of October 3, 1998, and September 27, 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended October 3, 1998 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
November 9, 1998 (except with respect
to the matter discussed in Note 15,
as to which the date is November 24, 1998)
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<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed immediately after this Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the heading "Forward-looking Statements."
Overview
The Company has developed a laser-based system called SoftLight(R) for the
removal of unwanted hair. The SoftLight system uses a low-energy, dermatology
laser in combination with a lotion that absorbs the laser's energy to disable
hair follicles. In April 1995, the Company received clearance from the U.S. Food
and Drug Administration (FDA) to commercially market hair-removal services using
the SoftLight system. The Company began earning revenue from the SoftLight
system in the first quarter of fiscal 1996 as a result of opening its first
commercial location (Spa Thira) in November 1995. The Company opened a total of
four spas during fiscal 1996, opened nine additional spas during fiscal 1997,
and opened its fourteenth spa in October 1997. In May 1998, the Company received
clearance from the FDA to market cosmetic skin-resurfacing services using the
same laser as the Company's hair-removal system. In this process, the laser's
energy reacts with an activating lotion, creating heat and mechanical energy
that remove the tough outer layer of dead skin. The treatment, known as the
SoftLight Laser Peel, is being offered at all of the Company's Spa Thira
locations, as well as through its physician licensees.
Rather than continuing to open additional Spa Thira locations, the Company
is concentrating its resources on attempting both to increase the capacity
utilization of its existing spas and to expand its physician-licensing program
and international licensing arrangements, discussed below. In connection with
its acquisition of The Greenhouse Spa, Inc. in June 1998 (Note 3), a
full-service, luxury, destination spa, the Company evaluated which of its
locations would be converted to Greenhouse spas and whether any of its Spa Thira
locations should be closed or sold. As a result of this evaluation, the Company
decided to close three of its domestic Spa Thira locations and convert its
remaining eleven domestic spas into Greenhouse spas which, in addition to
hair-removal and skin-resurfacing services, will offer more traditional day-spa
services, such as massages and facials. The Company's future results of
operations will be affected by the Company's ability to successfully convert the
existing spas into Greenhouse spas (Note 13). The period through June 1999 will
be critical in determining the economic viability of this strategy. Key to the
success of this strategy will be whether the results of the Greenhouse spas
reflect substantial progress toward breakeven operations in this timeframe.
In June 1996, the Company commenced a program to license to physicians and
others the right to perform the Company's patented SoftLight hair-removal
procedure. The Company also provides the licensees with the lasers and lotion
that are necessary to perform the service. In June 1998, the Company began to
offer the SoftLight Laser Peel procedure through its spas and existing physician
licensees.
The Company has experienced a decrease in revenues from its hair-removal
services, as discussed in the results of operations below. In response to this
trend and in an attempt to establish price points and other conditions designed
to increase demand and revenues, the Company significantly reduced treatment
prices at its Spa Thira locations and is in the process of modifying the terms
and conditions of its physician-licensing program. Under the terms of the
modified licenses, per-procedure royalties have been reduced or eliminated and a
minimum royalty and/or flat periodic fee requirement has been introduced. In
addition, the Company has begun offering licensees the opportunity to purchase
or lease SoftLight lasers in lieu of paying ongoing license fees. As a result of
these changes and other factors, including the addition of new physician
licensees in fiscal 1998, there has been a net reduction of 8% in the number of
physician licensees, compared to the number under agreement at the end of fiscal
1997, and two contracts with other licensees that accounted for approximately 4%
of the Company's total hair-removal revenues in fiscal 1997 were terminated.
There can be no assurance that the strategies described above will be successful
in improving the Company's results of operations.
22
<PAGE>
Overview (continued)
The Company is marketing the SoftLight system internationally through
joint ventures and other licensing arrangements. In January 1996, the Company
established a joint venture in Japan. During fiscal 1997, the Company
established joint ventures in France in November 1996 and England in September
1997, and six additional licensing arrangements: in Saudi Arabia in November
1996; in Tunisia and Belgium in December 1996; in the United Arab Emirates and
Oman in March 1997; in Switzerland in April 1997; in Brazil in June 1997; and in
the United Kingdom (excluding England) and the Republic of Ireland in September
1997. In December 1997, the Company established a joint venture to market the
SoftLight system in Australia, Cyprus, Germany, Greece, New Zealand, South
Africa, and Spain. The Company's international arrangements resulted in the
opening of spas in Paris in May 1997 and in Lugano, Switzerland, in October
1997. The Company has decided to close the spa in Paris and liquidate the joint
venture (Note 13).
The Company also manufactures and markets skin-care, bath-and-body
products, and markets dietary supplements through its Creative Beauty
Innovations, Inc. (CBI) subsidiary, which also manufactures the lotion used in
the SoftLight hair-removal process.
