SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended April 3, 1999
[ ] 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
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at April 30, 1999
Common Stock, $.01 par value 39,347,996
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMOLASE CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
<S> <C> <C>
April 3, October 3,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Current Assets:
Cash and cash equivalents (includes $37,848 and $51,246 under $ 40,820 $52,831
repurchase agreement with affiliated company)
Available-for-sale investments, at quoted market value - 3,072
(amortized cost of $3,072)
Accounts receivable, less allowances of $502 and $490 4,965 4,339
Inventories:
Raw materials and supplies 2,736 2,771
Work in process and finished goods 3,885 4,054
Prepaid expenses 1,022 698
-------- --------
53,428 67,765
-------- --------
Property, Plant, and Equipment, at Cost 55,685 54,706
Less: Accumulated depreciation and amortization 14,386 11,276
-------- --------
41,299 43,430
-------- --------
Other Assets (includes note receivable from joint venture of $1,667) 7,387 7,531
-------- --------
Cost in Excess of Net Assets of Acquired Companies 15,296 15,489
-------- --------
$117,410 $134,215
======== ========
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THERMOLASE CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
April 3, October 3,
(In thousands except share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Current Liabilities:
Accounts payable $ 2,314 $ 3,221
Accrued payroll and employee benefits 2,406 1,633
Accrued restructuring costs (Note 3) 2,507 5,153
Customer deposits 2,550 820
Other accrued expenses 4,429 5,141
Due to parent company and affiliated companies 3,174 3,200
-------- --------
17,380 19,168
-------- --------
Long-term Obligations:
4 3/8% Subordinated convertible debentures (includes $8,225 115,000 115,000
and $4,500 of related-party debt)
Other 54 66
-------- --------
115,054 115,066
-------- --------
Deferred Lease Liability 1,206 1,172
-------- --------
Common Stock Subject to Redemption 40,500 40,500
-------- --------
Shareholders' Investment:
Common stock, $.01 par value, 100,000,000 shares authorized; 408 408
40,829,132 shares issued
Capital in excess of par value 35,640 36,279
Accumulated deficit (72,244) (57,107)
Treasury stock at cost, 1,481,136 and 1,531,025 shares (20,534) (21,271)
-------- --------
(56,730) (41,691)
-------- --------
$117,410 $134,215
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
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THERMOLASE CORPORATION
Consolidated Statement of Operations
(Unaudited)
Three Months Ended
April 3, April 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ---------
Revenues:
Product revenues $ 5,820 $5,203
Service revenues 3,995 2,889
------- -------
9,815 8,092
------- -------
Costs and Operating Expenses:
Cost of product revenues 3,898 3,603
Cost of service revenues 7,977 5,828
Selling, general, and administrative expenses 3,674 5,724
Research and development expenses 484 883
------- -------
16,033 16,038
------- -------
Operating Loss (6,218) (7,946)
Interest Income 577 1,148
Interest Expense (includes $50 to related party in fiscal 1999) (1,340) (1,334)
Equity in Losses of Joint Ventures - (420)
------- -------
Loss Before Income Taxes (6,981) (8,552)
Income Tax (Provision) Benefit (52) 17
------- -------
Net Loss $(7,033) $(8,535)
======= =======
Basic and Diluted Loss per Share (Note 4) $ (.18) $ (.22)
======= =======
Basic and Diluted Weighted Average Shares (Note 4) 39,344 38,080
======= ======
The accompanying notes are an integral part of these consolidated financial
statements.
