SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------------------------
FORM 10-K
(mark one)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended October 2, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 1-13104
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 the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to the filing requirements for
at least the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of October 29, 1999, was approximately $10,699,000.
As of October 29, 1999, the Registrant had 39,347,996 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended October 2, 1999, are incorporated by reference into Parts I and II.
<PAGE>
PART I
Item 1. Business
(a) General Development of Business
ThermoLase Corporation, which we also refer to as "the company" or the
"registrant," operates in two business segments: Hair-removal and Related
Activities (Hair Removal) and Health and Beauty Products. The company's Hair
Removal segment has developed SoftLight(R), a proprietary system for the removal
of 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 and, in May 1998, the FDA cleared our SoftLight Laser Peel for
skin-resurfacing. Due to the company's continuing losses, in fiscal 1999*, we
decided to substantially exit this business, as discussed below.
Our Creative Beauty Innovations, Inc. (CBI) subsidiary represents the
Health and Beauty Products segment, which manufactures and markets skin-care,
bath, and body products, and markets dietary supplements.
Hair-removal and Related Activities
Spas
To provide our laser-based hair-removal and skin-resurfacing services,
ThermoLase developed a network of 14 high-end day spas, originally called Spa
Thira. In June 1998, the company acquired The Greenhouse Spa, Inc., a
destination spa located in Arlington, Texas. During fiscal 1998, the company
announced the closure of three of the day spas and converted the other 11 into
full-service day spas that were operated under The Greenhouse Spa name. In
addition to hair-removal and skin-resurfacing services, these spas offered more
traditional day spa services such as massages and facials. During the third
quarter of fiscal 1999, ThermoLase closed two additional spas and sold the nine
remaining day spas, as well as The Greenhouse Spa, Inc. In connection with the
sale and closures announced in fiscal 1999, as well as other actions, the
company recorded restructuring and related costs of $67.7 million.
Licensing Programs
In June 1996, ThermoLase began a program to license the SoftLight
technology to physicians and others who wanted to offer SoftLight as part of
their practices. Through these arrangements, we received a per-procedure or
minimum royalty and/or a flat periodic fee. The company also entered into a
variety of joint ventures and licensing agreements to bring the technology to
international markets. During fiscal 1998, we closed the spa in France, which
operated under a joint venture agreement, and during fiscal 1999, we terminated
or renegotiated the terms of the remaining international licensing arrangements
to minimize our ongoing management, maintenance, and service obligations. In
fiscal 1999, the company offered licensees the opportunity to purchase or lease
SoftLight lasers in lieu of paying ongoing licensing fees.
We purchased our SoftLight laser systems and components from Trex Medical
Corporation, a majority-owned subsidiary of ThermoTrex Corporation, at an
aggregate cost of $3,414,000 in fiscal 1999, $2,902,000 in fiscal 1998, and
$11,390,000 in fiscal 1997.
- -----------------
* References to fiscal 1999, 1998, and 1997, in this document are for the years
ended October 2, 1999, October 3, 1998, and September 27, 1997, respectively.
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Proposed Reorganization
In fiscal 1999, Thermo Electron Corporation announced a proposed
reorganization involving certain of Thermo Electron's subsidiaries, including
the company. In December 1999, the boards of directors of the company and Thermo
Electron approved a definitive plan of merger under which Thermo Electron would
acquire all of the outstanding shares of company common stock (other than shares
held by Thermo Electron or ThermoTrex) in exchange for Thermo Electron common
stock. As a result, the company would become a wholly owned subsidiary of Thermo
Electron. The terms of the exchange, and certain conditions as to which the
completion of the merger is subject to, are outlined in Note 14 to Consolidated
Financial Statements in our Fiscal 1999 Annual Report to Shareholders. This
information is incorporated in this document by reference.
Stock Ownership
On October 2, 1999, our parent company, ThermoTrex owned 27,960,996 shares
of our common stock, representing 71% of ThermoLase's outstanding shares on that
date. ThermoTrex is a majority-owned public subsidiary of Thermo Electron. 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 dental imaging systems. ThermoTrex also conducts advanced-technology research
in communications, avionics, X-ray detection, signal processing, and lasers. On
October 2, 1999, Thermo Electron owned 5,473,935 shares of ThermoLase's common
stock, representing 14% of our outstanding stock on that date. During fiscal
1999, Thermo Electron purchased 1,233,200 shares of ThermoLase's common stock in
the open market for $5,117,000, and 1,620,127 units for $28,572,000. These units
represent one share of company common stock and one redemption right, which
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. As of
October 2, 1999, Thermo Electron owned 1,620,127 units, representing 81% of our
outstanding units on that date. Thermo Electron is a leading provider of
analytical and monitoring instruments, used in everything from life sciences
research to food and beverage production, and a recognized leader in
heart-assist devices, respiratory-care equipment, neurodiagnostics, and
mammography systems. In addition, Thermo Electron develops and operates power
plants, offers a range of environmental consulting and resource management
services, is a major producer of paper-recycling equipment, provides
water-clarification and fiber-recovery products and services, and conducts a
broad range of advanced technology R&D.
Forward-looking Statements
We make forward-looking statements throughout this document. We typically
use the words "believe," "anticipate," "plan," "expect," "seek," "estimate," and
similar expressions to identify forward-looking statements. Unless a passage
describes an historical event, you should consider it to be a forward-looking
statement. As you make decisions about your investments in 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 1999 Annual Report to
Shareholders, which is incorporated in this document by reference.
(b) Financial Information About Segments
Financial information concerning the company's segments is summarized in
Note 12 to Consolidated Financial Statements in our Fiscal 1999 Annual Report to
Shareholders. This information is incorporated in this document by reference.
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<PAGE>
(c) Description of Business
(i) Principal Products and Services
Health and Beauty Products
CBI has built its reputation as a 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. It does not manufacture packaging materials,
such as containers and boxes, but contracts with third parties for these
supplies. During fiscal 1998, CBI began to diversify from being primarily a
private-label manufacturer to marketing products under its own brand names.
During fiscal 1999, CBI discontinued certain branded product lines. CBI sales
accounted for 64% of our total revenue in fiscal 1999, 57% in fiscal 1998, and
53% in fiscal 1997.
(ii) New Products
During fiscal 1999, ThermoLase submitted a 510k application with the FDA
to use its lasers for tattoo removal.
(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
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.
(v) Seasonal Influences
Wholesale sales of CBI's products decrease, while retail sales increase,
during the December holiday season.
(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 revenue in
fiscal 1999.
(viii)Backlog
Our backlog of firm orders at the Health and Beauty Products segment was
$4,537,000 at October 2, 1999, compared with $4,116,000 at October 3, 1998. We
anticipate that substantially all of our fiscal 1999 backlog will be shipped or
completed during fiscal 2000.
(ix) Government Contracts
Not applicable.
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(x) Competition
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
We spent $1,519,000 on research and development in fiscal 1999, $3,028,000
in fiscal 1998, and $5,704,000 in fiscal 1997. Research and development funds
supported development of our SoftLight Laser Peel and CBI's branded product
lines.
(xii)Environmental Protection Regulations
We believe that compliance with federal, state, and local environmental
regulations will not have a material adverse effect on our capital expenditures,
earnings, or competitive position.
(xiii)Number of Employees
As of October 2, 1999, ThermoLase employed 211 people.
(d) Financial Information about Exports by Domestic Operations
Not applicable.
(e) Executive Officers of the Registrant
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name Age Present Title (Fiscal Year First Became
Executive Officer)
------------------ --- --------------------------------------------
Gerald Feldman 49 President and Chief Executive Officer (1998)
Theo Melas-Kyriazi 40 Chief Financial Officer (1999)
Richard E. Weitzel 51 Vice President, Marketing (1998)
Paul F. Kelleher 57 Chief Accounting Officer (1992)
</TABLE>
Each executive officer serves until his successor is chosen or appointed
by the board of directors and qualified, or until earlier resignation, death, or
removal. 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. Mr. Melas-Kyriazi was appointed
chief financial officer of the company and Thermo Electron on January 1, 1999.
He joined Thermo Electron in 1986 as assistant treasurer, and became treasurer
in 1988. He was named president and chief executive officer of ThermoSpectra
Corporation, a public subsidiary of Thermo Instrument Systems Inc., in 1994, a
position he held until becoming vice president of corporate strategy for Thermo
Electron in 1998. Mr. Melas-Kyriazi remains a vice president of Thermo Electron.
Mr. Weitzel was appointed vice president, marketing in 1998. Prior to joining
ThermoLase, Mr. Weitzel was employed at Arthur Andersen LLP, where he served as
the director of business development. Prior to joining Arthur Andersen in 1998,
he served as the vice president of marketing for various companies from 1995
through 1998. From 1989 to 1994, Mr. Weitzel served as president and chief
operating officer of CITATION Professional Services, Inc. Mr. Kelleher has held
comparable positions for at least five years with Thermo Electron. Mr.
Melas-Kyriazi and Mr. Kelleher are full-time employees of Thermo Electron, but
they devote as much time to the affairs of the company as is reasonably
required.
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Item 2. Properties
The Health and Beauty Products segment occupies approximately 201,000
square feet of office and manufacturing space in Carrollton, Texas, under a
lease expiring in 2004. We believe that this facility is in good condition and
is 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 1999 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 1999 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 1999 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Registrant's Fiscal 1999 Annual Report to Shareholders and is
incorporated in this document by reference.
Item 8. Financial Statements and Supplementary Data
The Registrant's Consolidated Financial Statements and Supplementary Data
are included in the Registrant's Fiscal 1999 Annual Report to Shareholders and
are incorporated in this document by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
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PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
Set forth below are the names of the directors; their ages; their offices
in the company, if any; their principal occupation or employment for the past
five years; the length of their tenure as directors; and the names of other
public companies in which such persons hold directorships.
<TABLE>
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<S> <C>
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Carliss Y. Baldwin Dr. Baldwin, 49, has been a director of the company since June 1994. She has
been the William L. White Professor of Business Administration, Harvard Business
School, since 1988.
- ----------------------------------------------------------------------------------------------------------
I. MacAllister Booth Mr. Booth, 67, has been a director of the company since June 1999. He was
president, chairman, and chief executive officer of Polaroid Corporation, a
manufacturer of instant and digital imaging and related products, from 1986 until
1995. He is also a director of John Hancock Mutual Life Insurance Company, State
Street Bank and State Street Holding Company, and Western Digital Corporation.
- ----------------------------------------------------------------------------------------------------------
Gerald Feldman Mr. Feldman, 49, has been a director of the company since September 1998. He has
also served as the president and chief executive officer of the company since
August 1998. Mr. Feldman has been the president of International Technidyne
Corporation, a wholly owned subsidiary of Thermo Cardiosystems Inc. (an indirect
majority-owned subsidiary of Thermo Electron), since October 1987; and a director
since September 1991. International Technidyne develops, manufactures, and
markets hemostasis management products.
- ----------------------------------------------------------------------------------------------------------
Elias P. Gyftopoulos Dr. Gyftopoulos, 72, has been a director of the company since September 1994. He
is Professor Emeritus of the Massachusetts Institute of Technology, where he was
the Ford Professor of Mechanical Engineering and of Nuclear Engineering for more
than 20 years until his retirement in 1996. He is also a director of Thermo
BioAnalysis Corporation, Thermo Cardiosystems, Thermo Electron, ThermoRetec
Corporation, Trex Medical, and Thermo Vision Corporation.
- ----------------------------------------------------------------------------------------------------------
John T. Keiser Mr. Keiser, 63, has been a director of the company since September 1998. He has
been the chief operating officer, biomedical, of Thermo Electron, a provider of
products and services in measurement instrumentation, biomedical devices, energy,
resource recovery, and emerging technologies, since September 1998; and was a
vice president from April 1997 until his promotion. He has been the president
of Thermedics Inc. since March 1998, and was named chief executive officer in
December 1998. He was a senior vice president of Thermedics from 1994 until his
promotion to president. Mr. Keiser has also been the president of Thermo
Electron's wholly owned biomedical group, a manufacturer of medical equipment and
instruments, since 1994. He is a director of Metrika Systems Corporation,
Thermedics, Thermedics Detection Inc., Thermo Cardiosystems, Thermo Sentron Inc.,
ThermoTrex, and Trex Medical.
- ----------------------------------------------------------------------------------------------------------
Paul F. Kelleher Mr. Kelleher, 57, has been chief accounting officer of the company since its
inception in December 1992, and a director since March 1994. He has been senior
vice president, finance and administration, of Thermo Electron since June 1997;
and served as its vice president, finance, from 1987 to
1997, and as its controller from 1982 to January 1996.
- ----------------------------------------------------------------------------------------------------------
Nicholas T. Zervas Dr. Zervas, 70, has been a director of the company since its inception in
December 1992, and has been Chief of Neurological Service at Massachusetts
General Hospital since 1977. Dr. Zervas is also a director of Thermedics, Thermo
Cardiosystems, and ThermoTrex.
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Executive Officers
Reference is made to Item 1(e) - Executive Officers of the Registrant for
information regarding the Executive Officers of the company.
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Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the company's directors, executive officers, and beneficial owners of more than
10% of the company's common stock (the Common Stock), such as Thermo Electron,
to file with the Securities and Exchange Commission initial reports of ownership
and periodic reports of changes in ownership of the company's securities. Based
upon a review of such filings, all Section 16(a) filing requirements applicable
to such persons were complied with during fiscal 1999, except in the following
instances: Thermo Electron filed one Form 4 late reporting a total of 15
transactions, including one open market purchase of Units (each Unit consisting
of one share of Common Stock and one redemption right) and 14 transactions
associated with the cancellation and grant of options to purchase Common Stock
granted to employees under its stock option program.
Item 11. Executive Compensation
Compensation of Directors
Cash Compensation
Outside directors receive an annual retainer of $2,000, a fee of $1,000
per day for attending regular meetings of the board of directors, and $500 per
day for participating in meetings of the board of directors held by means of
conference telephone and for participating in certain meetings of committees of
the board of directors. Payment of directors' fees is made quarterly. Mr.
Feldman, Mr. Keiser, and Mr. Kelleher are all employees of Thermo Electron or
its subsidiaries and do not receive any cash compensation from the company for
their services as directors. Directors are also reimbursed for out-of-pocket
expenses incurred in attending such meetings.
The board of directors established a special committee (the Special
Committee) consisting solely of outside directors for the purpose of evaluating
the merits and negotiating the terms of the proposed transaction with Thermo
Electron pursuant to which the company would be taken private. Dr. Baldwin and
Mr. Booth were appointed as the members of the Special Committee.
The members of the Special Committee receive a one-time retainer of
$20,000, a fee of $1,000 per day for attending regular meetings of the Special
Committee, and $500 per day for participating in meetings of the Special
Committee held by means of conference telephone.
Deferred Compensation Plan for Directors
Under the company's deferred compensation plan for directors (the Deferred
Compensation Plan), a director has the right to defer receipt of his cash fees
until he ceases to serve as a director, dies, or retires from his principal
occupation. In the event of a change in control or proposed change in control of
the company that is not approved by the board of directors, deferred amounts
become payable immediately. Any of the following is deemed to be a change of
control: (i) the acquisition by any person of 40% or more of the outstanding
common stock or voting securities of Thermo Electron; (ii) the failure of the
Thermo Electron board of directors to include a majority of directors who are
"continuing directors," which term is defined to include directors who were
members of Thermo Electron's board on July 1, 1999, or who subsequent to that
date were nominated or elected by a majority of directors who were "continuing
directors" at the time of such nomination or election; (iii) the consummation of
a merger, consolidation, reorganization, recapitalization, or statutory share
exchange involving Thermo Electron or the sale or other disposition of all or
substantially all of the assets of Thermo Electron unless immediately after such
transaction all holders of Thermo Electron common stock immediately prior to
such transaction own more than 60% of the outstanding voting securities of the
resulting or acquiring corporation in substantially the same proportions as
their ownership immediately prior to such transaction and no person after the
transaction owns 40% or more of the outstanding voting securities of the
resulting or acquiring corporation; or (iv) approval by stockholders of a
complete liquidation or dissolution of Thermo Electron. Amounts deferred
pursuant to the Deferred Compensation Plan are valued at the end
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of each quarter as units of Common Stock. When payable, amounts deferred may be
disbursed solely in shares of Common Stock accumulated under the Deferred
Compensation Plan. A total of 100,000 shares of Common Stock have been reserved
for issuance under the Deferred Compensation Plan. As of October 2, 1999,
deferred units equal to approximately 3,435 full shares of Common Stock were
accumulated for current directors under the Deferred Compensation Plan.
Directors Stock Option Plan
The company's directors stock option plan (the Directors Plan) provides
for the grant of stock options to purchase shares of Common Stock of the company
and its majority-owned subsidiaries to outside directors as additional
compensation for their service as directors. Under the Directors Plan, outside
directors are automatically granted options to purchase 1,000 shares of Common
Stock annually. The annual grant is made at the close of business on the date of
each Annual Meeting of the Stockholders of the company to each outside director
then holding office. Options evidencing annual grants are immediately
exercisable at any time from and after the grant date of the option and prior to
the earliest to occur of (i) the expiration of the option on the third
anniversary of the grant date; (ii) two years after the director ceases to serve
as a director of the company; or (iii) the date of dissolution or liquidation of
the company. Shares acquired upon exercise of the options are subject to
repurchase by the company at the exercise price if the recipient ceases to serve
as a director of the company or another Thermo Electron company prior to the
first anniversary of the grant date.
The exercise price for options granted under the Directors Plan is the
average of the closing prices of the Common Stock as reported on the American
Stock Exchange (or other principal market on which the Common Stock is then
traded) for the five trading days immediately preceding and including the date
of grant, or, if the shares are not then traded, at the last price paid per
share by third parties in an arms-length transaction prior to the option grant.