Results of Operations
Fiscal 1998 Compared With Fiscal 1997
Revenues decreased to $40.1 million in fiscal 1998 from $45.2 million in
fiscal 1997. The Company earned revenues from hair-removal services and related
activities of $17.3 million in fiscal 1998, compared with $21.0 million in
fiscal 1997. The decrease in revenues resulted in part from reduced demand and
price reductions at the Company's Spa Thira locations in fiscal 1998 compared
with fiscal 1997, offset in part by an increase in the number of U.S. spas to
14, compared with 13 spas open in fiscal 1997. As discussed in the overview
above, the Company will close three of its domestic spas (Note 13). Revenues
from the Company's physician-licensing program decreased in fiscal 1998 compared
with fiscal 1997, due to a reduction in royalty rates and other changes to the
financial terms of the licenses and the termination of two significant licensing
contracts, described above, as well as a decrease in one-time fees due to a
decline in the number of new physician licensees. Revenues from hair-removal
services and related activities included $2.8 million in fiscal 1998 and $4.2
million in fiscal 1997 for minimum guaranteed payments recorded upon granting
technology rights under the Company's international licensing arrangements. The
amount of minimum guaranteed payments recorded by the Company will vary
depending on the Company's ability to enter into additional international
licensing arrangements, the availability of additional territories, and the
terms of any such arrangements. Revenues at CBI decreased to $22.8 million in
fiscal 1998 from $24.2 million in fiscal 1997, primarily due to a shift by
certain of its retail customers away from health- and beauty-aid sales. These
decreases were offset in part by the inclusion of $0.8 million of revenues from
The Greenhouse Spa, acquired in June 1998 (Note 3).
The gross profit margin in fiscal 1998 was 6%, compared with 20% in fiscal
1997. The Company's hair-removal business reported gross profit of negative $5.0
million in fiscal 1998, compared with gross profit of $1.4 million in fiscal
1997. Each period was impacted by the operations of the Spa Thira business,
which has been operating below maximum capacity as the Company seeks to develop
its client base, expand its product lines, and refine its operating procedures.
This negative impact was offset in part by the effect of physician-licensing
fees and minimum guaranteed payments relating to international licensing
arrangements, which have a relatively high gross profit margin. In addition,
fiscal 1997 was negatively impacted by pre-opening costs incurred in connection
with new spa openings. The gross profit margin decreased in fiscal 1998,
primarily due to decreased revenues at the Company's Spa Thira locations and the
physician-licensing program, as well as increased fixed costs associated with
operating more spas in fiscal 1998. The Company believes that increasing spa
utilization by broadening the array of spa-related services and products
offered, through conversion of the remaining Spa Thiras into Greenhouse spas, is
critical to its ability to improve the profitability of its spas. The degree to
which the Company's recent changes in pricing structure are successful will also
affect the Company's gross profit margin. The gross profit margin at CBI was 32%
in both periods.
23
<PAGE>
Fiscal 1998 Compared With Fiscal 1997 (continued)
Selling, general, and administrative expenses as a percentage of revenues
increased to 56% in fiscal 1998 from 51% in fiscal 1997, primarily due to a
decrease in revenues.
Research and development expenses decreased to $3.0 million in fiscal 1998
from $5.7 million in fiscal 1997, primarily due to a reduction in the number of
outside testing facilities and consultants used by the Company, as well as a
reduction in payroll costs.
During fiscal 1998, the Company recorded restructuring costs of $10.2
million, primarily related to closing three of its domestic spas, closing its
spa in France and liquidating the related French joint venture, and relocating
its corporate office to its CBI subsidiary in Carrollton, Texas. The degree to
which the Company is successful in improving its profitability will affect the
future of its remaining spas and the realizability of its related assets (Note
13).
Interest income increased to $4.5 million in fiscal 1998 from $2.1 million
in fiscal 1997, primarily due to interest income earned on the invested proceeds
from the Company's August 1997 issuance of $115.0 million principal amount of 4
3/8% subordinated convertible debentures, offset in part by cash used to fund
the Company's loss. Interest expense increased to $5.3 million in fiscal 1998
from $0.6 million in fiscal 1997, primarily due to the inclusion of a full
period of interest expense on the subordinated convertible debentures.
Equity in losses of joint ventures in the accompanying statement of
operations represents the Company's proportionate share of losses from its
international joint ventures, beginning in the third quarter of fiscal 1997
(Note 4).
The provision for income taxes in fiscal 1998 reflects the establishment
of a valuation allowance for the tax asset associated with previously benefited
loss carryforwards and the tax loss arising in fiscal 1998. The Company
establishes valuation allowances in accordance with the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The
increase in the valuation allowance in fiscal 1998 is a result of the Company's
increased operating losses, uncertainty concerning the Company's ability to
successfully convert its existing spas to Greenhouse spas (Note 1), and
resulting uncertainty concerning realization of the tax asset (Note 7).
In May 1998, a complaint, filed as a class action, was filed in California
Superior Court against the Company alleging that certain advertisements and
representations made by the Company and/or its licensees relating to the
Company's SoftLight laser hair-removal process were misleading. The Company has
settled this lawsuit for a nominal amount, subject to court approval.