4
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THERMOLASE CORPORATION
Consolidated Statement of Operations
(Unaudited)
Six Months Ended
April 3, April 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues:
Product revenues $ 12,610 $11,602
Service revenues 6,751 9,939
-------- --------
19,361 21,541
-------- --------
Costs and Operating Expenses:
Cost of product revenues 8,594 7,989
Cost of service revenues 14,671 11,461
Selling, general, and administrative expenses 8,527 10,850
Research and development expenses 973 1,822
-------- --------
32,765 32,122
-------- --------
Operating Loss (13,404) (10,581)
Interest Income 1,243 2,566
Interest Expense (includes $98 to related party in fiscal 1999) (2,680) (2,666)
Equity in Losses of Joint Ventures (200) (820)
-------- --------
Loss Before Income Taxes (15,041) (11,501)
Income Tax (Provision) Benefit (96) 930
-------- --------
Net Loss $(15,137) $(10,571)
======== ========
Basic and Diluted Loss per Share (Note 4) $ (.38) $ (.28)
======== ========
Basic and Diluted Weighted Average Shares (Note 4) 39,332 38,232
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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THERMOLASE CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
April 3, April 4,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Operating Activities:
Net loss $(15,137) $(10,571)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 3,824 3,382
Provision for losses on accounts receivable 12 54
Increase in prepaid income taxes - (1,060)
Increase in deferred lease liability 34 76
Equity in losses of joint ventures 200 820
Changes in current accounts:
Accounts receivable (638) 1,168
Inventories 204 (74)
Other current assets (324) (198)
Accounts payable (907) (3,390)
Other current liabilities (892) (1,259)
-------- -------
Net cash used in operating activities (13,624) (11,052)
-------- -------
Investing Activities:
Purchases of available-for-sale investments - (4,000)
Proceeds from maturities of available-for-sale investments 3,072 4,400
Purchases of property and equipment (1,746) (2,468)
Proceeds from sale of equipment 436 -
Advance under a note receivable from related-party - (1,667)
Increase in other assets (250) -
Other 15 (41)
-------- -------
Net cash provided by (used in) investing activities 1,527 (3,776)
-------- -------
Financing Activities:
Purchases of Company common stock - (8,806)
Net proceeds from issuance of Company common stock 123 222
Payment of withholding taxes related to stock option exercises (25) (415)
Other (12) -
-------- -------
Net cash provided by (used in) financing activities 86 (8,999)
-------- -------
Decrease in Cash and Cash Equivalents (12,011) (23,827)
Cash and Cash Equivalents at Beginning of Period 52,831 87,843
-------- -------
Cash and Cash Equivalents at End of Period $ 40,820 $64,016
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
6
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Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by ThermoLase Corporation (the Company) without audit and, in the opinion of
management, reflect all adjustments of a normal recurring nature necessary for a
fair statement of the financial position at April 3, 1999, and the results of
operations for the three- and six-month periods ended April 3, 1999, and April
4, 1998, and the cash flows for the six-month periods ended April 3, 1999, and
April 4, 1998. The Company's results of operations for the six-month periods
ended April 3, 1999, and April 4, 1998, include 26 and 27 weeks, respectively.
Interim results are not necessarily indicative of results for a full year.
The consolidated balance sheet presented as of October 3, 1998, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K, as amended, for the fiscal year ended
October 3, 1998, filed with the Securities and Exchange Commission.
2. Related-party Transaction
During the second quarter of fiscal 1999 and 1998, and the six-months
ended April 3, 1999, and April 4, 1998, the Company purchased laser systems,
components, and related services from Trex Medical Corporation, a majority-owned
subsidiary of ThermoTrex Corporation (the Company's parent), at an aggregate
cost of $1,022,000 and $1,227,000, and $1,655,000 and $1,668,000 respectively.
3. Restructuring
During fiscal 1998, the Company initiated certain restructuring
activities, including the announced closure of three domestic spas and
termination of a joint venture that operated its spa in France. Two of the
domestic spas were closed during the first quarter of fiscal 1999. The Company
announced the closure of two additional spas in May 1999 and expects to sell or
close other spas during the remainder of fiscal 1999. As of October 3, 1998, the
Company had accrued $5,153,000 associated with the actions announced in fiscal
1998. During the six months ended April 3, 1999, the Company expended $2,646,000
for payments associated with terminating certain contractual agreements of the
French joint venture, closing the spa in France, and severance. As of April 3,
1999, the remaining obligation for the restructuring activities totaled
$2,507,000, which primarily represents $2,339,000 of lease payments on the
facilities being closed, net of assumed sublease receipts, and ongoing costs of
severance. Closure or sale of additional spas will result in charges for asset
impairment and losses on operating lease obligations, depending on the terms of
such arrangements.
4. Loss per Share
Basic loss per share has been computed by dividing the 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 debentures 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 April 3, 1999, there were outstanding options to
purchase 2,145,000 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.