As of October 2, 1999, options to purchase 127,400 shares of Common Stock had
been granted and were outstanding under the Directors Plan, 1,000 options had
lapsed or been exercised, and options to purchase 273,600 shares of Common Stock
were reserved and available for grant.
Stock Ownership Policies for Directors
The human resources committee of the board of directors (the Committee)
has established a stock holding policy for directors. The stock holding policy
requires each director to hold a minimum of 1,000 shares of Common Stock.
Directors are requested to achieve this ownership level within a three-year
period. The chief executive officer of the company is required to comply with a
separate stock holding policy established by the Committee, which is described
below.
In addition, the Committee has adopted a policy requiring directors to
hold shares of Common Stock equal to one-half of their net option exercises over
a period of five years. The net option exercise is determined by calculating the
number of shares acquired upon exercise of a stock option, after deducting the
number of shares that could have been traded to exercise the option and the
number of shares that could have been surrendered to satisfy tax-withholding
obligations attributable to the exercise of the option. This policy is also
applicable to executive officers and is described below.
Summary Compensation Table
The following table summarizes compensation during the last three fiscal
years for services to the company in all capacities awarded to, earned by, or
paid to the company's chief executive officer and its other executive officers,
whose total annual salary and bonus, as determined in accordance with the rules
of the Securities and Exchange Commission, was greater than $100,000, and who
were employed by the company as of the end of fiscal 1999. The table also
includes information as to one executive who was not serving as an executive
officer as of the end of fiscal 1999. These executive officers are together
referred to as the "named executive officers."
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The company is required to appoint certain executive officers and
full-time employees of Thermo Electron as executive officers of the company, in
accordance with the Thermo Electron Corporate Charter (the Charter). The
compensation for these executive officers is determined and paid entirely by
Thermo Electron. The time and effort devoted by these individuals to the
company's affairs is provided to the company under the Corporate Services
Agreement (the Services Agreement) between the company and Thermo Electron. See
Item 13 - Certain Relationships and Related Transactions. Accordingly, the
compensation for these individuals is not reported in the following table.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Summary Compensation Table
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Long Term
Compensation Securities
Name and Principal Fiscal Annual Compensation (1) Restricted Underlying All Other
Position Year Salary Bonus (2) Stock Award (3) Options (4) Compensation (5)
- -----------------------------------------------------------------------------------------------------------
Gerald Feldman (6) 1999 $210,000 N/A $224,975 (TMO) 27,800 (TMO) $ 6,715
President and Chief
Executive Officer 1998 $ 35,000 $103,000 - 225,000(TLZ) $ 5,625
55,000 (TMO)
45,000 (TKN)
- -----------------------------------------------------------------------------------------------------------
Gina M. Goodrich (7) 1999 $ 99,828 N/A - - $80,000 (8)
Former Vice President,
Licensees 1998 $ 97,958 $ 20,250 - 27,400 (TLZ) $ 4,874
- -----------------------------------------------------------------------------------------------------------
Richard E. Weitzel (9) 1999 $104,423 N/A - 20,000 (TLZ) -
Vice President, Marketing
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Annual compensation for the named executive officers is reviewed and
determined on a calendar year basis, even though the company's fiscal year
ends in September.
(2) Bonuses are generally determined and paid following the end of the calendar
year based on performance during the calendar year in which the
corporation's fiscal year end occurred. The bonus amount represents the
bonus paid for performance during the calendar year in which the company's
fiscal year-end occurred. As of the date hereof, bonuses for calendar 1999
have not yet been determined. The Committee expects to determine bonuses in
March 2000 when audited financial statements of the company's parent
company will be available.
(3) In fiscal 1999, Mr. Feldman was awarded 11,500 shares of restricted stock
of Thermo Electron with a value of $224,975 on the grant date. The
restricted stock awards vest 33%, 33%, and 34% on each of May 20, 2000,
2001, and 2002, respectively. Any dividends paid on restricted stock are
entitled to be retained by the recipient without regard to vesting. At the
end of fiscal 1999, Mr. Feldman held 11,500 shares of restricted stock with
an aggregate value of $155,969.
(4) Options granted by the company are designated in the table as "TLZ." In
addition, the named executive officers have also been granted options to
purchase common stock of Thermo Electron and its majority-owned
subsidiaries from time to time as part of Thermo Electron's stock option
program. Options have been granted during the last three fiscal years in
the following Thermo Electron companies: Thermo Electron (designated in the
table as TMO) and ThermoTrex (designated in the table as TKN).
(5) Represents the amount of matching contributions made on behalf of the named
executive officer participating in the Thermo Electron 401(k) Plan, except
as noted.
(6) Mr. Feldman was appointed president and chief executive officer of the
company on August 3, 1998. The salary reported for fiscal year 1998
represents the amount paid from the commencement of his employment through
October 3, 1998.
(7) Ms. Goodrich was elected a vice president of the company on August 3, 1998.
The salary reported for fiscal year 1998 represents compensation for the
entire fiscal year. Ms. Goodrich resigned as a vice president of the
company effective July 31, 1999.
(8) In addition to a $6,667 matching contribution referred to in footnote (5)
in fiscal 1999, this amount includes a payment of $73,333 as part of a
severance agreement.
(9) Mr. Weitzel was elected a vice president of the company on December 16,
1998. The salary reported for fiscal year 1999 represents the amount paid
from the commencement of his employment through October 2, 1999.
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<PAGE>
Stock Options Granted During Fiscal 1999
The following table sets forth information concerning individual grants of
stock options made during fiscal 1999 to the company's named executive officers.
It has not been the company's policy in the past to grant stock appreciation
rights, and no such rights were granted during fiscal 1999.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Option Grants in Fiscal 1999
- ----------------------------------------------------------------------------------------------------------
Potential Realizable
Number of Securities Percent of Value at Assumed
Underlying Options Total Options Annual Rates of Stock
Granted and Company (1) Granted to Exercise Price Appreciation for
Employees in Price Per Expiration Option Term (2)
Name Fiscal Year Share Date 5% 10%
- ----------------------------------------------------------------------------------------------------------
Gerald Feldman 25,400 (TMO) 0.5% (3) $17.06 12/02/03 $119,720 $264,549
2,400 (TMO) 0.05% (3) $14.81 09/22/04 $ 9,820 $ 21,700
- ----------------------------------------------------------------------------------------------------------
Gina M. Goodrich - - - - - -
- ----------------------------------------------------------------------------------------------------------
Richard E. Weitzel 20,000 (TLZ) 9.6% $ 4.41 12/16/05 $ 35,910 $ 83,676
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) All of the options granted during the fiscal year are immediately
exercisable at the date of grant. In all cases, the shares acquired upon
exercise are subject to repurchase by the granting company at the exercise
price if the optionee ceases to be employed by such company or any other
Thermo Electron company. The granting company may exercise its repurchase
rights within six months after the termination of the optionee's
employment. The repurchase rights lapse ratably over a one to five year
period, depending on the option term, which in the present case is five to
seven years, provided the optionee continues to be employed by the granting
company or any other Thermo Electron company. The granting company may
permit the holder of options to exercise options and to satisfy tax
withholding obligations by surrendering shares equal in fair market value
to the exercise price or withholding obligation. See footnote (4) under
Summary Compensation Table above for the company abbreviations used in this
table.
(2) The amounts shown on this table represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. These gains are based on assumed rates of stock appreciation of 5%
and 10% compounded annually from the date the respective options were
granted to their expiration date. The gains shown are net of the option
exercise price, but do not include deductions for taxes or other expenses
associated with the exercise. Actual gains, if any, on stock option
exercises will depend on the future performance of the common stock of the
applicable corporation, the optionee's continued employment through the
option period, and the date on which the options are exercised.
(3) These options were granted under stock option plans maintained by Thermo
Electron and accordingly are reported as a percentage of total options
granted to employees of Thermo Electron and its subsidiaries.
11
<PAGE>
Stock Options Exercised During Fiscal 1999 and Fiscal Year-End Option Values
The following table reports certain information regarding stock option
exercises during fiscal 1999 and outstanding stock options held at the end of
fiscal 1999 by the company's named executive officers. No stock appreciation
rights were exercised or were outstanding during fiscal 1999.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Aggregated Option Exercises In Fiscal 1999 And Fiscal 1999 Year-End Option Values
- --------------------------------------------------------------------------------------------------------
Number of Value of
Unexercised Unexercised
Shares Options at Fiscal In-the-Money
Acquired on Year-End Options at Fiscal
Exercise Value (Exercisable/ Year-End
Realized (2) Unexercisable)(1) (Exercisable/
Name Company (1) Unexercisable)
- --------------------------------------------------------------------------------------------------------
Gerald Feldman (3) (TLZ) - - 225,000 /- $0 /-
(TMO) - - 82,800 /- $0 /-
(TKN) - - 45,000 /- $0 /-
- --------------------------------------------------------------------------------------------------------
Gina M. Goodrich (TLZ) - - 10,750 /- $0 /-
- --------------------------------------------------------------------------------------------------------
Richard E. Weitzel (TLZ) - - 20,000 /- $0 /-
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) All of the options reported outstanding at the end of the fiscal year are
immediately exercisable as of fiscal year-end. In all cases, the shares
acquired upon exercise of the options reported in the table are subject to
repurchase by the granting company at the exercise price if the optionee
ceases to be employed by such company or any other Thermo Electron company.
The granting company may exercise its repurchase rights within six months
after the termination of the optionee's employment. The repurchase rights
generally lapse ratably over a four- to five-year period, depending on the
option term, which may vary from five to seven years, provided that the
optionee continues to be employed by the granting company or another Thermo
Electron company. The granting company may permit the holder of options to
exercise options and to satisfy tax withholding obligations by surrendering
shares equal in fair market value to the exercise price or withholding
obligation. See footnote (4) under Summary Compensation Table above for the
company abbreviations used in this table.
(2) Amounts shown in this column do not necessarily represent actual value
realized from the sale of the shares acquired upon exercise of the option
because in many cases the shares are not sold on exercise but continue to
be held by the named executive officer exercising the option. The amounts
shown represent the difference between the option exercise price and the
market price on the date of exercise, which is the amount that would have
been realized if the shares had been sold immediately upon exercise.
(3) Mr. Feldman became president and chief executive officer of the company in
August 1998. Prior to that date, he had been employed by International
Technidyne, a wholly owned subsidiary of Thermo Cardiosystems, an indirect
majority-owned subsidiary of Thermo Electron, and had been granted options
to purchase shares of common stock of Thermo Electron and its subsidiaries,
other than the company, as compensation for his services to Thermo
Electron. These options are not reported in the table as they were granted
as compensation for service to Thermo Electron companies other than the
company.
Executive Retention Agreements
Thermo Electron has entered into agreements with certain executive
officers and key employees of Thermo Electron and its subsidiaries that provide
severance benefits if there is a change in control of Thermo Electron and their
employment is terminated by Thermo Electron "without cause" or by the individual
for "good reason", as those terms are defined therein, within 18 months
thereafter. For purposes of these agreements, a change in control exists upon
(i) the acquisition by any person of 40% or more of the outstanding common stock
or voting securities of Thermo
12
<PAGE>
Electron; (ii) the failure of the Thermo Electron board of directors to include
a majority of directors who are "continuing directors", which term is defined to
include directors who were members of Thermo Electron's board on the date of the
agreement or who subsequent to the date of the agreement were nominated or
elected by a majority of directors who were "continuing directors" at the time
of such nomination or election; (iii) the consummation of a merger,
consolidation, reorganization, recapitalization, or statutory share exchange
involving Thermo Electron or the sale or other disposition of all or
substantially all of the assets of Thermo Electron unless immediately after such
transaction all holders of Thermo Electron common stock immediately prior to
such transaction own more than 60% of the outstanding voting securities of the
resulting or acquiring corporation in substantially the same proportions as
their ownership immediately prior to such transaction and no person after the
transaction owns 40% or more of the outstanding voting securities of the
resulting or acquiring corporation; or (iv) approval by stockholders of a
complete liquidation or dissolution of Thermo Electron.
In 1998, Thermo Electron authorized an executive retention agreement with
Mr. Feldman. This agreement provides that in the event Mr. Feldman's employment
is terminated under the circumstances described above, he would be entitled to a
lump sum payment equal to the sum of (a) one times his highest annual base
salary in any 12-month period during the prior five-year period, plus (b) one
times his highest annual bonus in any 12-month period during the prior five-year
period. In addition, he would be provided benefits for a period of one year
after such termination substantially equivalent to the benefits package he would
have been otherwise entitled to receive if he was not terminated. Further, all
repurchase rights of Thermo Electron and its subsidiaries shall lapse in their
entirety with respect to all options that he holds in Thermo Electron and its
subsidiaries, including the company, as of the date of the change in control.
Finally, Mr. Feldman would be entitled to a cash payment equal to $15,000, to be
used toward outplacement services.
Assuming that the severance benefits would have been payable as of October
2, 1999, the lump sum salary and bonus payment under such agreement to Mr.
Feldman would have been approximately $313,000. In the event that payments under
these agreements are deemed to be so called "excess parachute payments" under
the applicable provisions of the Internal Revenue Code of 1986, as amended, Mr.
Feldman would be entitled to receive a gross-up payment equal to the amount of
any excise tax payable by him with respect to such payment, plus the amount of
all other additional taxes imposed on him attributable to the receipt of such
gross-up payment.
Stock Ownership Policies
The Committee established a stock holding policy for executive officers of
the company that required executive officers to own a multiple of their
compensation in shares of Common Stock. For the chief executive officer, the
multiple is one times his base salary and reference incentive compensation for
the fiscal year. For all other officers, the multiple was one times the
officer's base salary. The Committee deemed it appropriate to permit officers to
achieve these ownership levels over a three-year period. The policy has been
amended to apply only to the chief executive officer.
In order to assist executive officers in complying with the policy, the
Committee also adopted a stock holding assistance plan under which the company
is authorized to make interest-free loans to executive officers to enable them
to purchase shares of Common Stock in the open market. This plan was also
amended to apply only to the chief executive officer. The loans are required to
be repaid upon the earlier of demand or the tenth anniversary of the date of the
loan, unless otherwise determined by the Committee.
The Committee also has a policy requiring its executive officers to hold
shares of Common Stock equal to one-half of their net option exercises over a
period of five years. The net option exercise is determined by calculating the
number of shares acquired upon exercise of a stock option, after deducting the
number of shares that could have been traded to exercise the option and the
number of shares that could have been surrendered to satisfy tax withholding
obligations attributable to the exercise of the option.
13
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the beneficial ownership of Common Stock,
as well as the common stock of Thermo Electron and ThermoTrex, as of October 2,
1999, with respect to (i) each director, (ii) each executive officer named in
the summary compensation table set forth in Item 11 - Executive Compensation,
and (iii) all directors and current executive officers as a group. In addition,
the following table sets forth the beneficial ownership of Common Stock, as of
October 2, 1999, with respect to each person who was known by the company to own
beneficially more than 5% of the outstanding shares of Common Stock.
While certain directors or executive officers of the company are also
directors and executive officers of Thermo Electron or its subsidiaries other
than the company, all such persons disclaim beneficial ownership of the shares
of Common Stock beneficially owned by Thermo Electron.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name (1) ThermoLase ThermoTrex Thermo Electron
Corporation (2) Corporation (3) Corporation (4)
- ----------------------------------------------------------------------------------------------------------
Thermo Electron Corporation (5) 33,908,040 N/A N/A
Carliss Y. Baldwin 62,400 0 1,000
I. MacAllister Booth 0 0 0
Gerald Feldman 225,000 45,000 152,161
Gina M. Goodrich 1,120 0 63
Elias P. Gyftopoulos 64,754 0 73,272
John T. Keiser 0 90,000 290,487
Paul F. Kelleher 83,300 8,916 205,251
Richard E. Weitzel 20,000 0 0
Nicholas T. Zervas 89,554 10,647 0
All directors and current executive officers as a group 546,345 154,563 1,032,177
(10 persons)
</TABLE>
(1) Except as reflected in the footnotes to this table, shares of Common Stock
and the common stock of ThermoTrex and Thermo Electron beneficially owned
consist of shares owned by the indicated person or by that person for the
benefit of minor children, and all share ownership includes sole voting and
investment power.
(2) Shares of Common Stock beneficially owned by Dr. Baldwin, Mr. Feldman, Dr.
Gyftopoulos, Mr. Kelleher, Mr. Weitzel, Dr. Zervas, and all directors and
current executive officers as a group include 62,400, 225,000, 62,400,
77,000, 20,000, 68,318, and 515,118 shares, respectively, that such person
or group has the right to acquire within 60 days of October 2, 1999,
through the exercise of stock options. Shares beneficially owned by Dr.
Gyftopoulos, Dr. Zervas, and all directors and current executive officers
as a group include 1,354, 2,080, and 3,434, shares, respectively, allocated
through October 2, 1999, to their respective accounts maintained pursuant
to the company's Deferred Compensation Plan for Directors. No director or
named executive officer beneficially owned more than 1% of the Common Stock
as of October 2, 1999; all directors and current executive officers as a
group beneficially owned 1.38% of the Common Stock outstanding as of such
date.
(3) Shares of ThermoTrex common stock beneficially owned by Mr. Feldman, Mr.
Keiser, Mr. Kelleher, Dr. Zervas, and all directors and current executive
officers as a group include 45,000, 90,000, 5,000, 5,850, and 145,850
shares, respectively, that such person or group has the right to acquire
within 60 days of October 2, 1999, through the exercise of stock options.