Fiscal 1997 Compared With Fiscal 1996
Revenues increased to $45.2 million in fiscal 1997 from $27.8 million in
fiscal 1996. The Company earned revenues from hair-removal services and related
activities of $21.0 million in fiscal 1997, compared with $4.6 million in fiscal
1996. The increase in revenues resulted primarily from an increase in the number
of U.S. spas to 13, nine of which opened in fiscal 1997, compared with four spas
open during fiscal 1996. Revenues also increased as a result of fees from the
Company's physician-licensing program, which was started in the third quarter of
fiscal 1996 and did not produce significant revenues during fiscal 1996. In
addition, revenues from hair-removal services and related activities in fiscal
1997 included $4.2 million of minimum guaranteed payments recorded upon granting
technology rights under the Company's international licensing arrangements,
compared with $2.0 million in fiscal 1996. Revenues at CBI increased slightly to
$24.2 million in fiscal 1997 from $23.2 million in fiscal 1996. A portion of
CBI's revenues are derived from sales to large retailers, which have a
relatively long buying cycle that results in periodic variations in revenues.
The gross profit margin in fiscal 1997 was 20%, compared with 28% in
fiscal 1996. The Company's hair-removal business reported gross profit of $1.4
million in fiscal 1997, compared with gross profit of negative $0.3 million in
fiscal 1996. Each period was impacted by the early operations of the Spa Thira
business, which has been operating below maximum capacity as discussed in the
results of operations for fiscal 1998, and pre-opening costs incurred in
connection with new spa openings, offset in part by the effect of
physician-licensing fees and minimum guaranteed payments relating to
international licensing arrangements, which have a relatively high gross profit
margin. The gross profit margin at CBI declined to 32% in fiscal 1997 from 35%
in fiscal 1996, as a result of a continued shift to lower-margin products.
24
<PAGE>
Fiscal 1997 Compared With Fiscal 1996 (continued)
Selling, general, and administrative expenses as a percentage of revenues
increased to 51% in fiscal 1997 from 35% in fiscal 1996. The increase was
primarily due to costs related to expanding the Company's administrative and
management efforts for its Spa Thira business and domestic and international
licensing programs; increased marketing efforts, including national advertising
costs for the physician-licensing program; and legal costs associated with
obtaining and protecting the Company's patent rights.
Research and development expenses increased to $5.7 million in fiscal 1997
from $3.5 million in fiscal 1996, primarily due to continued pre-clinical and
clinical research related to improving the effectiveness of the Company's
hair-removal process and developing its SoftLight Laser Peel skin-resurfacing
process, and the investigation of other health and beauty applications for its
proprietary laser technology.
Interest income decreased to $2.1 million in fiscal 1997 from $3.5 million
in fiscal 1996, primarily as a result of lower average invested balances, which
resulted primarily from property and equipment expenditures for the Company's
Spa Thira locations and licensing programs and cash used to fund the Company's
operating loss. Interest expense in fiscal 1997 represents interest associated
with the $115.0 million principal amount of 4 3/8% subordinated convertible
debentures issued in August 1997.
Equity in losses of joint ventures in the accompanying statement of
operations represents the Company's proportionate share of losses from its
international joint ventures, beginning in the third quarter of fiscal 1997.
The effective tax rate approximates the statutory federal income tax rate
in fiscal 1997 due to nondeductible amortization of cost in excess of net assets
of acquired company offset by a state income tax benefit arising from operating
losses in certain states. The effective tax rate is less than the statutory
federal income tax rate in fiscal 1996 due to nondeductible amortization of cost
in excess of net assets of acquired company and the impact of a provision for
state income taxes.
Liquidity and Capital Resources
Consolidated working capital was $48.6 million at October 3, 1998,
compared with $95.5 million at September 27, 1997. Included in working capital
are cash, cash equivalents, and available-for-sale investments of $55.9 million
at October 3, 1998, compared with $100.3 million at September 27, 1997.
Operating activities used $24.5 million of cash during fiscal 1998. Cash was
used primarily to fund the Company's loss, excluding noncash items. Cash of $3.5
million was used to fund an increase in inventories due to the development of
new branded product lines at CBI, introduced in the fourth quarter of fiscal
1998. A decrease in accounts payable used $2.4 million of cash, primarily due to
the timing of payments.
Excluding available-for-sale investment activity, the Company's investing
activities in fiscal 1998, consisted primarily of $4.5 million of expenditures
for purchases of property, plant, and equipment, including the purchase of laser
systems and components from Trex Medical Corporation, a majority-owned
subsidiary of ThermoTrex Corporation (Note 8). In June 1998, a wholly owned
subsidiary of the Company merged with The Greenhouse Spa, exchanging 1,000,000
shares of Company common stock, valued at $8.0 million at the time of the
transaction, and the repayment of $4.2 million of debt for all of the
outstanding stock of The Greenhouse Spa (Note 3). In connection with certain of
the Company's joint venture arrangements, the Company advanced $1.7 million
under a note receivable (Note 8).
The Company's financing activities during fiscal 1998 consisted primarily
of repurchases of Company common stock. In September 1997, the Company's Board
of Directors authorized the repurchase by the Company of up to 1,000,000 shares
of Company common stock through September 4, 1998, in the open market, in
negotiated transactions, or pursuant to the exercise by investors of
standardized put options written on the Company's common stock. During fiscal
1998, the Company purchased 643,000 shares of its common stock for $8.8 million.
25
<PAGE>
Liquidity and Capital Resources (continued)
The Company's capital expenditures during fiscal 1999 will primarily be
affected by the number of physicians and other domestic and international
licensees engaged in its licensing programs and converting the remaining eleven
domestic Spa Thira locations to Greenhouse spas. Depending on the extent of
renovations necessary, the cost of converting each spa is expected to be
approximately $50,000 to $150,000. In addition, the Company plans to expend
approximately $900,000 to renovate the original Greenhouse Spa in Arlington,
Texas. The Company expects that it will finance its capital requirements through
its internal funds. The Company's ongoing operating losses are continuing to
consume significant amounts of the Company's working capital.