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5. Comprehensive Income
During the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
This pronouncement sets forth requirements for disclosure of the Company's
comprehensive income and accumulated other comprehensive items. In general,
comprehensive income combines net income and "other comprehensive items," which
represents certain amounts that are reported as components of shareholders'
investment in the accompanying balance sheet, including unrealized net of tax
gains and losses on available-for-sale investments. During the second quarter of
fiscal 1999 and 1998, the Company had a comprehensive loss of $7,033,000 and
$8,530,000, respectively. During the first six months of fiscal 1999 and 1998,
the Company had a comprehensive loss of $15,137,000 and $10,554,000,
respectively.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed under the heading "Forward-looking
Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K, as
amended, for the fiscal year ended October 3, 1998, filed with the Securities
and Exchange Commission.
Overview
The Company 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 day spa
locations, as well as through participating physician licensees.
In connection with its acquisition of The Greenhouse Spa, Inc. in June
1998, a full-service, luxury, destination spa, the Company converted 11 domestic
Spa Thiras to Greenhouse day spas, which, in addition to hair-removal and
skin-resurfacing services, offer more traditional day-spa services, such as
massages and facials. The Company closed two of its domestic spas in November
1998, announced the closure of its Chicago and Boca Raton spas on May 7, 1999,
and expects to sell or close additional domestic spas during the remainder of
fiscal 1999. The Company's future results of operations will be materially
affected by the success of the Greenhouse day spas as well as by decisions to
sell or close additional spas. Closure of spas or sale of facilities at less
than their carrying value would have a material adverse effect on future results
of operations. The Company's investment in spa assets and lasers totaled
approximately $27.0 million at April 3, 1999. In addition, at April 3, 1999, the
Company had operating lease commitments of approximately $24.0 million related
to its spas, other than those announced as closing in fiscal 1998. As additional
spas close in the future, the amount of lease obligations related to such spas
in excess of income from subleasing the facilities will be recorded as a loss.
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 other licensees.
8
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Overview (continued)
During the second quarter of fiscal 1998, the Company began to experience
a decrease in revenues from its hair-removal services. In response to this trend
and in an attempt to establish price points and other conditions designed to
increase demand and revenues, in April 1998 the Company significantly reduced
treatment prices at its spa locations and has modified the terms and conditions
offered to licensees. 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 was introduced. In addition, the Company now offers
licensees the opportunity to purchase or lease SoftLight lasers in lieu of
paying ongoing license fees. As a result of these changes and other factors,
there has been a net reduction of 48% in the number of licensees from the number
under agreement at the end of fiscal 1998.
Beginning in January 1996, the Company sought to market the SoftLight
system internationally through joint ventures and other licensing arrangements.
The Company liquidated its joint venture relating to the SoftLight system in
France in the fourth quarter of 1998 and has terminated its licensing
arrangements in various other countries. The Company is no longer seeking to
expand its international presence.
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 and skin-resurfacing processes.
Results of Operations
Second Quarter Fiscal 1999 Compared With Second Quarter Fiscal 1998
Revenues increased to $9.8 million in the second quarter of fiscal 1999
from $8.1 million in the second quarter of fiscal 1998. The Company earned
service revenues of $4.0 million in fiscal 1999, compared with $2.9 million in
fiscal 1998, primarily due to the inclusion of $1.1 million in revenue from The
Greenhouse Spa Inc., acquired in June 1998. International revenues increased due
to the receipt of a $0.2 million final installment of a minimum guaranteed
payment recorded upon granting technology rights under an international
licensing arrangement and an increase in licensing fees. Spa revenues increased
as a result of the Company's recent conversion of its existing spas to
Greenhouse day spas, offset in part by a decrease in revenue due to the closure
of the Company's LaJolla and Miami spas during the first quarter of fiscal 1999.
These increases in service revenues were offset in part by a decrease in
revenues from the Company's licensing program in fiscal 1999 compared with
fiscal 1998, due to a reduction in the number of participating licensees, a
reduction in royalty rates and other changes to the financial terms of the
licenses, and a decrease in the number of one-time fees from new licensees.
Product revenues include sales by CBI, and in the fiscal 1999 period,
beauty product sales at the Company's spas and lasers sold in international and
domestic markets. Revenues at CBI decreased to $5.0 million in the second
quarter of fiscal 1999 from $5.2 million in the second quarter of fiscal 1998,
primarily due to a decrease in private label sales, offset in part by sales of
its new branded product lines, introduced in the fourth quarter of fiscal 1998.
This decrease in CBI revenues was more than offset by revenues from the sale of
SoftLight lasers, as well as sales of beauty products at the spas.