Shares beneficially owned by Dr. Zervas and all directors and current
executive officers as a group include 4,797 shares allocated through
October 2, 1999, to Dr. Zervas's account maintained pursuant to
ThermoTrex's Deferred Compensation Plan for Directors. No director or named
executive officer beneficially owned more than 1% of the common stock of
ThermoTrex as of October 2, 1999; all directors and current executive
officers as a group beneficially owned less than 1% of the common stock of
ThermoTrex outstanding as of such date.
14
<PAGE>
(4) Shares of Thermo Electron common stock beneficially owned by Mr. Feldman,
Dr. Gyftopoulos, Mr. Keiser, Mr. Kelleher, and all directors and current
executive officers as a group include 124,920, 9,673, 243,334, 172,333, and
821,032 shares, respectively, that such person or group has the right to
acquire within 60 days of October 2, 1999, through the exercise of stock
options. Shares beneficially owned by Mr. Kelleher and all directors and
current executive officers as a group include 1,426 and 2,497 shares,
respectively, allocated through October 2, 1999, to their respective
accounts maintained pursuant to Thermo Electron's employee stock ownership
plan, of which the trustees, who have investment power over its assets,
were, as of October 2, 1999, executive officers of Thermo Electron. Shares
beneficially owned by Dr. Gyftopoulos and all directors and current
executive officers as a group include 1,020 shares allocated through
October 2, 1999, to Dr. Gyftopoulos' account maintained pursuant to Thermo
Electron's Deferred Compensation Plan for Directors. No director or named
executive officer beneficially owned more than 1% of Thermo Electron's
common stock outstanding as of such date; all directors and current
executive officers as a group beneficially owned less than 1% of the common
stock of Thermo Electron outstanding as of such date.
(5) Thermo Electron beneficially owned 85.99% of the Common Stock outstanding
as of October 2, 1999, of which 71.06 % is owned through ThermoTrex, a
majority-owned subsidiary of Thermo Electron. Shares beneficially owned by
Thermo Electron include 473,109 shares issuable upon conversion of
$8,225,000 principal amount of the company's 4 3/8% Convertible
Subordinated Debenture due in 2004. Thermo Electron's address is 81 Wyman
Street, Waltham, Massachusetts 02454-9046. As of October 2, 1999, Thermo
Electron, through ThermoTrex, had the power to elect all of the members of
the company's board of directors.
Item 13. Certain Relationships and Related Transactions
Thermo Electron has, from time to time, caused its subsidiaries to sell
minority interests to investors, resulting in several majority-owned, private
and publicly-held subsidiaries. Thermo Electron has created the company as a
majority-owned, publicly-held subsidiary. The company and such other
majority-owned Thermo Electron subsidiaries are hereinafter referred to as the
"Thermo Subsidiaries."
Thermo Electron and each of the Thermo Subsidiaries recognize that the
benefits and support that derive from their affiliation are essential elements
of their individual performance. Accordingly, Thermo Electron and each of the
Thermo Subsidiaries, including the company, have adopted the Thermo Electron
Corporate Charter to define the relationships and delineate the nature of such
cooperation among themselves. The purpose of the Charter is to ensure that (1)
all of the companies and their stockholders are treated consistently and fairly;
(2) the scope and nature of the cooperation among the companies, and each
company's responsibilities, are adequately defined; (3) each company has access
to the combined resources and financial, managerial, and technological strengths
of the others; and (4) Thermo Electron and the Thermo Subsidiaries, in the
aggregate, are able to obtain the most favorable terms from outside parties.
To achieve these ends, the Charter identifies the general principles to be
followed by the companies, addresses the role and responsibilities of the
management of each company, provides for the sharing of group resources by the
companies, and provides for centralized administrative, banking, and credit
services to be performed by Thermo Electron. The services provided by Thermo
Electron include collecting and managing cash generated by members, coordinating
the access of Thermo Electron and the Thermo Subsidiaries (the Thermo Group) to
external financing sources, ensuring compliance with external financial
covenants and internal financial policies, assisting in the formulation of
long-range planning, and providing other banking and credit services. Pursuant
to the Charter, Thermo Electron may also provide guarantees of debt or other
obligations of the Thermo Subsidiaries or may obtain external financing at the
parent level for the benefit of the Thermo Subsidiaries. In certain instances,
the Thermo Subsidiaries may provide credit support to, or on behalf of, the
consolidated entity or may obtain financing directly from external financing
sources. Under the Charter, Thermo Electron is responsible for determining that
the Thermo Group remains in compliance with all covenants imposed by external
financing sources, including covenants related to borrowings of Thermo Electron
or other members of the Thermo Group, and for apportioning such constraints
within the Thermo Group. In addition, Thermo Electron establishes certain
internal policies and procedures applicable to members of the Thermo Group. The
cost of the services provided by Thermo Electron to the Thermo Subsidiaries is
covered under existing corporate services agreements between Thermo Electron and
the Thermo Subsidiaries.
15
<PAGE>
The Charter currently provides that it shall continue in effect so long as
Thermo Electron and at least one Thermo Subsidiary participate. The Charter may
be amended at any time by agreement of the participants. Any Thermo Subsidiary,
including the company, can withdraw from participation in the Charter upon 30
days' prior notice. In addition, Thermo Electron may terminate a subsidiary's
participation in the Charter in the event the subsidiary ceases to be controlled
by Thermo Electron or ceases to comply with the Charter or the policies and
procedures applicable to the Thermo Group. A withdrawal from the Charter
automatically terminates the corporate services agreement and tax allocation
agreement (if any) in effect between the withdrawing company and Thermo
Electron. The withdrawal from participation does not terminate outstanding
commitments to third parties made by the withdrawing company, or by Thermo
Electron or other members of the Thermo Group, prior to the withdrawal. In
addition, a withdrawing company is required to continue to comply with all
policies and procedures applicable to the Thermo Group and to provide certain
administrative functions mandated by Thermo Electron so long as the withdrawing
company is controlled by or affiliated with Thermo Electron.
As provided in the Charter, the company and Thermo Electron have entered
into a Corporate Services Agreement under which Thermo Electron's corporate
staff provides certain administrative services, including certain legal advice
and services, risk management, employee benefit administration, tax advice and
preparation of tax returns, centralized cash management, and financial and other
services to the company. The company was assessed an annual fee equal to 0.8% of
the company's revenues for these services in fiscal 1999. The annual fee will
remain at 0.8% of the company's revenues for fiscal 2000. The fee is reviewed
annually and may be changed by mutual agreement of the company and Thermo
Electron. During fiscal 1999, Thermo Electron assessed the company $290,000 in
fees under the Services Agreement. Management believes that the charges under
the Services Agreement are reasonable and that the terms of the Services
Agreement are fair to the company. In fiscal 1999, the company was billed an
additional $87,000 by Thermo Electron for certain administrative services
required by the company that were not covered by the Services Agreement. The
Services Agreement automatically renews for successive one-year terms, unless
canceled by the company upon 30 days' prior notice. In addition, the Services
Agreement terminates automatically in the event the company ceases to be a
member of the Thermo Group or ceases to be a participant in the Charter. In the
event of a termination of the Services Agreement, the company will be required
to pay a termination fee equal to the fee that was paid by the company for
services under the Services Agreement for the nine-month period prior to
termination. Following termination, Thermo Electron may provide certain
administrative services on an as-requested basis by the company or as required
in order to meet the company's obligations under Thermo Electron's policies and
procedures. Thermo Electron will charge the company a fee equal to the market
rate for comparable services if such services are provided to the company
following termination.
The company has entered into a Tax Allocation Agreement with Thermo
Electron that outlines the terms under which the company will be included in
Thermo Electron's consolidated federal and state income tax returns. Under
current law, the company will be included in such tax returns so long as Thermo
Electron (and/or its 80% owned subsidiaries) owns 80% of the Common Stock. If
Thermo Electron's equity ownership of the company were to drop below 80%, the
company would file its own tax returns. The agreement provides that Thermo
Electron charges or pays the company amounts based on the company's relative
contribution to Thermo Electron's tax liability at the time that Thermo Electron
pays its tax liability or receives a tax benefit. Due to the tax losses incurred
by the company since June 1999 when the company became part of a consolidated
tax group with Thermo Electron, Thermo Electron will pay to the company with
respect to fiscal 1999, an amount equal to the tax benefit received by Thermo
Electron with respect to such tax losses.
As of October 2, 1999, Thermo Electron and its other subsidiaries owed the
company an aggregate of $486,000 for products and services and miscellaneous
items, net of amounts owed by the company to Thermo Electron and its other
subsidiaries for amounts due under the Corporate Services Agreement and related
administrative charges, for other products and services, and for miscellaneous
items excluding the debentures described below. The largest amount of such net
indebtedness owed by the company to Thermo Electron and its other subsidiaries
since October 3, 1998 was $4,038,000. These amounts do not bear interest and are
expected to be paid in the normal course of business.
16
<PAGE>
Gina Goodrich, former Vice President, Licensees, of the company resigned
in July 1999. In connection with her resignation, the company entered into a
separation agreement pursuant to which the company paid Ms. Goodrich $73,333 as
severance pay, and $3,569 for certain medical and dental benefits.
From time to time, the company may transact business with other companies
in the Thermo Group. In fiscal 1999, such transactions included the following:
In fiscal 1999, the company subleased office and research facilities from
ThermoTrex and was 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 $111,000 in fiscal 1999.
During fiscal 1999, the company purchased laser systems and components at
an aggregate cost of $3,414,000 from Trex Medical, a majority-owned subsidiary
of ThermoTrex.
As of October 2, 1999, the company owed Thermo Electron $8,225,000
principal amount, pursuant to a 4 3/8% subordinated convertible debenture due
2004, convertible into shares of the company's common stock at $17.385 per
share.
During fiscal 1999, the company purchased products totaling $169,000 from
Bird Products Corporation, a wholly owned subsidiary of Thermo Electron.
As of October 3, 1998, $51,246,000 of the company's cash equivalents were
invested in a repurchase agreement with Thermo Electron. Under this agreement,
the company in effect lent excess cash to Thermo Electron, which Thermo Electron
collateralized with investments principally consisting of corporate notes, U.S.
government agency securities, commercial paper, money market funds, and other
marketable securities, in the amount of at least 103% of such obligation. The
company's funds subject to the repurchase agreement were readily convertible
into cash by the company. The repurchase agreement earned a rate based on the
90-day Commercial Paper Composite Rate plus 25 basis points, set at the
beginning of each quarter. Effective June 1999, the company adopted a new cash
management arrangement with Thermo Electron, described below, that replaces the
repurchase agreement.
As of October 2, 1999, $15,387,000 of the company's cash equivalents were
invested in a cash management arrangement with Thermo Electron, which was
effective June 1999. Under the cash management arrangement, the company lends
its excess cash to Thermo Electron and has the contractual right to withdraw its
invested funds upon 30 days' prior notice. Thermo Electron is contractually
required to maintain cash, cash equivalents, and/or immediately available bank
lines of credit equal to at least 50% of all the funds invested under the
arrangement by all Thermo Electron subsidiaries other than wholly-owned
subsidiaries. The company's funds invested in the cash management arrangement
earn a rate equal to the 30-day Dealer Commercial Paper Rate as reported in The
Wall Street Journal plus 50 basis points, set at the beginning of each month.
Thermo Electron has announced a proposed reorganization involving certain
of Thermo Electron's subsidiaries, including the company. Under this plan, the
company would be merged into Thermo Electron. As a result, the company would
become a wholly owned subsidiary of Thermo Electron. In December 1999, the
boards of directors of the company and Thermo Electron approved a definitive
agreement and plan of merger pursuant to which Thermo Electron would acquire all
of the outstanding common stock, $.01 par value per share (Common Stock), held
by the shareholders of the company other than Thermo Electron and ThermoTrex in
exchange for shares of Thermo Electron's common stock (TMO Common Stock). The
company's board of directors approved the merger agreement based on a
recommendation of its special committee, which was charged with representing the
interests of the company's public shareholders.
17
<PAGE>
Under the agreement, the number of shares of TMO Common Stock to be issued
to the company's public shareholders will be determined at the completion of the
merger (the effective date), as described below.
(1) If the average closing price of TMO Common Stock is between $11.925 and
$17.887 for the 20 trading days prior to the effective date of the merger, a
preliminary exchange ratio of 0.158 shares of TMO Common Stock for each
share of Common Stock would be adjusted on the effective date by multiplying
0.158 by a fraction of which the numerator would be $14.906 (the average
per-share closing price of TMO Common Stock for the 20 trading days ended
December 13, 1999), and of which the denominator would be the average
per-share closing price of TMO Common Stock for the 20 trading days ending
on the day before the effective date.
(2) If the average closing price of TMO Common Stock for the 20 trading days
prior to the effective date is below $11.925, the exchange ratio would be
fixed at 0.198 shares of TMO Common Stock per share of Common Stock.
(3) If the average closing price of TMO Common Stock for the 20 trading days
prior to the effective date is above $17.887, the exchange ratio would be
fixed at 0.132 shares of TMO Common Stock per share of Common Stock.
In addition, under the agreement, units of the company (currently
consisting of one share of Common Stock coupled with the right to have the
company redeem that share for $20.25 in April 2001) would be modified so that,
following the merger, each unit would consist of a fractional share of TMO
Common Stock (in an amount determined using the exchange ratio described above),
which would be redeemable in April 2001 for $20.25. The cash value of the
redemption right would remain constant before and after the merger.
This proposal is subject to certain conditions including the completion of
review by the Securities and Exchange Commission of certain required filings
regarding the proposed transaction and listing on the New York Stock Exchange of
TMO Common Stock to be issued in connection with the merger.
18
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a, d) Financial Statements and Schedules
(1) The consolidated financial statements set forth in the list below
are filed as part of this Report.
(2) The consolidated financial statement schedule set forth in the list
below is filed as part of this Report.
(3) Exhibits filed herewith or incorporated 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 Comprehensive Income and Shareholders'
Investment
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Financial Statement Schedules filed herewith:
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or not
required, or because the required information is shown either in the
financial statements or in the notes thereto.
(b) Reports on Form 8-K
On December 17, 1999, the company filed a Current Report on Form 8-K
dated December 17, 1999, with respect to the execution of an Agreement
and Plan of Merger.
On July 12, 1999, the company filed a Current Report on Form 8-K dated
as of June 27, 1999, with respect to the disposition of the company's
spa business.
(c) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed by
the undersigned, thereunto duly authorized.
Date: December 23, 1999 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 23, 1999.
Signature Title
- --------- -----
By: /s/ Gerald Feldman President, Chief Executive Officer,
Gerald Feldman and Director
By: /s/ Theo Melas-Kyriazi Chief Financial Officer
Theo Melas-Kyriazi
By: /s/ Paul F. Kelleher Chief Accounting Officer and Director
Paul F. Kelleher
By: /s/ John T. Keiser Chairman of the Board and Director
John T. Keiser
By: /s/ Carliss Y. Baldwin Director
Carliss Y. Baldwin
By: /s/ I. MacAllister Booth Director
I. MacAllister Booth
By: /s/ Elias P. Gyftopoulos Director
Elias P. Gyftopoulos
By: /s/ Nicholas T. Zervas Director
Nicholas T. Zervas
20
<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, 1999 (except with respect to
the matter discussed in Note 14, as to which the date is December 16, 1999). Our
audits were made for the purpose of forming an opinion on those statements taken
as a whole. The schedule listed in Item 14 on page 19 is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states, in all material respects, the
consolidated financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
November 9, 1999
21
<PAGE>
SCHEDULE II
THERMOLASE CORPORATION
Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Description Balance at Provision Accounts Balance
Beginning Charged to Written at End
of Year Expense (a) Off of Year
- ----------------------------------- ------------- ---------- ----------- ---------- -------
Allowance for Doubtful Accounts
Year Ended October 2, 1999 $ 490 $ 1,891 $ (301) $ 2,080
Year Ended October 3, 1998 $ 402 $ 88 $ - $ 490
Year Ended September 27, 1997 $ 319 $ 83 $ - $ 402
Description Balance at Provision Activity Balance
Beginning Costs Charged to at End
of Year Charged to Reserve of Year
Expense (c)
- ------------------------------------------------- ---------- ----------- ---------- -------
Accrued Restructuring Costs (b)
Year Ended October 2, 1999 $ 5,153 $22,285 $(8,597) $ 18,841
Year Ended October 3, 1998 $ - $ 5,962 $ (809) $ 5,153
(a) Includes a provision of $1.7 million in fiscal 1999, recorded in connection
with certain restructuring actions as described in Note 13 to Consolidated
Financial Statements in the Registrant's Fiscal 1999 Annual Report to
Shareholders.
(b) The nature of activity in this account is described in Note 13 to
Consolidated Financial Statements in the Registrant's Fiscal 1999 Annual
Report to Shareholders.
(c) Excludes noncash charges of $2.9 million, primarily for the write-off of
leasehold improvements and related spa assets and $1.3 million for the
write-off of a joint venture in fiscal 1998. Excludes noncash charges of
$19.9 million for the loss on the sale of the spa business and $18.1
million, primarily for the write-off of leasehold improvements and equipment
in fiscal 1999.
22
<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, [File No. 1-13104] 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 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).
10.4 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).
10.5 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).
10.6 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.)
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.
23
<PAGE>
Exhibit
Number Description of Exhibit
10.7 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).
10.8 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).
10.9 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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, [File No. 1-13104] and incorporated herein
by reference).
10.14 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).
10.15 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).
10.16 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).
10.17 Agreement and Plan of Merger dated June 12, 1998, by and among
the Registrant, 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).
24
<PAGE>
Exhibit
Number Description of Exhibit
10.18 Master Cash Management, Guarantee Reimbursement, and Loan
Agreement dated as of June 1, 1999, between the Registrant and
Thermo Electron Corporation (filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
July 3, 1999 [File No. 1-13104] and incorporated herein by
reference).