Market Risk
The Company is exposed to market risk from changes in interest rates and
equity prices, which could affect its future results of operations and financial
condition. The Company manages its exposure to these risks through its regular
operating and financing activities.
Interest Rates
The Company's available-for-sale investments and long-term obligations are
sensitive to changes in interest rates. Interest rate changes would result in a
change in the fair value of these financial instruments due to the difference
between the market interest rate and the rate at the date of purchase or
issuance of the financial instrument. A 10% decrease in year-end fiscal 1998
market interest rates would result in a negative impact of $1.2 million on the
net fair value of the Company's interest-sensitive financial instruments.
Equity Prices
The Company's 4 3/8% subordinated convertible obligation is sensitive to
fluctuations in the price of Company common stock into which it is convertible.
In addition, the Company's common stock subject to redemption is sensitive to
fluctuations in the price of the Company's units. Changes in equity prices would
result in changes in the fair value of the Company's convertible obligation and
common stock subject to redemption due to the difference between the current
market price and the market price at the date of issuance of the financial
instrument. A 10% increase in the year-end fiscal 1998 market equity prices
would result in a negative impact of $13.9 million on the net fair value of the
Company's price-sensitive equity financial instruments.
Year 2000
The Company continues to assess the potential impact of the year 2000 on
the Company's internal business systems and operations. The Company's year 2000
initiatives include (i) testing and upgrading internal business systems and
facilities; (ii) contacting key suppliers, vendors, and customers to determine
their year 2000 compliance status; and (iii) developing contingency plans.
The Company's State of Readiness
The Company has tested and evaluated its critical information-technology
systems for year 2000 compliance. The Company plans to upgrade or replace its
noncompliant systems. The Company expects that all of its material
information-technology systems will be year 2000 compliant by the end of 1999.
The Company is also evaluating the potential year 2000 impact on its facilities,
including its buildings and utility systems. Any problems that are identified
will be prioritized and remediated based on their assigned priority. The Company
will continue periodic testing of its critical internal business systems and
facilities in an effort to minimize operating disruptions due to year 2000
issues.
26
<PAGE>
Year 2000 (continued)
Contingency Plan
The Company intends to develop a contingency plan that will allow its
primary business operations to continue despite disruptions due to year 2000
issues. This plan may include identifying and securing alternative suppliers,
increasing inventories, and modifying production facilities and schedules. As
the Company continues to evaluate the year 2000 readiness of its business
systems and facilities, significant suppliers, vendors, and customers, it will
modify and adjust its contingency plan as may be required.
Estimated Costs to Address the Company's Year 2000 Issues
The Company does not expect total year 2000 remediation costs to be
material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance. The Company does
not track costs incurred for its year 2000 compliance project. Such costs are
principally the related payroll costs for its information systems employees.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
issues will not have a material adverse impact on the Company's business,
operations, or financial condition. If any of the Company's material suppliers,
vendors, or customers experience business disruptions due to year 2000 issues,
the Company might also be materially adversely affected. There is expected to be
a significant amount of litigation relating to the year 2000 issue and there can
be no assurance that the Company will not incur material costs in defending or
bringing lawsuits. Any unexpected costs or delays arising from the year 2000
issue could have a significant adverse impact on the Company's business,
operations, and financial condition.
27
<PAGE>
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important risk factors, among others, in some cases have affected, and
in the future could affect, the Company's actual results and could cause its
actual results in fiscal 1999 and beyond to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company.
Recent Operating Losses of the Company. The Company incurred losses of
approximately $41.2 million, $12.4 million, $1.4 million, and $1.7 million in
fiscal 1998, 1997, 1996, and 1995, respectively. At October 3, 1998, the
Company's accumulated deficit was $57.1 million. There can be no assurance that
the Company will achieve profitable operations in any future period.
Difficulty in Retaining Qualified Management. The Company has had
difficulty in retaining management, technical, marketing, and sales personnel,
due in part to the relocation of the Company headquarters to Carrollton, Texas.
The Company's future success depends in part on whether the Company can attract
and retain highly qualified management, technical, marketing, and sales
personnel. The Company faces significant competition for the services of such
personnel. There can be no assurance that the Company will attract and retain
personnel with the background and expertise necessary to support the development
of the Company's businesses. The failure to hire and retain such personnel could
materially adversely affect the financial position and results of operations of
the Company. The Company continues to employ The Greenhouse Spa management and
other personnel and will rely on such management and personnel to operate The
Greenhouse Spa and assist in the conversion of the Spa Thira locations to
Greenhouse spas. There can be no assurance that the Company will be able to
continue to retain the services of The Greenhouse Spa management and other
personnel on terms acceptable to the Company.