The gross profit margin decreased to negative 21% in the second quarter of
fiscal 1999 from negative 17% in the second quarter of fiscal 1998. The
Company's service revenues had a negative gross profit of $4.0 million in fiscal
1999, compared with a negative gross profit of $2.9 million in fiscal 1998. This
decrease was primarily due to an increase in spa-specific marketing and
advertising expenses related to the Company's recent conversion of its existing
spas to Greenhouse day spas. To a lesser extent, the gross profit margin
decreased due to a decline in initial sign-up fees relating to the licensing
program, which have a relatively high gross profit margin. The gross profit
margin at CBI increased to 32% in the second quarter of fiscal 1999 from 31% in
the second quarter of fiscal 1998, primarily due to a reduction in overhead.
9
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Second Quarter Fiscal 1999 Compared With Second Quarter Fiscal 1998 (continued)
Selling, general, and administrative expenses as a percentage of revenues
decreased to 37% in the second quarter of fiscal 1999 from 71% in the second
quarter of fiscal 1998, primarily due to the ongoing cost reduction efforts
implemented by the Company during the second half of fiscal 1998.
Research and development expenses decreased to $0.5 million in the second
quarter of fiscal 1999 from $0.9 million in the second quarter of fiscal 1998,
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.
Interest income decreased to $0.6 million in the second quarter of fiscal
1999 from $1.1 million in the second quarter of fiscal 1998, primarily due to
lower average invested balances. Interest expense was $1.3 million in both
periods.
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.
The effective tax rate for the second quarter of fiscal 1999 and fiscal
1998 reflects the establishment of a valuation allowance for the tax benefit
associated with losses arising during the periods. The Company establishes
valuation allowances in accordance with the provisions of Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Management
believes that it is more likely than not that tax benefits that arose during the
periods will not be used prior to their expiration.
First Six Months Fiscal 1999 Compared With First Six Months Fiscal 1998
Revenues decreased to $19.4 million in the first six months of fiscal 1999
from $21.5 million in the first six months of fiscal 1998. The Company earned
service revenues of $6.8 million in fiscal 1999, compared with $9.9 million in
fiscal 1998. International revenues decreased due to a decline in minimum
guaranteed payments recorded upon granting technology rights under international
licensing arrangements, offset in part by an increase in licensing fees.
Revenues from the Company's licensing program decreased in fiscal 1999 compared
with fiscal 1998, due to a reduction in the number of participating licensees, a
reduction in royalty rates and other changes to the financial terms of the
licenses, and a decrease in the number of one-time fees from new licensees. Spa
revenues decreased due to reduced demand and price reductions at the Company's
spas in fiscal 1999 compared with fiscal 1998, as well as the closure of the
Company's LaJolla and Miami spas during the first quarter of fiscal 1999. These
decreases in revenues were offset in part by the inclusion of $1.9 million in
revenues from The Greenhouse Spa, Inc., acquired in June 1998.
Product revenues include sales by CBI, and in the fiscal 1999 period,
beauty product sales at the Company's spas and laser sales. Revenues at CBI
decreased to $11.0 million in the first six months of fiscal 1999 from $11.6
million in the first six months of fiscal 1998, primarily due to the reasons
discussed in the results of operations for the second quarter. This decrease in
CBI revenues was more than offset by revenues from the sale of SoftLight lasers,
as well as sales of beauty products at the spas.
The gross profit margin decreased to negative 20% in the first six months
of fiscal 1999 from 10% in the first six months of fiscal 1998. The Company's
service revenues had a negative gross profit of $7.9 million in fiscal 1999,
compared with a negative gross profit of $1.5 million in fiscal 1998. This
decrease was primarily due to a decline in minimum guaranteed payments relating
to international licensing arrangements and initial sign-up fees relating to the
licensing program, both of which have a relatively high gross profit margin. To
a lesser extent, the gross profit margin decreased due to an increase in
spa-specific marketing and advertising expenses related to the Company's recent
conversion of its existing spas to Greenhouse day spas and a decrease in spa
revenues. The gross profit margin at CBI decreased to 29% in the first six
months of fiscal 1999 from 31% in the first six months of fiscal 1998, primarily
due to a decrease in revenues, as well as changes in product mix.