10.19 Amended and Restated Directors Stock Option Plan of the
Registrant (filed as Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended July 3, 1999 [File
No. 1-13104] and incorporated herein by reference).
10.20 Amended and Restated Deferred Compensation Plan for Directors of
the Registrant (filed as Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended July 3, 1999
[File No. 1-13104] and incorporated herein by reference).
10.21 Amended and Restated Equity Incentive Plan of the Registrant
(filed as Exhibit 10.4 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended July 3, 1999 [File No.
1-13104] and incorporated herein by reference).
10.22 Amended and Restated Nonqualified Stock Option Plan of the
Registrant (filed as Exhibit 10.5 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended July 3, 1999
[File No. 1-13104] and incorporated herein by reference).
10.23 Tax Allocation Agreement by and between the Registrant and Thermo
Electron Corporation dated as of June 1, 1999.
10.24 Agreement between the Registrant and Gina Goodrich dated
July 16, 1999.
10.25 Agreement and Plan of Merger by and among the Registrant, Thermo
Electron Corporation, and ThermoLase Acquisition Corporation
dated as of December 14, 1999 (filed as Exhibit 2.1 to the
Registrant's Current Report on Form 8-K filed December 17, 1999
[File No. 1-13104] and incorporated herein by reference).
13 Annual Report to Shareholders for the fiscal year ended October
2, 1999 (only those portions incorporated herein by reference).
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
</TABLE>
TAX ALLOCATION AGREEMENT
---------------------------
THIS AGREEMENT is made as of June 1, 1999 between Thermo Electron
Corporation, a Delaware corporation ("Thermo Electron"), and ThermoLase
Corporation, a Delaware corporation ("ThermoLase").
Preliminary Statement
-----------------------
Thermo Electron is the parent of an affiliated group of corporations
(including ThermoLase) within the meaning of Section 1504(a) of the Internal
Revenue Code of 1986, as amended (the "Code").
Thermo Electron owns more than 80% of the issued and outstanding shares
of voting common stock of ThermoLase, including the units of common stock
coupled with a right to redeem such stock in April 2001, the only stock that
ThermoLase is authorized to issue. ThermoLase is required to file consolidated
federal income tax returns with Thermo Electron.
Thermo Electron is the common parent of an affiliated group of
corporations and ThermoLase recognizes that any one of them that sustains a net
operating loss or otherwise generates beneficial tax attributes for a taxable
period may be deprived of such benefits when offset in that or other periods
against income or tax liabilities of the others.
By this Agreement, the parties desire to set forth the understanding
they have reached with respect to the filing of the consolidated United States
federal and state income tax returns. Foreign tax returns are not subject to
this Agreement.
Agreements
-------------------
IT IS MUTUALLY agreed by the parties hereto as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 The term "Thermo Electron Group" means the group of corporations of
which Thermo Electron is common parent and with which Thermo Electron files a
consolidated federal income tax return, excluding ThermoLase and subsidiaries of
ThermoLase that may exist now or in the future. For purposes of this Agreement,
the Thermo Electron Group shall be treated as a single corporate entity. The
Thermo Electron Group and ThermoLase and its subsidiaries, respectively, are
sometimes herein referred to collectively as the "Companies," and each of the
Companies is referred to herein as a "Company."
1.2 The paragraph titles used herein are for convenience of reference
only and will not be considered in the interpretation or construction of any of
the provisions hereof. Words may be construed in the singular or the plural as
the context requires.
1
<PAGE>
2. TAX RETURNS.
2.1 FEDERAL TAX RETURNS. Thermo Electron as the common parent will
prepare and file or cause to be prepared and filed federal income tax returns on
a consolidated basis, for the Thermo Electron Group and ThermoLase and its
subsidiaries for all fiscal periods as to which a consolidated return is
appropriate in accordance with the terms of this Agreement. ThermoLase will
reimburse Thermo Electron for its portion of the tax. Such reimbursement will be
the tax ThermoLase would have paid on a separate return basis.
2.2 STATE TAX RETURNS. Thermo Electron as the common parent will
prepare and file or cause to be filed state income tax returns on a combined,
consolidated, or unitary basis, or using any other allowable method that Thermo
Electron believes will result in a lower overall tax liability to the Companies.
ThermoLase will reimburse Thermo Electron for its portion of the tax. Such
reimbursement will be the tax ThermoLase would have paid on a separate return
basis, but only if it was required to file a return in that state.
3. TIME OF PAYMENT OF FEDERAL TAX OBLIGATIONS TO OR BY THERMO ELECTRON.
The obligations of the Companies for Federal income tax payments will be
determined and paid as follows:
(a) Not later than the 15th day after the end of the fourth, sixth,
ninth and twelfth months of each consolidated taxable year of Thermo Electron,
Thermo Electron will make a reasonable determination (consistent with the
provisions of Section 6655 of the Code) of the separate federal income tax
liability that ThermoLase would be required to pay as estimated payments on a
separate return basis for that period. ThermoLase shall pay to Thermo Electron
the amount of such liability within ten days after receipt of notification of
such determination.
(b) After the end of Thermo Electron's fiscal year and before the 15th
day of the fourth month thereafter, ThermoLase will promptly pay to Thermo
Electron the entire amounts estimated to be due and payable under ThermoLase's
federal income tax return as if filed on a separate return basis, less all
amounts previously paid with respect to that year pursuant to subparagraph (a)
of this Paragraph 3.
(c) If upon the filing of the consolidated income tax return, a revised
calculation is made in the manner set forth in subparagraph (b) of this
Paragraph 3, and it is determined that ThermoLase has paid to Thermo Electron
with respect to the consolidated taxable year an amount greater than that
required by Paragraph 3(b), then that excess will be promptly paid by Thermo
Electron to ThermoLase or applied against the next estimated tax due; and if it
is determined that ThermoLase has paid an amount that is less than that
required, then ThermoLase will promptly pay such deficiency to Thermo Electron.
4. TAX OBLIGATIONS OF THERMO ELECTRON. Thermo Electron will pay the
consolidated tax liabilities of the Companies arising from filing a consolidated
federal income tax return.
5. PAYMENT OF FUNDS BY THERMO ELECTRON. If in any year the Companies
incur a loss, Thermo Electron shall pay to ThermoLase a sum equal to the amount
of benefit realized by Thermo Electron that is attributable to the tax loss
incurred by ThermoLase. Payments due to
2
<PAGE>
ThermoLase from Thermo Electron under this section shall be made promptly
following the realization and receipt of such tax benefits by Thermo Electron.
6. CHANGES IN PRIOR YEAR'S TAX LIABILITIES. In the event that the
consolidated tax liability or the separate tax liability referred to in
Paragraphs 3 and 5 hereof for any year for which a consolidated tax return for
the Companies was filed is increased or decreased by reason of filing an amended
return or returns (including carry-back claims), or by reason of the examination
of the returns by the Internal Revenue Service, the amounts due Thermo Electron
for payment of taxes under Paragraph 3 hereof, and the amount to be paid under
Paragraph 5 hereof for each such year will be recomputed by Thermo Electron to
reflect the adjustments to taxable income and tax credits for the taxable year
and interest or penalties, if any. In accordance with those recomputations,
additional sums will be paid by ThermoLase to Thermo Electron or paid by Thermo
Electron to ThermoLase regardless of whether a member has become a Departing
Member (as defined in Paragraph 8 hereof) subsequent to the taxable year of
recomputation.
7. NEW MEMBERS. ThermoLase agrees that if, subsequent to the execution
of this Agreement, Thermo Electron becomes the parent, as that term is used in
Section 1504 of the Code, of one or more subsidiary corporations, in addition to
ThermoLase, then each newly acquired subsidiary corporation may become a
separate party to this Agreement by consenting in writing to be bound by its
provisions, effective immediately upon its delivery to Thermo Electron, but the
income, deductions and tax credits of the newly acquired subsidiary corporations
will first be included in the consolidated federal income tax return as required
by the Code.
8. DEPARTING MEMBERS.
8.1 The term "Departing Member," as used herein, will mean a Company
that is no longer permitted under the Code to be included in the consolidated
federal income tax return.
8.2 In applying this Agreement to a Departing Member for the final
taxable year in which its income, deductions, and tax credits are required to be
included in the consolidated federal income tax return: (i) the amount required
to be paid by a Departing Member under the provisions of Paragraph 3 hereof and
(ii) the amount that the Departing Member is entitled to receive under the
provisions of Paragraph 5 hereof, will be determined by taking into account the
income, deductions and tax credits of the Departing Member only for the
fractional part of such year as the Departing Member was a member of the
consolidated group and included in the consolidated federal income tax return.
8.3. After the filing of the consolidated federal income tax return for
the last taxable year that the Departing Member was included therein, the
Departing Member will be informed of the amount of consolidated carry-overs as
of the end of the taxable year or period which are attributable to the Departing
Member, as provided by Treasury Regulations Section 1.1502-79 or otherwise,
including the agreement of the parties.
9. DETERMINATION OF SUMS DUE FROM AND PAYABLE TO MEMBERS. Thermo
Electron will determine the sums due from and payable to ThermoLase under the
provisions of this Agreement
3
<PAGE>
(including the determination for purposes of Paragraph 6 hereof). ThermoLase
agrees to provide Thermo Electron with such information as may reasonably be
necessary to make these determinations. Issues arising in the course of the
determinations that are not expressly provided for in this Agreement will be
resolved in an equitable manner.
10. TAX CONTROVERSIES. If a consolidated federal income tax return for
any taxable year during which this Agreement is in effect is examined by the
Internal Revenue Service, the examination, as well as any other matters relating
to that tax return, including any tax litigation, will be handled solely by
Thermo Electron. ThermoLase will cooperate with Thermo Electron and to this end
will execute protests, petitions, and any other documents as Thermo Electron
determines to be necessary or appropriate. The cost and expense of Thermo
Electron's handling of a tax controversy, including legal and accounting fees,
will be allocated to and paid by the Company to which the tax controversy
relates. If the tax controversy relates to both Thermo Electron and ThermoLase,
the cost and expense will be allocated between Thermo Electron and ThermoLase in
the proportion that such Company's potential additional tax liability bears to
the total potential additional tax liability of the Companies (determined in
accordance with Paragraph 6 hereof and assuming that the tax controversy is
resolved in favor of the Internal Revenue Service) for the taxable year in
issue. If the tax controversy encompasses more than one taxable year, Thermo
Electron will first allocate the cost and expense to each taxable year in the
proportion that the potential additional tax liability for each taxable year
bears to the total potential additional tax liability for the taxable years in
issue.
11. EFFECTIVE DATE. This Agreement shall be effective beginning as of
the date of this Agreement, and will continue on a year-to-year basis thereafter
with respect to ThermoLase for so long as ThermoLase is permitted to file a
consolidated federal income tax return with Thermo Electron.
12. STATE TAXES. ThermoLase will jointly file any state tax return
using a combined, consolidated, unitary, or other allowable method that Thermo
Electron determines results in a lower overall tax liability to the Companies.
In the event that said state tax returns shall be filed, the provisions of
sections 1 through 11 hereof shall apply, mutatis mutandis (the necessary
changes being made) to the allocation, preparation, filing and payment related
to such state taxes and tax returns.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers as of the date first above written.
THERMO ELECTRON CORPORATION THERMOLASE CORPORATION
By: s/Theo Melas-Kyriazi By: s/Gerald Feldman
------------------------------ --------------------------
Name: Theo Melas-Kyriazi Name: Gerald Feldman
Title: Chief Financial Officer Title: President and CEO
4
PERSONAL and CONFIDENTIAL
- -------------------------
July 16, 1999
Gina Goodrich
9060 Pamunkey River Farms Dr.
Mechanicsville, VA 23111
Re: Separation of Employment
Dear Gina:
This letter confirms our agreements regarding your separation as an
officer and an employee of ThermoLase Corporation (the "Company") as a result of
the restructuring of the Company's SoftLight Division, as well as your continued
employment by the Company through July 31, 1999 (the "Termination Date").
1. TERMINATION OF EMPLOYMENT. You agree to resign as an officer and
employee of the Company as of the Termination Date.
2. You agree to return all company property, including, but not limited
to: all company files, customer files, credit cards, pager, computer equipment,
fax machine, etc.
3. SEVERANCE PAY. The Company will pay you Seventy-Three Thousand Three
Hundred Thirty Three and 33/100 Dollars ($73,333.33) as severance pay on the
eighth day after your written acceptance of the terms set forth in this letter
if you have not rescinded your acceptance within seven days after your execution
of this letter.
4. ACCRUED VACATION. You will be paid for any accrued vacation through
the Termination Date.
5. MEDICAL AND DENTAL INSURANCE. Your medical and dental insurance
coverage will cease on the Termination Date. You may elect to continue your
medical and dental coverage through COBRA for up to 18 months. The Company will
pay you $3,568.80 which is the current cost of COBRA coverage for eight months
for Employee +1 for medical and dental insurance in the state of Florida. This
will be paid when the other severance payment is made. You will be responsible
for all medical and dental coverage beginning on the Termination Date. Be aware
that failure to pay
<PAGE>
premiums when due will terminate your coverage and it will not be reinstated. A
COBRA package containing all of the guidelines and election forms will be mailed
to your home from the COBRA administrators within seven days after you are no
longer actively employed with ThermoLase Corporation. FAILURE TO RETURN THE
PROVIDED ELECTION FORM WITHIN THE SPECIFIED PERIOD WILL RESULT IN LOSS OF
BENEFITS.
6. LONG TERM DISABILITY. Long term disability insurance coverage will
terminate effective as of the Termination Date.
7. LIFE INSURANCE. Your life insurance coverage will continue until the
Termination Date. You may convert your insurance to an individual policy. If
interested please contact the Company's Human Resources Department for
information. You must contact a Prudential agent within 31 days after your life
insurance coverage ends to initiate a conversion.
8. MONEY MATCH PLUS. If you participate in the Money Match Plus program
and wish to receive a distribution of the funds held in your account, please
contact the Company's Human Resources Department. Information will be provided
as to various election options available.
9. EMPLOYEE STOCK PURCHASE PROGRAM. If you participate in the Employee
Stock Purchase Program you may make a withdrawal. The Company's Human Resources
Department will provide you with information.
10. STOCK OPTIONS. Your stock options in the Company shall cease
vesting on the Termination Date, and no further lapsing of repurchase rights
will occur. You will then have 90 days to exercise your vested options. If you
do not exercise your vested options by the specified deadline, your options will
be canceled, and you will have no further rights with respect to your options.
11. RELEASE. In consideration for the severance pay described in
paragraph 2 of this letter, you hereby release and discharge the Company and its
affiliates and each of their respective current, former, or future officers,
director, employees, agents, representatives, and legal predecessors, and
successors from all claims, liabilities and causes of action whether known or
unknown, which you have, may have, or claim to have against any of them,
including without limitation those based upon or arising out of your decision to
accept the Company's employment offer, your employment with the Company, the
termination of your employment and other relationships with the Company, your
service as an officer or director of the Company and any of the Company's
policies, procedures or requirements, and your status as a shareholder or holder
of stock options of the Company. This release includes, without limitations, any
and all claims for breach of contract or implied contract, breach of the
covenant of good faith and fair dealing, inducement of breach, wrongful or
unlawful discharge, violation of public policy, retaliation, intentional or
negligent infliction of emotional distress, intentional or negligent
misrepresentation, failure to pay wages, bonuses, benefits, or other
compensation of any sort (other than compensation, benefits, and other payments
as
2
<PAGE>
set forth in this letter), defamation, negligence, discrimination on the basis
of race, color, sex, national origin, religion, age, disability, medical
condition or marital status, sexual or any other form of harassment and/or
violation of any statutes, rules, regulations, or ordinances, including but not
limited to Title VII of the Civil Rights Act of 1964 as amended by the Civil
Rights Act of 1991, the Age Discrimination in Employment Act of 1967, as amended
by the Older Workers Benefits Protection Act of 1990, the Americans with
Disabilities Act, and the California Fair Employment and Housing Act.
You represent and warrant that neither you nor anyone on your behalf
has assigned or subrogated any such rights, claims and causes of action or
authorized any other person or entity to assert such claim or claims on your
behalf, and you agree to indemnify and hold the Company harmless against any
assignments of such rights, claims, and/or causes of action.
You acknowledge that you have read and understand the significance of
Section 1542 of the Civil Code of the State of California, which states as
follows:
A general release does not extend to claims, which the creditor does
not know or suspect to exist in his favor at the time of executing the release,
which if known by him must have materially affected his settlement with the
debtor.
You hereby waive any right, which you have under Section 1542, or any
similar law of any other jurisdiction, to the full extent that you may lawfully
waive such rights pertaining to this release.
You further acknowledge that you have been advised that you could have
twenty-one (21) days to consider the terms set forth in this letter and that you
were informed that you have the right to consult with counsel regarding this
letter. To the extent that you have taken less than twenty-one (21) days to
consider this letter, you acknowledge that you have had sufficient time to
consider the terms set forth in this letter and to consult with counsel and that
you do not desire additional time to do so.
Your agreement to the terms set forth in this letter is revocable by
you for a period of seven (7) days following your execution of this letter. The
revocation must be in writing, must specifically revoke your agreement to the
terms set forth in this letter, and must be received by the President of the
Company at the Company's offices prior to the eighth day following your
execution of this letter. The terms set forth in this letter become effective,
enforceable and irrevocable on the eighth day following your execution of this
letter.
12. SEVERABILITY. If one or more provisions of this letter are held to
be unenforceable under applicable law, such provision shall be excluded from the
terms of this letter and replaced with a provision which is enforceable and
comes closest to the intent of the parties underlying the unenforceable
provision.