Conversion of Spa Thiras; Focus of Business; Absence of Experience
Relating to Day-Spa Operations. The Company is in the process of converting its
domestic Spa Thira locations to Greenhouse luxury day spas. The Company has
minimal experience relating to the ownership, operation, or marketing of spas
providing traditional day spa services or, with the exception of the Greenhouse
management, relating to the ownership, operation, or marketing, of a destination
spa. In connection with the conversions, the Company is refocusing its laser
hair-removal spa business to include a broader range of day-spa services such as
skin resurfacing (including the Company's SoftLight Laser Peel), traditional
day-spa services, and an expanded line of beauty and personal care products. The
Company will try to identify a mix of spa services and products and prices that
will lead to profitable operations. There can be no assurance that these efforts
will be successful.
Future Significant Expenditures Required. Continued development of the
Company's business will require significant expenditures. There can be no
assurance that the balance of the Company's working capital will be sufficient
to fund its planned operations. The Company's financing requirements will depend
on many factors, including the progress of its licensing program, development
efforts, the refocusing of its business on traditional spa services as well as
additional services and products, and its ability to limit its expenses and
reduce operating losses. The Company may need to raise additional funds and if
needed, such funds may not be available on acceptable terms or at all. Neither
the Company's ultimate parent, Thermo Electron Corporation, nor any of its
subsidiaries, including ThermoTrex Corporation, has any obligation to supply any
funds to the Company. The inability of the Company to raise needed funds would
have a material adverse effect on the Company's financial condition and results
of operations.
Potential for Customer Claims; Insurance. The Company has received
complaints from several of its physician licensees, joint venture partners, and
consumers stating that that the Company's SoftLight hair-removal process has not
met their expectations. Some of these parties have filed lawsuits against the
Company. The Company may receive similar allegations and/or become subject to
similar lawsuits in the future. There can be no assurance that
28
<PAGE>
additional litigation relating to such claims will not be brought against the
Company, or that the Company would prevail in any or all such cases, if brought.
The Company has no insurance coverage for such claims. In addition, the laser
hair-removal and skin-resurfacing market involves the treatment of persons who
could be harmed by or have an adverse reaction to the SoftLight laser resulting
in liability claims against the Company. Such claims could result in damages
against the Company and negative publicity. The Company currently carries
general liability, product liability, and other insurance coverage. There can be
no assurance that such coverage will be adequate to cover all losses arising
from such claims or that in the future such insurance will be available to the
Company at reasonable cost or at all.
Disappointing Market Acceptance; Need for Improved SoftLight Laser
Hair-Removal Process. Market acceptance of the SoftLight laser hair-removal
process has been disappointing to date. The Company continues to study the
SoftLight laser hair-removal process to better understand the effects of the
process. Failure to improve the process, including extending the duration of
time for which hair is removed using the SoftLight process, will continue to
limit the Company's ability to successfully commercialize the SoftLight laser
hair-removal process. The Company continues to have difficulty demonstrating to
consumers that the SoftLight laser hair-removal process offers advantages over
traditional methods of hair-removal and alternative laser and other types of
hair-removal systems. There can be no assurance that the Company will be
successful in its efforts to improve the SoftLight laser hair-removal process or
the market acceptance thereof.
Uncertain Market Acceptance of SoftLight Laser Peel. The SoftLight Laser
Peel for skin resurfacing is a new application of the SoftLight process and
differs from alternative methods of skin resurfacing. Consumers may not accept
or be receptive to the potential benefits of the SoftLight Laser Peel. Market
acceptance of the SoftLight Laser Peel will depend in large part upon the
ability of the Company to demonstrate to consumers the safety and effectiveness
of the SoftLight Laser Peel and its advantages over other methods of skin
resurfacing, including carbon dioxide and erbium skin-resurfacing lasers and
chemical peels. There can be no assurance that the SoftLight Laser Peel will
achieve sufficient market acceptance in order to permit the Company to
successfully commercialize the SoftLight Laser Peel.
Dependence Upon Proprietary Technology. There can be no assurance that
other companies or individuals are not investigating, developing, or using other
technologies that are similar to the Company's technology, that the Company will
be awarded any additional patents, or that the Company's patents or any
additional patents, if issued, will provide the Company with sufficiently broad
patent coverage to provide any significant deterrent to competitive products or
services. The Company knows of several companies that are commercializing other
laser-based hair- removal systems and skin-resurfacing techniques. If 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 persons other than the Company, which, if
infringed by the Company, would permit the owner to prevent the Company from
marketing, licensing, or using the SoftLight hair-removal and skin-resurfacing
processes and entitle the owner to damages for past infringement. The Company
has from time to time received allegations that the SoftLight hair-removal
process infringes the intellectual property rights of others, and the Company
may receive similar allegations in the future. There can be no assurance that
litigation relating to such a claim will not be brought against the Company, or
that the Company would prevail in any or all such cases, if brought. The
Company's financial position and results of operations would be materially
adversely affected if the Company devotes substantial financial or management
resources to intellectual property litigation. The Company has pending patent
applications relating to laser hair removal in various countries outside the
United States. There can be no assurance that any of these patent applications
will result in any patents being issued. In September 1998, the European Patent
Office issued a patent to the Company for its SoftLight laser hair-removal
process. That patent is being challenged. The issuance of additional patents to
the Company with respect to any technological improvements or new products and
the validity and enforceability of such patents may be essential to the success
of the Company. There can be no assurance that the Company will be able to
obtain such patent protection.