10
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First Six Months Fiscal 1999 Compared With First Six Months Fiscal 1998 (continued)
Selling, general, and administrative expenses as a percentage of revenues
decreased to 44% in the first six months of fiscal 1999 from 50% in the first
six months of fiscal 1998, primarily due to the reason discussed in the results
of operations for the second quarter.
Research and development expenses decreased to $1.0 million in the first
six months of fiscal 1999 from $1.8 million in the first six months of fiscal
1998, primarily due to the reasons discussed in the results of operations for
the second quarter.
Interest income decreased to $1.2 million in the first six months of fiscal
1999 from $2.6 million in the first six months of fiscal 1998, primarily due to
lower average invested balances. Interest expense was $2.7 million in both
periods.
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.
The effective tax rate for the first six months of fiscal 1999 reflects
the establishment of a valuation allowance for the tax benefit associated with
losses arising during the period. The Company establishes valuation allowances
in accordance with the provisions of SFAS No. 109, "Accounting for Income
Taxes." Management believes that it is more likely than not that tax benefits
that arose during the period will not be used prior to their expiration.
Liquidity and Capital Resources
Consolidated working capital was $36.0 million at April 3, 1999, compared
with $48.6 million at October 3, 1998. Included in working capital are cash,
cash equivalents, and available-for-sale investments of $40.8 million at April
3, 1999, compared with $55.9 million at October 3, 1998. Operating activities
used $13.6 million of cash during the first six months of fiscal 1999. Cash was
used primarily to fund the Company's loss, excluding noncash items, as well as a
decrease in accounts payable and other current liabilities, primarily due to the
timing of payments, which used $1.8 million of cash.
Excluding available-for-sale investment activity, the Company's investing
activities in the first six months of fiscal 1999 consisted primarily of $1.7
million of expenditures for purchases of property and equipment, including the
purchase of laser systems and components from Trex Medical Corporation, a
majority-owned subsidiary of ThermoTrex Corporation.
The Company's capital expenditures during the remainder of fiscal 1999
will primarily be affected by the number of physicians and other domestic and
international licensees engaged in its licensing programs. 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.
If these losses are not reduced significantly, the Company may not be able to
remain in business.
Year 2000
The following information constitutes a "Year 2000 Readiness Disclosure"
under the Year 2000 Information Readiness Disclosure Act. The Company continues
to assess the potential impact of the year 2000 date recognition issue on the
Company's internal business systems and operations. The Company's year 2000
initiatives include (i) testing and upgrading significant information technology
systems and facilities; (ii) assessing the year 2000 readiness of its key
suppliers, vendors, and customers; and (iii) developing contingency plans.
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Year 2000 (continued)
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and facilities will be ready for the
year 2000. The first phase of the program, testing and evaluating the Company's
critical information technology systems and facilities, has been substantially
completed. During phase one, the Company tested and evaluated its significant
computer systems, software applications, and related equipment for year 2000
compliance. The Company also evaluated the potential year 2000 impact on its
critical facilities. The Company's efforts included testing the year 2000
readiness of its utility and telecommunications systems at its critical
facilities. The Company is currently in phase two of its program, during which
any material noncompliant systems or facilities that were identified during
phase one are prioritized and remediated. The Company is currently upgrading or
replacing its noncompliant information technology systems. In many cases, such
upgrades or replacements are being made in the ordinary course of business,
without accelerating previously scheduled upgrades or replacements. For example,
the Company had planned to upgrade its spa point-of-sale system with a new
point-of-sale system for efficiency and other reasons unrelated to year 2000
compliance. Accordingly, in lieu of remediating the point-of-sale system, the
system will be replaced in the ordinary course of business. The Company expects
that all of its material information technology systems and critical facilities
will be year 2000 compliant by July 1999. There can be no assurance that the
Company will be able to identify all of the year 2000 problems with its critical
information technology systems.
The Company is in the process of identifying and assessing the year 2000
readiness of key suppliers and vendors that are believed to be significant to
the Company's business operations. As part of this effort, the Company has
developed and is distributing questionnaires relating to year 2000 compliance to
its significant suppliers and vendors. To date, no significant supplier or
vendor has indicated that it believes its business operations will be materially
disrupted by the year 2000 issue. The Company will follow-up with significant
suppliers and vendors that have not responded to the Company's questionnaires.
The Company has not completed the majority of its assessment of third-party
risk, but expects to be substantially completed by September 1999.