13. VOLUNTARY AGREEMENT. In signing this letter, you give the Company
assurance that you have signed it voluntarily and with a full understanding of
3
<PAGE>
its terms and that you have had sufficient opportunity to consider this letter
and to consult with anyone of your choosing before signing it.
YOU UNDERSTAND THAT YOU HAVE BEEN ADVISED TO SEEK THE ADVICE OF AN
ATTORNEY, IF YOU SO CHOOSE, PRIOR TO SIGNING THIS RELEASE AND THAT, TO THE
EXTENT DESCRIBED HEREIN, YOU ARE GIVING UP ANY LEGAL CLAIMS YOU HAVE AGAINST THE
COMPANY AND ITS AFFILIATES, AND EACH OF THEIR RESPECTIVE, CURRENT, FORMER OR
FUTURE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, REPRESENTATIVES, LEGAL
PREDICESSORS, AND SUCCESSORS BY SIGNING THIS RELEASE.
If the terms of this letter are acceptable to you, please sign and
return it to the undersigned.
THERMOLASE CORPORATION
By: /s/Richard Weitzel
---------------------
Name: Richard Weitzel
Title: Vice President
Accepted and Agreed to:
/s/ Gina Goodrich
- -----------------
Gina Goodrich
Date: 7/20/99
4
<PAGE>
Exhibit 13
ThermoLase Corporation
Consolidated Financial Statements
Fiscal Year 1999
<PAGE>
<TABLE>
<CAPTION>
ThermoLase Corporation 1999 Financial Statements
Consolidated Statement of Operations
Year Ended
-----------------------------------------
<S> <C> <C> <C>
(In thousands except per share amounts) October 2, October 3, September 27,
1999 1998 1997
- ----------------------------------------------------------- --------------- --------------- --------------
Revenues (Note 12)
Product revenues $ 26,059 $ 22,765 $ 24,196
Service revenues 10,196 17,326 21,037
-------- -------- --------
36,255 40,091 45,233
-------- -------- --------
Costs and Operating Expenses:
Cost of product revenues (Note 13) 20,590 15,590 16,499
Cost of service revenues 24,010 22,285 19,628
Selling, general, and administrative 16,083 22,306 22,972
expenses (Notes 8 and 13)
Research and development expenses 1,519 3,028 5,704
Restructuring and nonrecurring costs (Note 13) 60,326 10,155 -
-------- -------- --------
122,528 73,364 64,803
-------- -------- --------
Operating Loss (86,273) (33,273) (19,570)
Interest Income 2,061 4,512 2,110
Interest Expense (includes $290 and $39 to (5,361) (5,343) (637)
related party in fiscal 1999 and 1998; Note 9)
Equity in Losses of Joint Ventures (Note 4) (200) (1,203) (700)
Other Expense (Note 13) (3,399) - -
-------- -------- --------
Loss Before Income Taxes (93,172) (35,307) (18,797)
Income Tax (Provision) Benefit (Note 7) (159) (5,879) 6,392
-------- -------- --------
Net Loss $(93,331) $(41,186) $(12,405)
======== ======== ========
Basic and Diluted Loss per Share $ (2.37) $ (1.07) $ (.31)
======== ======== ========
Basic and Diluted Weighted Average Shares 39,340 38,528 40,075
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
ThermoLase Corporation 1999 Financial Statements
Consolidated Balance Sheet
<S> <C> <C>
October 2, October 3,
(In thousands) 1999 1998
- ------------------------------------------------------------------------------ ------------- -------------
Assets
Current Assets:
Cash and cash equivalents (includes $51,246 under $ 1,358 $ 52,831
repurchase agreement with affiliated company in fiscal
1998)
Advance to affiliate 15,387 -
Available-for-sale investments, at quoted market value - 3,072
(amortized cost of $3,072; Note 2)
Accounts receivable, less allowances of $2,080 and $490 (Note 13) 3,959 4,339
Inventories 4,374 6,825
Other current assets (Note 13) 4,000 -
Prepaid expenses 85 698
Due from parent company and affiliated companies 486 -
--------- ----------
29,649 67,765
--------- ----------
Property, Plant, and Equipment, at Cost, Net (Note 13) 2,889 43,430
--------- ----------
Other Assets (Note 13) 5,817 7,531
--------- ----------
Cost in Excess of Net Assets of Acquired Companies (Notes 3 and 13) 7,623 15,489
--------- ----------
$ 45,978 $ 134,215
========= ==========
3
<PAGE>
ThermoLase Corporation 1999 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) October 2, October 3,
1999 1998
- ------------------------------------------------------------------------------ ------------- -------------
Liabilities and Shareholders' Investment
Current Liabilities:
Accounts payable $ 932 $ 3,221
Accrued payroll and employee benefits 741 1,633
Accrued restructuring costs (Note 13) 18,841 5,153
Other accrued expenses 3,973 5,961
Due to parent company and affiliated companies - 3,200
--------- ----------
24,487 19,168
--------- ----------
Long-term Obligations:
4 3/8% Subordinated Convertible Debentures (includes $8,225 and 115,000 115,000
$4,500 of related-party debt; Note 9)
Other - 66
--------- ----------
115,000 115,066
--------- ----------
Deferred Lease Liability 195 1,172
--------- ----------
Common Stock Subject to Redemption (Note 1) 40,500 40,500
--------- ----------
Commitments and Contingencies (Notes 8 and 10)
Shareholders' Investment (Notes 5 and 6):
Common stock, $.01 par value, 100,000,000 shares authorized; 408 408
40,829,132 shares issued
Capital in excess of par value 36,360 36,279
Accumulated deficit (150,438) (57,107)
Treasury stock at cost, 1,481,136 and 1,531,025 shares (20,534) (21,271)
--------- ----------
(134,204) (41,691)
--------- ----------
$ 45,978 $ 134,215
========= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
ThermoLase Corporation 1999 Financial Statements
Consolidated Statement of Cash Flows
Year Ended
-----------------------------------------
<S> <C> <C> <C>
October 2, October 3, September 27,
(In thousands) 1999 1998 1997
- ----------------------------------------------------------- --------------- --------------- --------------
Operating Activities
Net loss $(93,331) $(41,186) $(12,405)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 6,015 7,234 4,345
Provision for losses on accounts receivable (Note 13) 1,891 88 83
Decrease (increase) in prepaid income taxes - 5,567 (6,236)
Increase in deferred lease liability 62 71 885
Equity in losses of joint ventures (Note 4) 200 1,203 700
Noncash restructuring costs (Note 13) 37,238 4,193 -
Other noncash items 5,325 - -
Changes in current accounts, excluding the
effects of acquisition and sale of spas:
Accounts receivable (1,716) 1,275 (1,374)
Inventories 363 (3,450) 1,021
Other current assets (272) 1,158 (714)
Accounts payable (2,150) (2,426) (16)
Other current liabilities 11,224 1,804 3,767
-------- -------- --------
Net cash used in operating activities (35,151) (24,469) (9,944)
-------- -------- --------
Investing Activities
Acquisition, net of cash acquired (Note 3) - (4,180) -
Advances to affiliate, net (15,387) - -
Purchases of available-for-sale investments - (4,000) (10,400)
Proceeds from maturities of available-for-sale 3,072 13,400 41,500
investments
Purchases of property, plant, and equipment (5,134) (4,513) (26,807)
Increase in other assets (250) (983) (1,144)
Advance under a note receivable from related - (1,667) -
party
Other 1,297 230 -
-------- -------- --------
Net cash provided by (used in) $(16,402) $ (1,713) $ 3,149
investing activities
-------- -------- --------
5
<PAGE>
ThermoLase Corporation 1999 Financial Statements
Consolidated Statement of Cash Flows (continued)
Year Ended
-----------------------------------------
(In thousands) October 2, October 3, September 27,
1999 1998 1997
- ----------------------------------------------------------- --------------- --------------- --------------
Financing Activities
Net proceeds from issuance of subordinated $ - $ - $112,551
convertible debentures (Note 9)
Purchases of Company common stock - (8,806) (26,072)
Net proceeds from issuance of Company common stock 123 776 625
and sale of put options
Payment of withholding taxes related to stock (25) (792) (891)
option exercises
Net proceeds from common stock exchange offer - - 502
(Notes 1 and 5)
Other (18) (8) -
-------- -------- --------
Net cash provided by (used in) 80 (8,830) 86,715
financing activities
-------- -------- --------
Increase (Decrease) in Cash and Cash Equivalents (51,473) (35,012) 79,920
Cash and Cash Equivalents at Beginning of Year 52,831 87,843 7,923
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 1,358 $ 52,831 $ 87,843
======== ======== ========
Cash Paid For
Income taxes $ - $ - $ 70
Interest $ 5,037 $ 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 - (7,975) -
company
-------- -------- --------
Liabilities assumed of acquired company $ - $ 4,973 $ -
======== ======== ========
Exchange of common stock for common stock subject $ - $ - $ 40,500
to redemption (Notes 1 and 5) ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
ThermoLase Corporation 1999 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment
Year Ended
------------------------------------------
(In thousands) October 2, October 3, September 27,
1999 1998 1997
- ----------------------------------------------------------- --------------- --------------- --------------
Comprehensive Income
Net Loss $ (93,331) $ (41,186) $ (12,405)
Other Comprehensive Items:
Net unrealized gain on available-for-sale investments - 10 37
--------- --------- ---------
$ (93,331) $ (41,176) $ (12,368)
========= ========= =========
Shareholders' Investment
Common Stock, $.01 Par Value:
Balance at beginning and end of year $ 408 $ 408 $ 408
--------- --------- ---------
Capital in Excess of Par Value:
Balance at beginning of year 36,279 46,379 85,813
Activity under employees' and directors' stock plans (639) (3,986) (2,969)
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 - - 294
Due from affiliated company for tax benefit utilized 720 - -
(Note 7)
--------- --------- ---------
Balance at end of year 36,360 36,279 46,379
--------- --------- ---------
Accumulated Deficit:
Balance at beginning of year (57,107) (15,921) (3,516)
Net loss (93,331) (41,186) (12,405)
--------- --------- ---------
Balance at end of year (150,438) (57,107) (15,921)
--------- --------- ---------
Treasury Stock:
Balance at beginning of year (21,271) (30,523) (3,621)
Activity under employees' and directors' stock plans 737 3,969 2,409
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 (20,534) (21,271) (30,523)
--------- --------- ---------
Accumulated Other Comprehensive Items:
Balance at beginning of year - (10) (47)
Other comprehensive items - 10 37
--------- --------- ---------
Balance at end of year - - (10)
--------- --------- ---------
$(134,204) $ (41,691) $ 333
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
ThermoLase Corporation 1999 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
ThermoLase Corporation (the Company) operates in two business segments:
Hair-removal and Related Activities (Hair Removal) and Health and Beauty
Products. The Company's Hair Removal segment 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 has marketed the SoftLight hair-removal
and the SoftLight Laser Peel skin-resurfacing services through its day spa
locations through June 1999, and through a network of independent doctors who
paid the Company a per-procedure or minimum royalty and/or a flat periodic fee,
as well as internationally through joint ventures and other licensing
arrangements. The Company also has offered licensees the opportunity to purchase
or lease SoftLight lasers in lieu of paying ongoing licensing fees. During
fiscal 1999, the Company began the process of terminating its
physician-licensing program, and terminated or renegotiated the terms of its
licensing arrangements in various countries following a decision to
substantially exit the hair-removal business (Note 13).
In June 1998, the Company acquired The Greenhouse Spa, Inc. (Note 3), a
luxury, destination spa located in Texas. In connection with this acquisition,
the Company converted its domestic Spa Thira locations into facilities that were
operated under The Greenhouse Spa name. The Company provided hair-removal and
skin-resurfacing services as well as more traditional day spa services, such as
massages and facials, through its Greenhouse day spas, prior to their sale in
June 1999 (Note 13).
The Company's Creative Beauty Innovations, Inc. (CBI) subsidiary
represents the Health and Beauty Products segment, which manufactures and
markets skin-care, bath, and body products and markets dietary supplements.
Relationship with ThermoTrex Corporation and Thermo Electron Corporation
The Company was incorporated in January 1993 as a wholly owned subsidiary
of ThermoTrex Corporation. As of October 2, 1999, ThermoTrex owned 27,960,996
shares of the Company's common stock, representing 71% of such stock
outstanding. ThermoTrex is an 80%-owned subsidiary of Thermo Electron
Corporation. As of October 2, 1999, Thermo Electron owned 5,473,935 shares of
the Company's common stock, representing 14% of such stock outstanding.
Thermo Electron has announced a proposed reorganization involving certain
of Thermo Electron's subsidiaries, including the Company. Under this plan, the
Company would be merged into Thermo Electron. As a result, the Company would
become a wholly owned subsidiary of Thermo Electron (Note 14).
Principles of Consolidation
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 1999, 1998, and 1997 are for the years ended
October 2, 1999, October 3, 1998, and September 27, 1997, respectively. Fiscal
1999 and 1997 each included 52 weeks; fiscal 1998 included 53 weeks.
8
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Revenue Recognition
The Company generally recognizes product revenues upon shipment of its
products. Prior to the Company exiting the spa business in June 1999 (Note 13),
the Company offered a variety of treatment plans for its spa-based services,
which included one-time services and multiple treatment plans that provided
varying numbers of treatments or treatment periods. The Company recognized
revenue from the one-time treatment plan upon performance of the related
service. Revenues from multiple treatment plans were recognized over the
anticipated treatment period, which was six months in each period based upon the
average service pattern for customers treated.
The Company earned an initial technology licensing fee and ongoing
royalties from licensing its SoftLight technology to a network of independent
physicians. Initial nonrefundable technology licensing fees were recorded as
revenue at the time the technology was transferred to the practitioner.
Royalties arising from hair-removal and skin-resurfacing procedures performed by
these physicians were recognized when such procedures were performed.
During fiscal 1998, the Company initiated the process of modifying the
terms of its physician-licensing program under which per-procedure royalties
were reduced or eliminated and a minimum royalty and/or flat periodic fee was
required. Minimum royalties and flat fees were recognized monthly. During fiscal
1999, the Company began to terminate its physician-licensing program and by the
end of calendar 1999 will no longer earn monthly royalties from licensees.
The Company earned an initial technology licensing fee and ongoing
technology licensing royalties from its international arrangements. Initial
nonrefundable technology licensing fees were recorded as revenue at the time the
technology was transferred. Ongoing technology licensing royalties were recorded
when earned in accordance with contractual terms. The accompanying statement of
operations includes international licensing fees of $724,000, $2,760,000, and
$4,195,000 in fiscal 1999, 1998, and 1997, respectively. During fiscal 1999, the
Company terminated or renegotiated the terms of its licensing arrangements in
various countries (Note 13).
Pre-opening Spa Costs
The Company expensed all pre-opening costs associated with the
establishment and startup of its former 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 shareholders' investment.
Income Taxes
The Company was required to file its own federal income tax returns for
fiscal 1997 and 1998 because ThermoTrex's and Thermo Electron's equity ownership
in the Company was below 80%. Effective in the second quarter of fiscal 1999,
ThermoTrex's and Thermo Electron's equity ownership of the Company exceeded 80%.
As a result, the Company and ThermoTrex will be included in Thermo Electron's
consolidated tax return as provided for under a tax allocation agreement between
the Company and Thermo Electron. This agreement provides that Thermo Electron
charges or pays the Company amounts based on the Company's relative contribution
to Thermo Electron's tax liability.
9
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
In accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," the Company recognizes deferred income taxes
based on the expected future tax consequences of differences between the
financial statement basis and the tax basis of assets and liabilities calculated
using enacted tax rates in effect for the year in which the differences are
expected to be reflected in the tax return, subject to determination of the need
for a valuation allowance for any deferred tax assets (Note 7).
Loss per Share
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. Options to purchase 2,031,000, 2,672,000, and 2,912,000
shares of common stock were not included in the computation of diluted loss per
share for fiscal 1999, 1998, and 1997, respectively, due to the Company's net
loss position in each period. In addition, the computation of diluted loss per
share for each period excludes the effect of assuming the conversion of the
Company's $115,000,000 principal amount of 4 3/8% subordinated convertible
debentures, convertible at $17.385 per share, due to the Company's net loss
position.
Cash and Cash Equivalents
At fiscal year-end 1998, $51,246,000 of the Company's cash equivalents
were invested in a repurchase agreement with Thermo Electron. Under this
agreement, the Company in effect lent excess cash to Thermo Electron, which
Thermo Electron collateralized with investments principally consisting of
corporate notes, U.S. government-agency securities, commercial paper, money
market funds, and other marketable securities, in the amount of at least 103% of
such obligation. The Company's funds subject to the repurchase agreement were
readily convertible into cash by the Company. The repurchase agreement earned a
rate based on the 90-day Commercial Paper Composite Rate plus 25 basis points,
set at the beginning of each quarter. Effective June 1999, the Company adopted a
new cash management arrangement with Thermo Electron, described below, that
replaces the repurchase agreement.
Advance to Affiliate
Effective June 1999, the Company and Thermo Electron commenced use of a
new domestic cash management arrangement. Under the new arrangement, amounts
advanced to Thermo Electron by the Company for domestic cash management purposes
bear interest at the 30-day Dealer Commercial Paper Rate plus 50 basis points,
set at the beginning of each month. Thermo Electron is contractually required to
maintain cash, cash equivalents, and/or immediately available bank lines of
credit equal to at least 50% of all funds invested under this cash management
arrangement by all Thermo Electron subsidiaries other than wholly owned
subsidiaries. The Company has the contractual right to withdraw its funds
invested in the cash management arrangement upon 30 days' prior notice. Amounts
invested in this arrangement are included in "advance to affiliate" in the
accompanying balance sheet.