29
<PAGE>
The Company has registered trademarks and service marks in the United
States and certain foreign countries for "SoftLight". The Company also has
trademark and service mark applications for the "SoftLight" marks in various
other foreign countries. No assurance can be given that any pending trademark or
service mark application will be granted.
Need to Comply with FDA Regulations. The laser used in the SoftLight
hair-removal and skin-resurfacing process must comply with United States Food
and Drug Administration (FDA) regulations governing the use and marketing of
medical devices. The Company's hair-removal system received FDA clearance in
April 1995 and its SoftLight Laser Peel skin-resurfacing procedure received FDA
clearance in May 1998. In addition, the Company is subject to regulatory
requirements in foreign countries where the Company conducts its business or
advertises its services and products. Obtaining regulatory approvals is a
lengthy, expensive, and uncertain process. There can be no assurance that
foreign regulatory agencies will grant the necessary clearances or that the
process to obtain such clearances will not be excessively expensive or lengthy.
For example, in 1996 the Company established a joint venture to commercialize
the SoftLight laser hair-removal process in Japan and since that time has been
seeking the approval of the Japanese Ministry of Health to commercialize the
SoftLight process in Japan. We have submitted information requested by the
Japanese Ministry of Health, including the results of clinical trials performed
in Japan, and the Company continues to await a decision by the Japanese Ministry
of Health.
Most of CBI's products are classified as cosmetics, which are regulated by
the FDA, and are subject to inspection by the FDA. Furthermore, CBI manufactures
a few preparations, principally sunscreens and skin-bleaching agents, that are
classified as over-the-counter drugs, and CBI has an FDA license for this
purpose. This license requires, among other things, that CBI adhere to the FDA's
Good Manufacturing Practices procedures for finished pharmaceuticals, and
subjects CBI's facility to inspection by the FDA. CBI also markets nutritional
supplements which are also subject to FDA regulations.
The FDA also imposes various requirements on manufacturers and sellers of
products under its jurisdiction such as labeling, manufacturing practices,
record keeping, and reporting. The FDA may also require post-market testing and
surveillance programs of drugs or devices to monitor a product's effects.
Failure to comply with applicable regulatory requirements can result in, among
other things, civil and criminal fines, suspensions of approvals, recalls of
products, seizures, injunctions, and/or criminal prosecutions.
Compliance with State and Foreign Regulations. The extent to which a
physician must be involved in the performance of SoftLight laser hair-removal
and skin-resurfacing procedures, including a physician's ability to delegate to
nonphysicians responsibility for performing particular services, depends upon
applicable laws and regulations. Many jurisdictions have taken the position that
the use of lasers for hair-removal constitutes the practice of medicine. In
those jurisdictions, responsibility for performing laser hair-removal procedures
must be in accordance with applicable laws and regulations relating to the
performance and/or delegation of medical acts. Some jurisdictions have also
imposed limitations on the classes of persons to whom laser hair-removal
procedures can be delegated and the conditions under which such delegation is
permissible. Regulatory authorities in some jurisdictions have taken, and other
regulatory agencies may take, some or all of the following positions: (i) that a
physician must evaluate each person for whom laser hair-removal procedures are
performed, (ii) that a supervising physician must be present at all times at the
site where such procedures are being performed, (iii) that only a physician may
use a laser for hair- removal, or (iv) that persons performing laser
hair-removal procedures must have particular licenses or qualifications and may
perform laser hair-removal procedures only under particular conditions. The
adoption of these or similar regulatory requirements may have a material adverse
impact on the Company's operations and ability to conduct operations in
jurisdictions in which such requirements are imposed. For example, a requirement
in a particular jurisdiction that a physician must personally perform laser
hair-removal procedures would significantly limit the potential providers of
SoftLight laser hair-removal procedures in that jurisdiction and may materially
affect the costs associated with the performance of SoftLight laser hair-removal
procedures in that jurisdiction. The use of lasers for hair-removal is a new use
for lasers, and there can be no assurance that review by regulatory authorities
on matters
30
<PAGE>
such as the practice of medicine, the licensure of facilities, equipment or
personnel, and franchising, will not result in decisions that could adversely
affect the operations of the Company. Furthermore, interpretations of current
laws and regulations or changes in current laws and regulations could make
compliance by the Company more difficult or expensive. The SoftLight Laser Peel
may be subject to similar regulatory risks.
The Company's SoftLight laser hair-removal and skin-resurfacing procedures
have been performed, under varying degrees of physician supervision, by
registered nurses, licensed practical nurses, cosmetologists, aestheticians, and
electrologists. The Company believes that the exercise of judgment by the
Company and supervising physicians with respect to delegation of responsibility
for performing SoftLight laser hair-removal and skin-resurfacing procedures
complies with applicable requirements. However, there can be no assurance that
regulatory agencies or courts will agree with such judgments.
Limited Operating History; Need to Develop New Marketing Strategy. The
Company has been in business a short time. The Company began commercial sales of
services using the SoftLight hair-removal process through its spas in November
1995 and through its physician network in June 1996. The Company began to offer
its SoftLight Laser Peel skin-resurfacing procedure in June 1998. The Company's
initial marketing and commercialization strategy was centered around a belief
that the Company's services would command a premium price in the marketplace.