Contingency Plan
The Company is developing a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
This plan may include identifying and securing 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
To date, costs incurred in connection with the year 2000 issue have not
been material. The Company does not expect total year 2000 remediation costs to
be material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance. Year 2000 costs
relating to products and facilities were funded from working capital. All
internal costs and related external costs, other than capital additions, related
to year 2000 remediation have been and will continue to be expensed as incurred.
The Company does not track internal costs incurred for its year 2000 compliance
project. Such costs are principally the related payroll costs for its
information systems group.
Reasonably Likely Worst Case Scenario
At this point in time, the Company is not able to determine the most
reasonably likely worst case scenario to result from the year 2000 issue. One
possible worst case scenario would be that certain of the Company's material
suppliers or vendors experience business disruptions due to the year 2000 issue
and are unable to provide materials and
12
<PAGE>
Year 2000 (continued)
services to the Company on time. The Company's operations could be delayed or
temporarily shut down, and it could be unable to meet its obligations to
customers in a timely fashion. The Company's business, operations, and financial
condition could be adversely affected in amounts that cannot be reasonably
estimated at this time. If the Company believes that any of its key suppliers or
vendors may not be year 2000 compliant, it will seek to identify and secure
other suppliers or vendors as part of its contingency plan.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
issues will not have a material adverse impact on the Company's business,
operations, or financial condition. As discussed above, if any of the Company's
material suppliers or vendors experience business disruptions due to year 2000
issues, the Company might also be materially adversely affected. There is
expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. In addition, if any year 2000 issues
are identified, there can be no assurance that the Company will be able to
retain qualified personnel to remedy such issues. Any unexpected costs or delays
arising from the year 2000 issue could have a material adverse impact on the
Company's business, operations, and financial condition in amounts that cannot
be reasonably estimated at this time.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk from changes in interest rates and
equity prices has not changed materially from its exposure at fiscal year-end
1998.
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
On March 11, 1999, at the Annual Meeting of Shareholders, the shareholders
elected seven incumbent directors to a one-year term expiring in 2000. The
Directors elected at the meeting were: Dr. Carliss Y. Baldwin, Mr. Gerald
Feldman, Dr. Elias P. Gyftopoulos, Mr. John T. Keiser, Mr. Paul F. Kelleher, Ms.
Melissa F. Riordan, and Dr. Nicholas T. Zervas. Dr. Baldwin, Mr. Kelleher, Ms.
Riordan, and Dr. Zervas each received 35,903,727 shares voted in favor of his or
her election and 76,132 shares voted against. Mr. Feldman received 35,903,667
shares voted in favor of his election and 76,192 shares voted against. Dr.
Gyftopoulos and Mr. Keiser each received 35,903,627 shares voted in favor of his
election and 76,232 shares voted against. Mr. Gary S. Weinstein was not
reelected as a Director and received 9,161,403 shares voted in favor of his
election and 26,818,456 shares voted against. No abstentions or broker non-votes
were recorded on the election of directors.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
(b) Reports on Form 8-K
None.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 10th day of May 1999.
THERMOLASE CORPORATION
/s/ Paul F. Kelleher
------------------------
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
------------------------
Theo Melas-Kyriazi
Chief Financial Officer
14
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
27 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMOLASE
CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED APRIL 3, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-02-1999
<PERIOD-END> APR-03-1999
<CASH> 40,820
<SECURITIES> 0
<RECEIVABLES> 5,467
<ALLOWANCES> 502
<INVENTORY> 6,621
<CURRENT-ASSETS> 53,428
<PP&E> 55,685
<DEPRECIATION> 14,386
<TOTAL-ASSETS> 117,410
<CURRENT-LIABILITIES> 17,380
<BONDS> 106,829
0
0
<COMMON> 408
<OTHER-SE> (57,138)
<TOTAL-LIABILITY-AND-EQUITY> 117,410
<SALES> 12,610
<TOTAL-REVENUES> 19,361
<CGS> 8,594
<TOTAL-COSTS> 23,265
<OTHER-EXPENSES> 973
<LOSS-PROVISION> 12
<INTEREST-EXPENSE> 2,680
<INCOME-PRETAX> (15,041)
<INCOME-TAX> 96
<INCOME-CONTINUING> (15,137)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,137)
<EPS-PRIMARY> (0.38)
<EPS-DILUTED> (0.38)
</TABLE>