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out
basis) or market value and include materials, labor, and manufacturing overhead.
The components of inventories are as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1999 1998
- -------------------------------------------------------------------------------- ------ ------
Raw Materials and Supplies $3,240 $2,771
Work in Process 384 759
Finished Goods 750 3,295
------ ------
$4,374 $6,825
====== ======
10
<PAGE>
ThermoLase Corporation 1999 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
The Company periodically reviews the quantities of inventories on hand and
compares these amounts to expected usage of each particular product or product
line. The Company records as a charge to cost of product revenues any amounts
required to reduce the carrying value of inventories to net realizable value.
Property, Plant, and Equipment
The costs of additions and improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. The Company provides for
depreciation and amortization using the straight-line method over the estimated
useful lives of the property as follows: building, 40 years; machinery and
equipment, 5 to 10 years; and leasehold improvements, the shorter of the term of
the lease or the life of the asset. Property, plant, and equipment consists of
the following:
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ------- -------
Land $ - $ 730
Building - 7,494
Machinery and Equipment 4,554 30,773
Leasehold Improvements 1,450 15,709
------- -------
6,004 54,706
Less: Accumulated Depreciation and Amortization 3,115 11,276
------- -------
$ 2,889 $43,430
======= =======
Other Assets
Other assets includes the long-term portion of a note receivable recorded
at its estimated fair value (Note 13). Other assets also include a cost method
investment in a private company that was written down to its estimated
realizable value in fiscal 1999 (Note 13) and deferred debt expense, which is
amortized over the term of the debt.
Cost in Excess of Net Assets of Acquired Companies
The excess of cost over the fair value of net assets of the acquired
companies is amortized using the straight-line method over 40 years. Accumulated
amortization was $1,367,000 and $1,187,000 at fiscal year-end 1999 and 1998,
respectively. The Company assesses the future useful life of this asset whenever
events or changes in circumstances indicate that the current useful life has
diminished. The Company considers the future undiscounted cash flows of the
acquired businesses in assessing the recoverability of this asset. If impairment
has occurred, any excess of carrying value over fair value is recorded as a
loss. At October 2, 1999, this asset relates to the Company's CBI subsidiary.
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
11
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
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.
During fiscal 1999, Thermo Electron purchased 1,620,000 of the Company's
units in the open market.
Comprehensive Income
During the first quarter of fiscal 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This pronouncement sets forth requirements for
disclosure of the Company's comprehensive income and accumulated other
comprehensive items. In general, comprehensive income combines net income (loss)
and "other comprehensive items," which prior to fiscal 1999 represented
unrealized net of tax gains and losses on available-for-sale investments.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
As discussed in Note 13, during fiscal 1999, the Company recorded
significant restructuring and related costs associated with its Hair Removal
segment. These amounts include management's best estimate of the exit costs
associated with this business. It is reasonably possible that the amounts that
the Company will ultimately expend could differ materially in the near term from
the amounts recorded in the accompanying financial statements. The Company's
estimates will be affected principally by the amount of future sublease income
from its leased facilities and the result of any negotiations to settle the
lease obligations.
Presentation
Certain amounts in fiscal 1998 and 1997 have been reclassified to conform
to the presentation in the fiscal 1999 financial statements.
2. Available-for-sale Investments
The Company's debt securities are considered available-for-sale
investments in the accompanying fiscal 1998 balance sheet, are carried at market
value and represent investments in government-agency securities in which the
cost approximated market value.
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 operated a luxury, destination spa in Arlington, Texas.
The acquisition was 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 through the date of sale. The cost of
this acquisition exceeded the estimated fair value of the acquired net assets by
$7,686,000, which was being amortized over 40 years. 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.
In connection with certain restructuring activities, the Company sold The
Greenhouse Spa in June 1999 (Note 13).
12
<PAGE>
4. Joint Ventures
The Company entered into joint venture arrangements to market its
SoftLight system internationally. The Company currently has two joint venture
arrangements in which it holds a 46% and 50% stake. Amounts advanced under such
arrangements totaled $2,650,000 in fiscal 1998 and $1,144,000 in fiscal 1997. No
amounts were advanced in fiscal 1999. As of October 2, 1999, the Company had no
material obligation for further funding of such arrangements. The accompanying
fiscal 1999, 1998, and 1997 statement of operations includes $200,000,
$1,203,000, and $700,000, respectively, of equity in losses of joint ventures,
reflecting the Company's share of losses from joint venture operations. During
fiscal 1998, the Company liquidated its joint venture relating to the SoftLight
system in France and in fiscal 1999 terminated or renegotiated the terms of its
remaining joint venture arrangements (Note 13). The costs associated with these
actions are included in restructuring and nonrecurring costs in the accompanying
statement of operations.
5. Common Stock
Exchange Offer
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).
Reserved Shares
At October 2, 1999, the Company had reserved 9,799,000 unissued shares of
its common stock for possible issuance under stock-based compensation plans and
possible issuance upon conversion of its subordinated convertible debentures.
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 permit the grant of nonqualified and
incentive stock options. Two other plans 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. As of fiscal
year-end 1999, only nonqualified stock options have been awarded under these
plans. The option recipients and the terms of options granted under these plans
are determined by the Board Committee. Generally, options granted to date are
exercisable immediately, but are subject to certain transfer restrictions and
the right of the Company to repurchase shares issued upon exercise of the
options at the exercise price, upon certain events. The restrictions and
repurchase rights generally lapse ratably over a one to ten year period after
the first anniversary of the grant date, depending on the term of the option,
which generally ranges from five to twelve years. Nonqualified stock options may
be granted at any price determined by the Board Committee, although incentive
stock options must be granted at not less than the fair market value of the
Company's stock on the date of grant. To date, 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.
13
<PAGE>
6. Employee Benefit Plans (continued)
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 per share
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, which are
included in the fiscal 1999 grants in the table below. The other terms of the
new options are the same as the exchanged options except that the holders may
not sell shares pursuant to such new options for six months from the exchange
date. The options exchanged were canceled by the Company.
A summary of the Company's stock option activity is as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1999 1998 1997
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Price Price
Number Number Number
of of of
(Shares in thousands) Shares Shares Shares
- ---------------------------------------------- -------- ---------- -------- ---------- --------- ---------
Options Outstanding, Beginning of Year 2,492 $ 7.57 2,888 $ 8.72 2,820 $ 7.50
Granted 321 4.46 972 7.51 341 14.97
Exercised (54) 2.24 (358) 2.12 (173) 1.91
Forfeited (534) 11.88 (1,010) 12.74 (100) 7.33
Canceled due to exchange (465) 13.62 - - - -
----- ----- ------
Options Outstanding, End of Year 1,760 $ 4.26 2,492 $ 7.56 2,888 $ 8.72
===== ====== ===== ====== ====== ======
Options Exercisable 1,760 $ 4.26 2,492 $ 7.56 2,888 $ 8.72
===== ====== ===== ====== ====== ======
Options Available for Grant 1,225 548 410
===== ===== ======
</TABLE>
A summary of the status of the Company's stock options at October 2, 1999,
is as follows:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
-----------------------------------------------------
<S> <C> <C> <C>
Number Weighted Weighted
of Average Average
Shares Remaining Exercise
Range of Exercise Prices (In thousands) Contractual Life Price
- ------------------------------------------------ ----------------- ------------------- -------------------
$ 1.75 - $ 8.66 1,672 4.3 years $ 3.52
8.67 - 15.57 23 6.3 years 12.57
15.58 - 22.47 30 4.4 years 16.29
22.48 - 29.38 35 7.9 years 23.93
-----
$ 1.75 - $29.38 1,760 4.4 years $ 4.26
=====
14
<PAGE>
6. Employee Benefit Plans (continued)
Employee Stock Purchase Program
Substantially all of the Company's full-time employees are eligible to
participate in an employee stock purchase program sponsored by the Company and
Thermo Electron. Under this program, shares of the Company's and Thermo
Electron's common stock may be purchased at 85% of the lower of the fair market
value at the beginning or end of the plan year, and the shares purchased are
subject to a one-year resale restriction. Prior to November 1, 1998, the
applicable shares of common stock could be purchased at the end of a 12-month
period at 95% of the fair market value at the beginning of the period, and the
shares purchased were subject to a six-month 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:
(In thousands except per share amounts) 1999 1998 1997
- --------------------------------------------------------------------- --------- --------- ---------
Net Loss:
As reported $(93,331) $(41,186) $(12,405)
Pro forma (93,873) (41,910) (12,848)
Basic and Diluted Loss per Share:
As reported (2.37) (1.07) (.31)
Pro forma (2.39) (1.09) (.32)
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 $2.31,
$3.84, and $8.34 in fiscal 1999, 1998, and 1997, respectively. The fair value of
each option grant was estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
1999 1998 1997
- --------------------------------------------------------------------- --------- --------- ---------
Volatility 52% 51% 50%
Risk-free Interest Rate 4.8% 5.6% 6.3%
Expected Life of Options 5.3 years 5.1 years 6.1 years
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the input of highly
subjective assumptions including expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
15
<PAGE>
6. Employee Benefit Plans (continued)
401(k) Savings Plan
The majority of the Company's full-time employees are eligible to
participate in Thermo Electron's 401(k) savings plan. Contributions to the
401(k) savings plan are made by both the employee and the Company. Company
contributions are based upon the level of employee contributions. The Company
contributed and charged to expense for this plan $182,000, $220,000, and
$207,000 in fiscal 1999, 1998, and 1997, respectively.
7. Income Taxes
The components of the income tax (provision) benefit are as follows:
(In thousands) 1999 1998 1997
- ----------------------------------------------------------------------- ----------- ----------- ----------
Currently Payable:
Federal $ - $ - $ -
State (159) - (27)
------- ------- -------
(159) - (27)
------- ------- -------
Prepaid (Deferred):
Federal - (5,879) 6,226
State - - 193
------- ------- -------
- (5,879) 6,419
------- ------- -------
$ (159) $(5,879) $ 6,392
======= ======= =======
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) 1999 1998 1997
- ----------------------------------------------------------------------- ----------- ----------- ----------
Income Tax (Provision) Benefit at Statutory Rate $ 31,678 $ 12,004 $ 6,391
Differences Resulting From:
State income taxes, net of federal tax (159) - 110
Nondeductible expenses (161) (120) (109)
Increase in valuation allowance (31,517) (17,763) -
-------- -------- --------
$ (159) $ (5,879) $ 6,392
======== ======== ========
16
<PAGE>
7. Income Taxes (continued)
Prepaid income taxes in the accompanying balance sheet consists of the
following:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1999 1998
- ---------------------------------------------------------------------------------- ------------ ----------
Prepaid Income Taxes:
Net operating loss carryforward $39,897 $19,634
Inventory basis differences 1,251 409
Accruals and other reserves 8,294 2,598
Accrued compensation 262 280
Fixed assets 753 (3,609)
Other, net 883 511
------- -------
51,340 19,823
Less: Valuation allowance 51,340 19,823
------- -------
$ - $ -
======= =======
The valuation allowance relates primarily to loss carryforwards. During
fiscal 1998, the Company established a valuation allowance totaling $5,879,000
for previously benefited loss carryforwards. The Company took this action as a
result of increased operating losses, uncertainty concerning its ability to
successfully convert its existing spas to Greenhouse day spas (Note 1), and
resulting uncertainty concerning realization of the tax asset. Based on these
factors, the Company concluded in fiscal 1998 that it was more likely than not
that the tax benefit from the Company's loss carryforwards would not be
realized. As of October 2, 1999, the Company had federal tax net operating loss
carryforwards of approximately $114,000,000 that will begin to expire in fiscal
2009.
As of June 1999, ThermoTrex's and Thermo Electron's combined equity
ownership of the Company increased to greater than 80%, and as a result, the
Company and ThermoTrex will be included in Thermo Electron's consolidated
federal income tax return for periods thereafter. The majority of the existing
tax loss carryforwards of the Company were generated at a time when it was not
in a consolidated tax group with Thermo Electron. The Company's ability to
obtain a benefit for such tax loss carryforwards is dependent on the level of
its future taxable income. Tax losses incurred by the Company after it became
part of a consolidated tax group with Thermo Electron in June 1999 may be usable
by Thermo Electron under certain circumstances, and the Company will be paid
by Thermo Electron for the use of such tax losses pusuant to a tax allocation
agreement with Thermo Electron. Such payments are reflected as contributions to
shareholders' investment. As of October 2, 1999, the Company has recorded a
receivable of $720,000 from Thermo Electron for the tax benefit resulting from
approximately $2,000,000 of losses generated by the Company subsequent to being
included in the Thermo Electron consolidated tax group.
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 the Company's revenues. For these services, the Company
was charged $290,000, $348,000, and $452,000 in fiscal 1999, 1998, and 1997,
respectively. The fee is reviewed and adjusted annually by mutual agreement of
the parties. Management believes that the service fee charged by Thermo Electron
is reasonable and that such fees are representative of the expenses the Company
would have incurred on a stand-alone basis. The corporate services agreement is
renewed annually but can be terminated upon 30 days' prior notice by the Company
or upon the Company's withdrawal from the Thermo Electron Corporate Charter (the
Thermo Electron Corporate Charter defines the 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.
17
<PAGE>
ThermoLase Corporation 1999 Financial Statements
Notes to Consolidated Financial Statements
8. Related-party Transactions (continued)
Other Related-party Services
ThermoTrex provided personnel administration, accounting, data processing,
and general administrative management services to the Company, and charged the
Company based on actual usage. This agreement was terminated during fiscal 1997
and services are no longer being provided. The Company was charged $144,000 for
these services in fiscal 1997.
Operating Leases
Through the third quarter of fiscal 1999, the Company subleased office and
research facilities from ThermoTrex and was 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 $111,000, $306,000, and $296,000 in
fiscal 1999, 1998, and 1997, respectively.
Laser Manufacturing Arrangement
During fiscal 1999, 1998, and 1997, the Company purchased laser systems
and components at an aggregate cost of $3,414,000, $2,902,000, and $11,390,000,
respectively, from Trex Medical Corporation, a majority-owned subsidiary of
ThermoTrex.
Other Related-party Purchases
During fiscal 1999 and 1998, the Company purchased products totaling
$169,000 and $241,000, respectively, from Bird Products Corporation, a wholly
owned subsidiary of Thermo Electron.
Subordinated Convertible Debentures
See Note 9 for subordinated convertible debentures of the Company that are
held by Thermo Electron.
Cash Management
The Company invests excess cash in arrangements with Thermo Electron as
discussed in Note 1.
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 (Note
14). 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.
Thermo Electron purchased $3,725,000 and $4,500,000 principal amount of such
debentures in the open market in fiscal 1999 and 1998, respectively.
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 $4,436,000, $4,867,000, and $3,806,000 in fiscal 1999,
1998, and 1997, respectively. Future minimum payments due under noncancellable
operating leases as of October 2, 1999, are $2,954,000 in fiscal 2000;
$2,976,000 in fiscal 2001; $3,019,000 in fiscal 2002; $3,080,000 in fiscal 2003;
$2,751,000 in fiscal 2004; and $9,816,000 in fiscal 2005 and thereafter. Total
future minimum lease payments are $24,596,000, of
18
<PAGE>
10. Commitments and Contingencies (continued)
which $21,798,000 relates to lease payments for the spas that have been closed
and sold, for which the Company will be responsible in the event that the buyer
of the Greenhouse day spas does not continue to sublease these facilities. This
amount, net of assumed sublease income, is included in accrued restructuring
costs in the accompanying fiscal 1999 balance sheet (Note 13).
Technology License Agreement
In February 1993, the Company entered into an irrevocable exclusive
technology license agreement for the use of the laser-based hair-removal system
technology. Under the terms of the agreement, the Company will pay a royalty
equal to 0.25% of the revenues recorded from the sale or use of the laser-based
hair-removal system through February 10, 2010. No material amounts have been
incurred under this agreement.
Contingencies
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.
11. Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, advance to affiliate, available-for-sale investments, accounts
receivable, accounts payable, due to/from 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,
advance to affiliate, accounts receivable, accounts payable, and amounts due
to/from 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 fiscal 1998 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 $90,850,000 and $95,519,000 at October 2, 1999, and
October 3, 1998, respectively. The fair value is less than the carrying amount
in both periods, primarily due to a decrease in the market price of the
Company's 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 $34,750,000 and $30,750,000 at October 2, 1999,
and October 3, 1998, respectively.
12. Business Segment Information
The Company organizes and manages its businesses by individual functional
operating entity. The Company's businesses operate in two segments: Hair-removal
and Related Activities (Hair Removal) and Health and Beauty Products.
The Company's Hair Removal segment has marketed its SoftLight hair-removal
and SoftLight Laser Peel skin-resurfacing services through a network of
independent doctors as well as internationally through joint ventures and other
licensing arrangements. The Company also has offered licensees the opportunity
to purchase or lease SoftLight lasers in lieu of paying ongoing licensing fees.
Prior to the sale of the Greenhouse spas in June 1999 (Note 13), the
19
<PAGE>
12. Business Segment Information (continued)
Company provided hair-removal and skin-resurfacing services as well as more
traditional day spa services, such as massages and facials, through its spa
locations. During fiscal 1999, the Company began the process of terminating its
physician-licensing program, and terminated or renegotiated the terms of its
joint ventures and licensing arrangements in various countries.