Based on feedback from customers, the Company has shifted away from premium
pricing. The Company is currently revising its marketing and commercialization
strategy including refocusing its spa operations to include more traditional spa
services and expanding beauty and personal care product offerings. As part of
these efforts, the Company will be converting its remaining Spa Thira spas into
Greenhouse luxury day spas. The Company is restructuring its U.S. licensing
program to, among other things, require licensees to pay a fixed monthly fee
(rather than an initial fee and per treatment fee) and to charge licensees for
various other products and services. The Company now seeks to establish
relationships with distributors who would sell SoftLight lasers and the
Company's other products and services in new markets outside of the United
States. The Company would derive one-time sale revenues from such relationships
rather than initial and per-procedure royalty fees. No assurance can be given
that this revised marketing and commercialization strategy will be successful.
Intense Competition. Competition in the market for personal-care products
and services is intense. The SoftLight hair-removal process competes with
electrolysis and other traditional methods of hair removal, as well as other
lasers which have been or in the future may be cleared by the FDA for hair
removal. Competition limits the prices the Company is able to charge for its
services. In addition, the Company's services could become obsolete or
uneconomical if a competitor introduces a new product or process accomplishing
the same objective.
Dependence on International Relationships. The Company depends on its
foreign joint venture partners and licensees who provide the SoftLight
hair-removal and skin-resurfacing processes in foreign countries to provide the
Company with knowledge and expertise in such countries relating to business,
cultural, legal, and regulatory matters that may impact the establishment and
operation of SoftLight hair-removal and skin-resurfacing businesses in those
countries. There can be no assurance that the SoftLight hair-removal and
skin-resurfacing processes themselves or the Company's business models will (i)
be acceptable to foreign regulatory authorities or (ii) achieve consumer
acceptance in such countries.
In addition, there can be no assurance that the Company will be able to
effectively manage the non-U.S. businesses without devoting additional resources
to working with the Company's foreign joint venture partners and licensees to
ensure compliance with the Company's standards and the performance by such
partners of legal and contractual obligations owed to the Company.
31
<PAGE>
Potential Impact of Year 2000 on Processing of Date-sensitive Information.
The Company believes its products are not year 2000 sensitive. While the Company
is attempting to minimize any negative consequences arising from the year 2000
issue, there can be no assurance that year 2000 issues will not have a material
adverse impact on the Company's business, operations, or financial condition.
While the Company expects that upgrades to its internal business systems will be
completed in a timely fashion, there can be no assurance that the Company will
not encounter unexpected costs or delays. If any of the Company's material
suppliers or vendors experience business disruptions due to year 2000 issues,
the Company may be materially adversely affected. There is expected to be a
significant amount of litigation relating to the year 2000 issue and there can
be no assurance that the Company will not incur material costs in defending or
bringing lawsuits. Any unexpected costs or delays arising from the year 2000
issue could have a significant adverse impact on the Company's business,
operations, and financial condition.
32
<PAGE>
Selected Financial Information
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Nine
Months Year
Year Ended Ended (a) Ended
----------------------------------------- ---------- ----------
(In thousands except per share amounts) Oct. 3, Sept. 27, Sept. 28, Sept. 30, Sept. 30, Dec. 31,
1998 (b) 1997 (c) 1996 1995 1995 (d) 1994 (e)
- ------------------------------------------- ---------- --------- ---------- ---------- ---------- ----------
(Unaudited)
Statement of Operations Data
Revenues $ 40,091 $ 45,233 $ 27,812 $ 23,348 $ 17,544 $ 18,682
Income (Loss) Before Cumulative Effect (41,186) (12,405) (1,386) (1,675) (1,679) 6
of Change in Accounting Principle
Net Income (Loss) (41,186) (12,405) (1,386) (1,675) (1,679) 15
Basic and Diluted Loss per Share (1.07) (.31) (.03) (.04) (.04) -
Before Cumulative Effect of Change
in Accounting Principle
Basic and Diluted Loss per Share (1.07) (.31) (.03) (.04) (.04) -
Balance Sheet Data
Working Capital $ 48,597 $ 95,469 $ 47,197 $ 68,691 $ 16,235
Total Assets 134,215 174,595 95,520 89,463 33,570
Long-term Obligations 115,066 115,000 - - -
Common Stock Subject to Redemption 40,500 40,500 - - -
Shareholders' Investment (41,691) 333 79,037 82,218 28,997
</TABLE>
(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 restructuring costs (Note 13) and establishment of a tax valuation
allowance (Note 7).
(c) Reflects the issuance of $115.0 million principal amount
of 4 3/8% subordinated convertible debentures and
the reclassification of $40.5 million to "Common stock subject to
redemption" from "Shareholders' investment" due to the Company's stock
exchange transaction.
(d) Reflects the net proceeds of the Company's private placements and public
offering of common stock.
(e) Reflects the net proceeds of the Company's initial public offering and
the adoption of SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities."
33
<PAGE>
Common Stock and Unit Market Information
The Company's common stock is traded on the American Stock Exchange under
the symbol TLZ. The following table sets forth the high and low sale prices of
the Company's common stock for 1998 and 1997, as reported in the consolidated
transaction reporting system.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Common Stock Units
--------------------- ----------------------
Fiscal 1998 High Low High Low
- --------------------------------------------------------------- ---------- ---------- ---------- -----------
First Quarter $18 11/16 $10 1/2 $18 7/8 $17
Second Quarter 11 1/4 5 1/2 17 3/16 15 5/8
Third Quarter 8 1/2 5 1/8 16 1/2 15 5/8
Fourth Quarter 7 9/16 4 1/4 16 1/8 15 1/8
Fiscal 1997
- --------------------------------------------------------------- ---------- ---------- ---------- -----------
First Quarter $24 7/8 $15 7/8 $ - $ -
Second Quarter 17 3/8 12 3/8 - -
Third Quarter 14 7/8 9 1/4 18 1/4 16 1/8
Fourth Quarter 18 13 1/16 18 7/8 17 1/4
</TABLE>
As of October 30, 1998, the Company had 375 holders of record of its
common stock and 19 holders of record of its units. This does not include
holdings in street or nominee names. The closing market prices on the American
Stock Exchange for the Company's common stock and units on October 30, 1998,
were $5 1/2 per share of common stock and $16 1/4 per unit.
Transfer Agent
American Stock Transfer & Trust Company is the transfer agent for the
Company's common stock and units and maintains holders' activity records. The
agent will respond to questions on issuance of stock and unit certificates,
change of ownership, lost stock and unit certificates, and change of address.
For these and similar matters, please direct inquiries to:
American Stock Transfer & Trust Company
Shareholder Services Department
40 Wall Street, 46th Floor
New York, New York 10005
(718) 921-8200
Security Holder Services
Holders of ThermoLase Corporation common stock and units who desire
information about the Company are invited to contact the Investor Relations
Department, ThermoLase Corporation, 81 Wyman Street, P.O. Box 9046, Waltham,
Massachusetts 02454-9046, (781) 622-1111. A mailing list is maintained to enable
holders whose stock or units is held in street name, and other interested
individuals, to receive quarterly reports, annual reports, and press releases as
quickly as possible. Quarterly distribution of printed reports is limited to the
second quarter report only. All material is available from Thermo Electron's
Internet site (http://www.thermo.com/subsid/tlz1.html).
Dividend Policy
The Company has never paid cash dividends and does not expect to pay cash
dividends in the foreseeable future because its policy has been to use earnings
to finance expansion and growth. Payment of dividends will rest within the
discretion of the Board of Directors and will depend upon, among other factors,
the Company's earnings, capital requirements, and financial condition.
34
<PAGE>
Form 10-K Report
A copy of the Annual Report on Form 10-K for the year ended October 3,
1998, as filed with the Securities and Exchange Commission, may be obtained at
no charge by writing to the Investor Relations Department, ThermoLase
Corporation, 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046.
Annual Meeting
The annual meeting of shareholders will be held on Thursday, March 11,
1999, at 10:00 a.m. at the Westin Hotel, 70 Third Avenue, Waltham,
Massachusetts.
<PAGE>
Exhibit 21
THERMOLASE CORPORATION SUBSIDIARIES
As of November 19, 1998, the Registrant owned the following subsidiaries:
<TABLE>
<CAPTION>
<S> <C> <C>
STATE OR
JURISDICTION OF PERCENT OF
NAME INCORPORATION OWNERSHIP
Creative Beauty Innovations, Inc. Texas 100
The Greenhouse Spa, Inc. Pennsylvania 100
ThermoLase England L.L.C. Delaware 50*
ThermoLase UK Limited United Kingdom 100
ThermoLase France L.L.C. Delaware 71*
ThermoDess S.A.S. France 71*
ThermoLase International L.L.C. Delaware 35*
ThermoLase Japan L.L.C. Wyoming 50*
Thira Japan, Inc. Japan 100
</TABLE>
* Joint Venture/Partnership
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the
incorporation by reference of our reports dated November 9, 1998, included
in or incorporated by reference into ThermoLase Corporation's Annual
Report on Form 10-K for the year ended October 3, 1998, 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, Registration Statement No. 333-19633
on Form S-4, Registration Statement No. 333-34467 on Form S-3.
Arthur Andersen LLP
Boston, Massachusetts
December 15, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMOLASE
CORPORATION REPORT ON FORM 10-K FOR THE YEAR ENDED OCTOBER 3, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-END> OCT-03-1998
<CASH> 52,831
<SECURITIES> 3,072
<RECEIVABLES> 4,829
<ALLOWANCES> 490
<INVENTORY> 6,825
<CURRENT-ASSETS> 67,765
<PP&E> 54,706
<DEPRECIATION> 11,276
<TOTAL-ASSETS> 134,215
<CURRENT-LIABILITIES> 19,168
<BONDS> 110,566
0
0
<COMMON> 408
<OTHER-SE> (42,099)
<TOTAL-LIABILITY-AND-EQUITY> 134,215
<SALES> 22,765
<TOTAL-REVENUES> 40,091
<CGS> 15,590
<TOTAL-COSTS> 37,875
<OTHER-EXPENSES> 13,183
<LOSS-PROVISION> 88
<INTEREST-EXPENSE> 5,343
<INCOME-PRETAX> (35,307)
<INCOME-TAX> 5,879
<INCOME-CONTINUING> (41,186)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (41,186)
<EPS-PRIMARY> (1.07)
<EPS-DILUTED> (1.07)
</TABLE>