The Company's CBI subsidiary represents the Health and Beauty Products
segment, which manufactures and markets skin-care, bath, and body products and
markets dietary supplements.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------- ---------- ---------- --------
Revenues:
Hair Removal $ 13,159 $ 17,326 $ 21,037
Health and Beauty Products 23,096 22,765 24,196
--------- -------- ---------
$ 36,255 $ 40,091 $ 45,233
========= ======== =========
Loss Before Income Taxes:
Hair Removal (a) $ (79,866) $(31,267) $ (19,383)
Health and Beauty Products (b) (5,820) (1,612) 604
Corporate (c) (587) (394) (791)
--------- -------- ---------
Total operating loss (86,273) (33,273) (19,570)
Interest and other income (expense), net (6,899) (2,034) 773
--------- -------- ---------
$ (93,172) $(35,307) $ (18,797)
========= ======== =========
Total Assets:
Hair Removal (a) $ 9,106 $ 53,299 $ 46,478
Health and Beauty Products (b) 18,948 21,719 18,347
Corporate (d) 17,924 59,197 109,770
--------- -------- ---------
$ 45,978 $134,215 $ 174,595
========= ======== =========
Depreciation and Amortization:
Hair Removal $ 4,636 $ 6,055 $ 3,481
Health and Beauty Products 1,056 906 829
Corporate 323 273 35
--------- -------- ---------
$ 6,015 $ 7,234 $ 4,345
========= ======== =========
Capital Expenditures:
Hair Removal $ 4,301 $ 3,437 $ 26,156
Health and Beauty Products 833 1,076 651
--------- -------- ---------
$ 5,134 $ 4,513 $ 26,807
========= ======== =========
(a) Reflects restructuring and related costs of $64.3 million and $10.2 million
in fiscal 1999 and 1998, respectively, and the sale of spas in fiscal 1999.
(b) Reflects restructuring and related costs of $3.4 million in fiscal 1999.
(c) Primarily general and administrative expenses.
(d) Primarily cash and cash equivalents and advance to affiliate.
20
<PAGE>
13. Restructuring and Related Costs and Sale of Spas
Restructuring and Related Costs
During fiscal 1998, the Company initiated certain restructuring
activities, including the announced closure of three domestic spas and the
termination of a joint venture that operated its spa in France following
unsuccessful efforts to reduce significant operating losses at these facilities.
Two of the domestic spas were closed during the first quarter of fiscal 1999.
The Company closed the third spa, as well as two additional spas, in the third
quarter of fiscal 1999. Also during fiscal 1999, the Company sold its remaining
nine day spas, as well as the stock in its destination spa, The Greenhouse Spa,
Inc., following a determination that the Company would be unable to operate
these facilities profitably. In connection with the sale and closures announced
in fiscal 1999, as well as other actions, the Company recorded restructuring and
related costs of $67.7 million, including restructuring costs of $60.3 million,
an investment write-down of $3.4 million, inventory provisions of $2.3 million,
and provisions for uncollectible accounts receivable of $1.7 million. The
restructuring costs include a $19.9 million loss on the sale of the spa
business, discussed below; $17.4 million for the write-off of leasehold
improvements and equipment, primarily pertaining to the hair-removal business;
$11.7 million for ongoing lease obligations, net of assumed sublease income;
$10.0 million of estimated costs to terminate certain other obligations related
to the Company's hair-removal business (primarily payments to licensees and
joint venture partners to sever relationships and terminate all existing
arrangements); $0.4 million for losses on laser purchase commitments; $0.3
million for the write-down of investments in international joint ventures; and
$0.4 million for other related charges. The fiscal 1999 restructuring charges
are net of a reduction of $1.2 million in the cost of the fiscal 1998
restructuring plan, principally due to the favorable resolution of certain lease
obligations. In addition, fiscal 1999 restructuring costs include $0.2 million
of severance costs for 26 employees across all functions, 23 of whom were
terminated during fiscal 1999. The fiscal 1999 restructuring actions commenced
in June 1999, and are expected to be substantially completed by the middle of
calendar 2000.
Provisions for severance and leases were accounted for in accordance with
Emerging Issues Task Force Pronouncement No. 94-3. In the accompanying statement
of operations, the inventory provisions are included in cost of product
revenues, the provisions for uncollectible accounts receivable are included in
selling, general, and administrative expenses, and the investment write-down is
included in other expense. The inventory provisions were for certain branded
product lines at the Company's CBI subsidiary that have been discontinued and
the investment write-down was to reduce the carrying value of the Company's
investment in a privately held company to its estimated realizable value. The
accounts receivable write-down resulted principally from certain international
receivables that the Company deems uncollectible due to the decision to cease
international operations and, to a lesser extent, from the bankruptcy of a
retail chain customer of CBI.
During fiscal 1998, the Company's Hair Removal segment recorded
restructuring costs of $10.2 million. These costs consist of $4.6 million
related to the closure of three domestic Spa Thira locations, including $2.4
million for the write-off of leasehold improvements and related spa assets and
$2.2 million primarily for abandoned-facility payments, net of assumed sublease
income. In addition, in connection with the closure of its spa in France, which
operated under a joint venture agreement, the Company recorded costs of $3.6
million, including payments of $2.3 million to third parties to liquidate the
joint venture and $1.3 million to write off its remaining investment.
Restructuring costs also include $1.9 million related to certain actions
including the relocation of the Company's corporate office to its CBI subsidiary
in Carrollton, Texas. This amount primarily represents severance of $1.1 million
for 40 terminated employees and the write-off of fixed assets no longer of use.
The fiscal 1998 restructuring actions commenced in June 1998, and were completed
during the first quarter of fiscal 2000. The fiscal 1998 restructuring plan was
completed for $1.2 million less than had been accrued, primarily as a result of
a favorable settlement of certain lease obligations. The
21
<PAGE>
13. Restructuring and Related Costs and Sale of Spas (continued)
charges recorded by the Company in fiscal 1999 and 1998 were substantially
noncash except for amounts recorded as accrued restructuring costs. A summary of
activity in accrued restructuring costs is as follows:
</TABLE>
<TABLE>
<CAPTION>
Hair Removal Segment
-----------------------------------------------------
<S> <C> <C> <C> <C>
Abandonment Other Exit
of Excess Obligations
(In thousands) Severance Facilities Total
- ----------------------------------------------- -------------- -------------- -------------- -------------
Fiscal 1998 Restructuring Plan
Provision charged to expense in fiscal 1998 (a) $ 1,169 $ 2,399 $ 2,394 $ 5,962
Fiscal 1998 usage (757) - (52) (809)
------- ------- ------- -------
Balance at October 3, 1998 412 2,399 2,342 5,153
Fiscal 1999 usage (412) (1,258) (2,216) (3,886)
Transfer to fiscal 1999 restructuring - (1,141) (76) (1,217)
plan principally due to favorable
resolution of lease obligations
------- ------- ------- -------
Balance at October 2, 1999 $ - $ - $ 50 $ 50
======= ======= ======= =======
Fiscal 1999 Restructuring Plan
Transfer from fiscal 1998 restructuring $ - $ 1,141 $ 76 $ 1,217
plan principally due to favorable
resolution of lease obligations
Provision charged to expense in fiscal 1999 (b) 157 11,728 10,400 22,285
Fiscal 1999 usage (58) (1,870) (2,783) (4,711)
------- ------- ------- -------
Balance at October 2, 1999 $ 99 $10,999 $ 7,693 $18,791
======= ======= ======= =======
(a) Excludes noncash restructuring charges at the Hair Removal segment of $2.9
million, primarily for the write-off of leasehold improvements and related
spa assets and $1.3 million for the write-off of its remaining investment in
the joint venture in France.
(b) Excludes noncash restructuring charges at the Hair Removal segment of $19.9
million for the loss on the sale of the spa business, $17.3 million for the
write-off of leasehold improvements and equipment, and $0.3 million for the
write-down of investments in international joint ventures. Excludes noncash
charges at the Health and Beauty Products segment of $0.1 million for the
write-off of equipment no longer in use and $0.4 million for other related
charges.
Of the total restructuring costs accrued as of October 2, 1999, the
Company expects to pay $0.5 million during the remainder of calendar 1999, $9.5
million in calendar 2000, and $8.8 million in calendar 2001 and thereafter
through the expiration of various leases in fiscal 2014. The timing of these
cash payments will be affected by the terms of any subleases or settlement
arrangements with landlords.
22
<PAGE>
13. Restructuring and Related Costs and Sale of Spas (continued)
Sale of Spas
In June 1999, the Company sold the stock of its destination spa, The
Greenhouse Spa, Inc., and the assets, subject to certain liabilities, of its
domestic day spas to companies in which the former president of its day spa
division has a controlling interest. The aggregate sales price of $12.5 million
consists of two promissory notes that bear interest at 10% and are due in June
2000, subject to a six-month extension period that is contingent upon, among
other conditions, payment of $4.0 million of the outstanding balance on the
promissory note relating to the sale of The Greenhouse Spa, Inc. Accordingly, in
the accompanying fiscal 1999 balance sheet, the $4.0 million current portion of
the notes receivable is included in other current assets and the balance, which
has been recorded at its estimated fair value, is classified as long-term, and
is included in other assets. The Company recorded a loss of $19.9 million on the
sale of the spa business during fiscal 1999. Unaudited revenues and operating
losses before restructuring costs of the spa business were $9.0 million and
$19.3 million, respectively, in fiscal 1999.
14. Proposed Reorganization
Thermo Electron has announced a proposed reorganization involving certain
of Thermo Electron's subsidiaries, including the Company. Under this plan, the
Company would be merged into Thermo Electron. As a result, the Company would
become a wholly owned subsidiary of Thermo Electron. The public shareholders of
the Company would receive common stock in Thermo Electron in exchange for their
shares. In December 1999, the boards of directors of the Company and Thermo
Electron approved a definitive agreement and plan of merger pursuant to which
Thermo Electron would acquire all of the outstanding shares of Company common
stock held by shareholders other than Thermo Electron and ThermoTrex in exchange
for shares of Thermo Electron's common stock (TMO common stock). The Company's
board of directors approved the merger agreement based on a recommendation of
its special committee, which was charged with representing the interests of the
Company's public shareholders.
Under the agreement, the number of shares of TMO common stock to be issued
to the Company's public shareholders will be determined at the completion of the
merger (the effective date), as described below.
(1) If the average closing price of TMO common stock is between $11.925 and
$17.887 for the 20 trading days prior to the effective date of the merger, a
preliminary exchange ratio of 0.158 shares of TMO common stock for each
share of Company common stock would be adjusted on the effective date by
multiplying 0.158 by a fraction of which the numerator would be $14.906 (the
average per-share closing price of TMO common stock for the 20 trading days
ended December 13, 1999), and of which the denominator would be the average
per-share closing price of TMO common stock for the 20 trading days ending
on the day before the effective date.
(2) If the average closing price of TMO common stock for the 20 trading days
prior to the effective date is below $11.925, the exchange ratio would be
fixed at 0.198 shares of TMO common stock per share of Company common stock.
(3) If the average closing price of TMO common stock for the 20 trading days
prior to the effective date is above $17.887, the exchange ratio would be
fixed at 0.132 shares of TMO common stock per share of Company common stock.
In addition, under the agreement, units of the Company (currently
consisting of one share of Company common stock coupled with the right to have
the Company redeem that share for $20.25 in April 2001) would be modified so
that, following the merger, each unit would consist of a fractional share of TMO
common stock (in an amount determined using the exchange ratio described above),
which would be redeemable in April 2001 for $20.25. The cash value of the
redemption right would remain constant before and after the merger.
This proposal is subject to certain conditions including the completion of
review by the Securities and Exchange Commission of certain required filings
regarding the proposed transaction and listing on the New York Stock Exchange of
TMO common stock to be issued in connection with the merger.
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14. Proposed Reorganization (continued)
In October 1999, the American Stock Exchange (the Exchange) notified the
Company that if the Company did not have a definitive agreement to merge with
Thermo Electron by December 15, 1999, the Exchange would request a meeting to
discuss its intent to proceed with delisting the Company's shares from the
Exchange due to a possible failure to meet listing requirements. Holders of the
Company's subordinated convertible debentures would be entitled to have their
debentures redeemed by the Company if the Company's shares are neither listed
for trading on a United States national securities exchange nor approved for
trading on an established automated over-the-counter trading market in the
United States. As a result of the agreement to merge with Thermo Electron,
described above, the Company expects that its shares will continue to be listed
through the completion of the merger transaction. Accordingly, the Company has
classified the debentures as long-term in the accompanying fiscal 1999 balance
sheet.
15. Unaudited Quarterly Information
(In thousands except per share amounts)
1999 First Second Third (a) Fourth
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Revenues $ 9,546 $ 9,815 $11,024 $ 5,870
Gross Profit (1,844) (2,060) (5,432) 991
Net Loss (8,104) (7,033) (76,044) (2,150)
Basic and Diluted Loss per Share (.21) (.18) (1.93) (.06)
1998 First Second Third Fourth (b)
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
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)
(a) Reflects restructuring and related costs of $67.7 million and the sale of
spas.
(b) Reflects restructuring costs of $10.2 million and the establishment of
a tax valuation allowance.
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ThermoLase Corporation 1999 Financial Statements
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 2, 1999, and October 3, 1998, and
the related consolidated statements of operations, cash flows, and comprehensive
income and shareholders' investment for each of the three years in the period
ended October 2, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ThermoLase
Corporation and subsidiaries as of October 2, 1999, and October 3, 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended October 2, 1999, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
November 9, 1999 (except with respect to the matter
discussed in Note 14, as to which the date is December 16, 1999)
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ThermoLase Corporation 1999 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed immediately after this Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the heading "Forward-looking Statements."
Overview
The Company's businesses operate in two segments: Hair-removal and Related
Activities (Hair Removal) and Health and Beauty Products. The Company's Hair
Removal segment 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, known as
the SoftLight Laser Peel, using the same laser as the Company's hair-removal
system.
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.
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 modified the terms and conditions
offered to licensees. Under the terms of the modified licenses, per-procedure
royalties were reduced or eliminated and a minimum royalty and/or flat periodic
fee requirement was introduced. In fiscal 1999, the Company began offering
licensees the opportunity to purchase or lease SoftLight lasers in lieu of
paying ongoing license fees.
Beginning in January 1996, the Company sought to market the SoftLight
system internationally through joint ventures and other licensing arrangements.
In connection with its June 1998 acquisition of The Greenhouse Spa, Inc.,
a full-service, luxury, destination spa (Note 3), the Company converted 11
domestic Spa Thiras to Greenhouse day spas. In addition to hair-removal and
skin-resurfacing services, these facilities offered more traditional day-spa
services, such as massages and facials. Following conversion of the facilities
to Greenhouse day spas, significant losses continued and, during fiscal 1998,
the Company initiated certain restructuring actions, including the announced
closure of three of its domestic day spas and the termination of a joint venture
that operated its spa in France. The Company closed two of the domestic day spas
in November 1998 and the third spa, as well as two additional spas, were closed
in the third quarter of fiscal 1999. In May 1999, the Company announced
additional plans to undertake a broad-scale restructuring of its business. As
part of the restructuring plan, the Company decided to exit the spa business
and, as a result, sold The Greenhouse Spa, Inc., located in Arlington, Texas,
and the remaining nine Greenhouse day spas. In addition, the Company has begun
the process of terminating the physician-licensing program and has terminated or
renegotiated the terms of its international joint venture arrangements as well
as discontinuing certain branded product lines at the Company's Creative Beauty
Innovations, Inc. (CBI) subsidiary (Note 13). The Company expects to complete
its restructuring plan by the middle of calendar 2000.
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Overview (continued)
The Company's CBI subsidiary represents the Health and Beauty Products
segment, which manufactures and markets skin-care, bath, and body products and
markets dietary supplements. This business represents the Company's principal
operations following the sale of the spas and the termination of various
licensing agreements.
Results of Operations
Fiscal 1999 Compared With Fiscal 1998
Revenues were $36.3 million and $40.1 million in fiscal 1999 and 1998,
respectively. The Company's Hair Removal segment earned service revenues of
$10.2 million in fiscal 1999, compared with $17.3 million in fiscal 1998. Spa
revenues decreased in fiscal 1999 primarily due to the sale and closure of the
Company's Greenhouse day spas during the year (Note 13), as well as lower demand
and price reductions at the Company's spas while they were in operation.
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.
During fiscal 1999, the Company began to terminate its licensing program, and by
the end of calendar 1999 will no longer earn monthly royalties from licensees.
International revenues decreased due to a decline in minimum guaranteed payments
recorded upon granting technology rights under international licensing
arrangements. During fiscal 1999, the Company terminated or renegotiated the
terms of its international licensing arrangements. These decreases in revenues
were offset in part by an increase in revenues of $2.2 million from The
Greenhouse Spa, Inc., acquired in June 1998 (Note 3). In June 1999, the Company
sold The Greenhouse Spa, Inc. (Note 13).
The Company earned product revenues of $26.1 million in fiscal 1999,
compared with $22.8 million in fiscal 1998. Product revenues include sales at
the Health and Beauty Products segment, and in the fiscal 1999 period, beauty
product sales at the Company's spas and lasers sold in international and
domestic markets by the Company's Hair Removal segment. Product revenues at the
Hair Removal segment increased due to the introduction of sales of SoftLight
lasers in fiscal 1999, as well as an increase in sales of beauty products at the
spas. As a result of the sale of the spa business in June 1999 (Note 13), the
Company no longer sells its beauty products at the spas. Product revenues at the
Health and Beauty Products segment increased to $23.1 million in fiscal 1999
from $22.8 million in fiscal 1998, primarily due to increased demand for its
custom products.
The gross profit margin was negative 23% in fiscal 1999 compared with a
gross profit margin of 6% in fiscal 1998. The Company's service revenues had a
negative gross profit of $13.8 million in fiscal 1999, compared with a negative
gross profit of $5.0 million in fiscal 1998. This decrease in gross profit was
primarily due to increased overhead costs as a result of the assembly of a
management team to oversee the spa operations prior to the Company's decision to
sell the spa business and increased spa-specific marketing and advertising
expenses related to the Company's conversion of its existing spas to Greenhouse
day spas prior to their sale. To a lesser extent, the gross profit margin
decreased due to a reduction in higher-margin minimum guaranteed payments
relating to international licensing arrangements and initial sign-up fees
relating to the licensing program. The Company's product revenues had a gross
profit margin of 21% in fiscal 1999 compared with 32% in fiscal 1998, primarily
due to the write-off of inventory related to exiting certain branded product
lines (Note 13) and, to a lesser extent, changes in product mix.
Selling, general, and administrative expenses decreased to $16.1 million
in fiscal 1999 from $22.3 million in fiscal 1998, primarily due to ongoing cost
reduction efforts implemented by the Company during the second half of fiscal
1998. These efforts primarily included reductions in personnel. This decrease
was offset in part by a $1.7 million provision for uncollectible accounts
receivable (Note 13), principally for accounts receivable from parties with whom
the Company is terminating business relationships.
27
<PAGE>
Fiscal 1999 Compared With Fiscal 1998 (continued)
Research and development expenses decreased to $1.5 million in fiscal 1999
from $3.0 million in 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.
During fiscal 1999, the Company undertook certain restructuring actions,
including the sale of The Greenhouse Spa, Inc. and the remaining nine Greenhouse
day spas, as well as other actions. As a result, the Company recorded
restructuring and nonrecurring costs of $60.3 million (Note 13). The Company
expects that the restructuring actions will be completed by the middle of
calendar 2000.
Interest income decreased to $2.1 million in fiscal 1999 from $4.5 million
in fiscal 1998, primarily due to lower average invested balances. Interest
expense was relatively unchanged at $5.4 million and $5.3 million in fiscal 1999
and 1998, respectively.
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 (Note 4).
Other expense in fiscal 1999 represents the write-down of an investment to
its net realizable value (Note 13).
Fiscal 1998 Compared With Fiscal 1997
Revenues were $40.1 million and $45.2 million in fiscal 1998 and 1997,
respectively. The Company's Hair Removal segment earned service revenues 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 in fiscal 1997. Revenues from the Company's 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, as well as a decrease in the number of one-time
fees from new licensees. Service revenues included $2.8 million and $4.2 million
in fiscal 1998 and 1997, respectively, for minimum guaranteed payments recorded
upon granting technology rights under the Company's international licensing
arrangements. These decreases in revenues were offset in part by the inclusion
of $0.8 million in revenues from The Greenhouse Spa, Inc., acquired in June 1998
(Note 3).
Product revenues at the Health and Beauty Products segment 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.
The gross profit margin decreased to 6% in fiscal 1998 from 20% in fiscal
1997. The Company's service revenues had a negative gross profit of $5.0 million
in fiscal 1998, compared with gross profit of $1.4 million in fiscal 1997. Each
period was impacted by the operations of the Spa Thira business, which was
operating below maximum capacity as the Company attempted to develop its client
base, expand its product lines, and refine its operating procedures. The gross
profit margin decreased in fiscal 1998, primarily due to decreased revenues at
the Company's Spa Thira locations and the licensing program, as well as
increased fixed costs associated with operating more spas in fiscal 1998. This
decrease in the gross profit margin was offset in part by the effect of
licensing fees and minimum guaranteed payments relating to international
licensing arrangements, which have a relatively high gross profit margin. In
addition, fiscal 1997 was negatively impacted by pre-opening costs incurred in
connection with new spa openings. The Company's product revenues had a gross
profit margin of 32% in both periods.
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. Selling, general, and administrative expenses decreased to
$22.3 million in fiscal 1998 from $23.0 million in fiscal 1997, primarily due to
the cost reduction efforts implemented by the Company during the second half of
fiscal 1998. These efforts primarily included reductions in personnel.
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.
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Fiscal 1998 Compared With Fiscal 1997 (continued)
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 (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 day spas, and resulting
uncertainty concerning realization of the tax asset (Note 7).
Liquidity and Capital Resources
Consolidated working capital was $5.2 million at October 2, 1999, compared
with $48.6 million at October 3, 1998. Included in working capital are cash,
cash equivalents, and available-for-sale investments of $1.4 million at October
2, 1999, compared with $55.9 million at October 3, 1998. In addition, as of
October 2, 1999, the Company had $15.4 million invested in an advance to
affiliate. Prior to the use of a new domestic cash management arrangement
between the Company and Thermo Electron Corporation, which became effective June
1999, amounts invested with Thermo Electron were included in cash and cash
equivalents. Operating activities used $35.2 million of cash during fiscal 1999.
Cash was used primarily to fund the Company's loss, excluding noncash items, as
well as a decrease in accounts payable, which used $2.2 million of cash,
primarily due to the timing of payments. Cash of $11.2 million was provided by
an increase in other accrued liabilities, primarily due to the restructuring
costs recorded during fiscal 1999, which were not paid as of October 2, 1999. Of
the total restructuring costs accrued as of October 2, 1999, the Company expects
to pay $0.5 million during the remainder of calendar 1999, $9.5 million in
calendar 2000, and $8.8 million in calendar 2001 and thereafter through the
expiration of various leases in fiscal 2014. The timing of these cash payments
will be affected by the terms of any subleases or settlement arrangements with
landlords.
Excluding available-for-sale investment and advance to affiliate activity,
the Company's primary investing activity during fiscal 1999 consisted primarily
of $5.1 million 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 (Note 8).
The Company has an obligation to pay $40.5 million, in the aggregate, to
the holders of redemption rights if all of the holders thereof exercise their
redemption rights in April 2001 when such rights become exercisable. The Company
does not have sufficient funds to satisfy these obligations and the exercise of
the redemption rights would have a material adverse effect on the Company's
liquidity and financial position. Thermo Electron has guaranteed such
obligation. In addition, Thermo Electron has expressed its willingness to lend
the Company up to $10.0 million for short-term liquidity should the need arise.
Thermo Electron has announced a proposed reorganization involving certain
of Thermo Electron's subsidiaries, including the Company. Under this plan, the
Company would be merged into Thermo Electron. As a result, the Company would
become a wholly owned subsidiary of Thermo Electron (Note 14).
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Liquidity and Capital Resources (continued)
In October 1999, the American Stock Exchange (the Exchange) notified the
Company that if the Company did not have a definitive agreement to merge with
Thermo Electron by December 15, 1999, the Exchange would request a meeting to
discuss its intent to proceed with delisting the Company's shares from the
Exchange due to a possible failure to meet listing requirements. Holders of the
Company's subordinated convertible debentures would be entitled to have their
debentures redeemed by the Company if the Company's shares are neither listed
for trading on a United States national securities exchange nor approved for
trading on an established automated over-the-counter trading market in the
United States. As a result of the agreement to merge with Thermo Electron,
described in Note 14, the Company expects that its shares will continue to be
listed through the completion of the merger transaction. Accordingly, the
Company has classified the debentures as long-term in the accompanying fiscal
1999 balance sheet.
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 1999 and
1998 market interest rates would result in a negative impact to the Company of
$0.6 million and $1.2 million, respectively, on the net fair value of its
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 1999 and 1998 market equity
prices would result in a negative impact to the Company of $3.8 million and
$13.9 million, respectively, on the net fair value of its price-sensitive equity
financial instruments. The change in the net fair value from fiscal 1998 to 1999
is primarily due to a decrease in the market price of the Company's common stock
relative to the conversion price of the debentures.
Year 2000
The following information constitutes a "Year 2000 Readiness Disclosure"
under the Year 2000 Information and Readiness Disclosure Act. The Company
continues to assess the potential impact of the year 2000 date recognition issue
on the Company's internal business systems 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.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and non-information technology systems
will be ready for the year 2000. The first phase of the program, testing and
evaluating the Company's critical information technology systems and
non-information technology systems for year
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Year 2000 (continued)
2000 compliance, has been completed. During phase one, the Company tested and
evaluated its significant computer systems, software applications, and related
equipment for year 2000 compliance. The Company also evaluated the potential
year 2000 impact on its critical non-information technology systems, which
efforts included testing the year 2000 readiness of its utility and
telecommunications systems at its non-information technology systems. During
phase two of its program, the Company remediated any material noncompliant
systems or facilities identified during phase one. The Company has upgraded or
replaced its noncompliant information technology systems. In many cases, such
upgrades or replacements were made in the ordinary course of business, without
accelerating previously scheduled upgrades or replacements. 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. As a result
of a decision to exit this business, this upgrade will not be made. The Company
believes that all of its material information technology systems and critical
non-information technology systems are now year 2000 compliant.
The Company has assessed the year 2000 readiness of key suppliers and
vendors that are believed to be significant to the Company's business
operations. As part of this effort, the Company developed and distributed
questionnaires relating to year 2000 compliance to its significant suppliers and
vendors. No significant supplier or vendor has indicated that it believes its
business operations will be materially disrupted by the year 2000 issue.
Contingency Plan
The Company has developed a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
The plan identifies and secures alternative suppliers.
Estimated Costs to Address the Company's Year 2000 Issues
To date, costs incurred in connection with the year 2000 issue have not
been material. Year 2000 costs relating to products and facilities were funded
from working capital. All internal costs and related external costs, other than
capital additions, related to year 2000 remediation have been expensed as
incurred. The Company does not track internal costs incurred for its year 2000
compliance project. Such costs are principally the related payroll costs for its
information systems group.
Reasonably Likely Worst Case Scenario
At this point in time, the Company is not able to determine the most
reasonably likely worst case scenario to result from the year 2000 issue. One
possible worst case scenario would be that certain of the Company's material
suppliers or vendors experience business disruptions due to the year 2000 issue
and are unable to provide materials and services to the Company on time. The
Company's operations could be delayed or temporarily shut down, and it could be
unable to meet its obligations to customers in a timely fashion. The Company's
business, operations, and financial condition could be adversely affected in
amounts that cannot be reasonably estimated at this time.
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.
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ThermoLase Corporation 1999 Financial Statements
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important risk factors, among others, in some cases have affected, and
in the future could affect, the Company's actual results and could cause its
actual results in fiscal 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
$93.3 million, $41.2 million, $12.4 million, and $1.4 million in fiscal 1999,
1998, 1997, and 1996, respectively. At October 2, 1999, the Company's
accumulated deficit was $150.4 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 continuing business. The failure to hire and retain such
personnel could materially adversely affect the financial position and results
of operations of the Company.
Potential for Customer Claims; Insurance. The Company has received
complaints from several of its physician licensees, joint venture partners, and
consumers stating 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 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.
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. 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. 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.
32
<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 an uncertain process. There can be no assurance that
foreign regulatory agencies will grant the necessary clearances or that the
process to obtain such clearances will not be excessively expensive or lengthy.
For example, in 1996, the Company established a joint venture to commercialize
the SoftLight laser hair-removal process in Japan and, in 1999, withdrew its
application seeking the approval of the Japanese Ministry of Health to
commercialize the SoftLight process in Japan.
Most of CBI's products are classified as cosmetics, which are regulated by
the FDA, and are subject to inspection by the FDA. Furthermore, CBI manufactures
a few preparations, principally sunscreens and skin-bleaching agents, that are
classified as over-the-counter drugs, and CBI has an FDA license for this
purpose. This license requires, among other things, that CBI 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.
Intense Competition. Competition in the market for personal-care products
and services is intense. Competition limits the prices the Company is able to
charge for its products. Risks Associated with Cash Management Arrangement with
Thermo Electron.
The Company participates in a cash management arrangement with its parent
company, Thermo Electron. Under this cash management arrangement, the Company
lends its excess cash to Thermo Electron on an unsecured basis. The Company has
the contractual right to withdraw its funds invested in the cash management
arrangement upon 30 days' prior notice. Thermo Electron is contractually
required to maintain cash, cash equivalents, and/or immediately available bank
lines of credit equal to at least 50% of all funds invested under the cash
management arrangement by all Thermo Electron subsidiaries other than wholly
owned subsidiaries. The funds are held on an unsecured basis and therefore are
subject to the credit risk of Thermo Electron. The Company's ability to receive
its cash upon notice of withdrawal could be adversely affected if participants
in the cash management arrangement demand withdrawal of their funds in an
aggregate amount in excess of the 50% reserve required to be maintained by
Thermo Electron. In the event of a bankruptcy of Thermo Electron, the Company
would be treated as an unsecured creditor and its right to receive funds from
the bankruptcy estate would be subordinated to secured creditors and would be
treated on a pari passu basis with all other unsecured creditors. Further, all
cash withdrawn by the Company from the cash management arrangement within one
year before the bankruptcy would be subject to rescission. The inability of
Thermo Electron to return the Company's cash on a timely basis or at all could
have a material adverse effect on the Company's results of operations and
financial position.
33
<PAGE>
ThermoLase Corporation 1999 Financial Statements
Forward-looking Statements
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. 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. 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 significant adverse
impact on the Company's business, operations, and financial condition.
</TABLE>
Selected Financial Information
<TABLE>
<CAPTION>
Nine
Months
Year Ended Ended (d)
--------------------------------------------------------- ----------
<S> <C> <C> <C> <C> <C> <C>
(In thousands except Oct. 2, Oct. 3, Sept. 27, Sept. 28, Sept. 30, Sept. 30,
per share amounts) 1999 (a) 1998 (b) 1997 (c) 1996 1995 1995
- ---------------------------------- ----------- ----------- ------------ ----------- ----------- ----------
(Unaudited)
Statement of Operations Data
Revenues $ 36,255 $ 40,091 $ 45,233 $ 27,812 $ 23,348 $ 17,544
Net Loss (93,331) (41,186) (12,405) (1,386) (1,675) (1,679)
Basic and Diluted Loss per Share (2.37) (1.07) (.31) (.03) (.04) (.04)
Balance Sheet Data
Working Capital $ 5,162 $ 48,597 $ 95,469 $ 47,197 $ 68,691
Total Assets 45,978 134,215 174,595 95,520 89,463
Long-term Obligations 115,000 115,066 115,000 - -
Common Stock Subject to 40,500 40,500 40,500 - -
Redemption
Shareholders' Investment (134,204) (41,691) 333 79,037 82,218
(a) Reflects restructuring and related costs of $67.7 million and the sale of
spas.
(b) Reflects restructuring costs of $10.2 million and $5.9 million for the
establishment of a tax valuation allowance.
(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) 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.
34
<PAGE>
ThermoLase Corporation 1999 Financial Statements
Common Stock and Unit Market Information
The Company's common stock and units are traded on the American Stock
Exchange under the symbol TLZ and TLZ/U, respectively. The following table sets
forth the high and low sale prices of the Company's common stock and units for
1999 and 1998, as reported in the consolidated transaction reporting system.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Common Stock Units
Fiscal 1999 High Low High Low
- ---------------------------------------------------------- ----------- ------------ ------------ ---------
First Quarter $6 7/8 $4 1/4 $16 1/2 $15 1/4
Second Quarter 4 7/8 2 5/8 16 13/16 15 13/16
Third Quarter 3 3/16 1 5/16 17 3/4 16 5/8
Fourth Quarter 2 7/16 1 11/16 17 5/8 17 3/8
Fiscal 1998
- ---------------------------------------------------------- ----------- ------------ ------------ ---------
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
</TABLE>
As of October 29, 1999, the Company had 332 holders of record of its
common stock and 17 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 29, 1999,
were $1 13/16 per share of common stock and $17 3/8 per unit.
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.
Exhibit 21
THERMOLASE CORPORATION
Subsidiaries of the Registrant
At November 17, 1999, the Registrant owned the following companies:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
NAME STATE OR PERCENT OF
JURISDICTION OF OWNERSHIP
INCORPORATION
- -----------------------------------------------------------------------------------------------------------
Creative Beauty Innovations, Inc. Texas 100
ThermoLase England L.L.C. Delaware 46*
ThermoLase (Scotland) Ltd. Scotland 100
ThermoLase (Ireland) Ltd. Ireland 100
ThermoLase UK Limited England 100
ThermoDess S.A.S. France 71.05*
ThermoLase International L.L.C. Delaware 100
ThermoLase Iberica, S.A. Spain 100
ThermoLase (South Africa) Ltd. South Africa 100
ThermoLase Japan L.L.C. Wyoming 50*
* Joint Venture/Partnership
</TABLE>
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation
by reference of our reports dated November 9, 1999 (except with respect to the
matter discussed in Note 14, as to which the date is December 16, 1999) included
in or incorporated by reference into ThermoLase Corporation's Annual Report on
Form 10-K for the year ended October 2, 1999, 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, and Registration Statement No.
333-70605 on Form S-8.
Arthur Andersen LLP
Boston, Massachusetts
December 17, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMOLASE
CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED OCTOBER 2, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-02-1999
<PERIOD-END> OCT-02-1999
<CASH> 1,358
<SECURITIES> 0
<RECEIVABLES> 6,039
<ALLOWANCES> 2,080
<INVENTORY> 4,374
<CURRENT-ASSETS> 29,649
<PP&E> 6,004
<DEPRECIATION> 3,115
<TOTAL-ASSETS> 45,978
<CURRENT-LIABILITIES> 24,487
<BONDS> 106,775
0
0
<COMMON> 408
<OTHER-SE> (134,612)
<TOTAL-LIABILITY-AND-EQUITY> 45,978
<SALES> 26,059
<TOTAL-REVENUES> 36,255
<CGS> 20,590
<TOTAL-COSTS> 44,600
<OTHER-EXPENSES> 61,845
<LOSS-PROVISION> 1,891
<INTEREST-EXPENSE> 5,361
<INCOME-PRETAX> (93,172)
<INCOME-TAX> 159
<INCOME-CONTINUING> (93,331)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (93,331)
<EPS-BASIC> (2.37)
<EPS-DILUTED> (2.37)
</TABLE>
