-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ai//4oeX8JWbD6tRHrVPFOi//b3zGV1slyJd+pPFOiC4yDzwveQjwFjgGtTOOzVU mUYBr2P/3yf/t9G0gS/4mg== 0000901416-98-000013.txt : 19981221 0000901416-98-000013.hdr.sgml : 19981221 ACCESSION NUMBER: 0000901416-98-000013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981003 FILED AS OF DATE: 19981218 FILER: COMPANY DATA: COMPANY CONFORMED NAME: THERMOLASE CORP CENTRAL INDEX KEY: 0000901416 STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [2844] IRS NUMBER: 061360302 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13104 FILM NUMBER: 98772343 BUSINESS ADDRESS: STREET 1: 2055 C LUNA ROAD CITY: CARROLLTON STATE: TX ZIP: 75006 BUSINESS PHONE: 6176221000 MAIL ADDRESS: STREET 1: 2055 C LUNA ROAD CITY: CARROLLTON STATE: TX ZIP: 75006 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ---------------------------------------------------- FORM 10-K (mark one) [ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended October 3, 1998 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 1-13104 THERMOLASE CORPORATION (Exact name of Registrant as specified in its charter) Delaware 06-1360302 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2055-C Luna Road Carrollton, Texas 75006 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (781) 622-1000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of exchange on which registered Common Stock, $.01 par value American Stock Exchange Units (each unit consisting of one share of common stock and one redemption right) American Stock Exchange Securities registered pursuant to Section 12(g) of theAct: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to the filing requirements for at least the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the Registrant as of October 30, 1998, was approximately $47,302,000. As of October 30, 1998, the Registrant had 39,319,296 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the fiscal year ended October 3, 1998, are incorporated by reference into Parts I and II. Portions of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on March 11, 1999, are incorporated by reference into Part III. PART I Introduction You may notice some changes in this year's Form 10-K, compared with past years. The Securities and Exchange Commission is encouraging companies to write financial documents in plain English. We have rewritten our entire Form 10-K in plain English. Our goal is to discuss our company in language that is more easily understood. Item 1. Business (a) General Development of Business ThermoLase Corporation, which we also refer to as "the company or the registrant," developed SoftLight(R), a proprietary system to remove unwanted hair. In April 1995, we received clearance from the U.S. Food and Drug Administration (FDA) to commercially market hair-removal services using this system. SoftLight uses a low-energy laser, similar to the lasers used in dermatological applications such as tattoo and birthmark removal, in combination with a specially formulated lotion, to disable hair follicles. In May 1998, the FDA cleared our SoftLight laser for skin-resurfacing as well. We began marketing our new SoftLight Laser Peel skin-resurfacing service in September 1998 through our spas and licensees. ThermoLase manufactures and markets skin-care and bath-and-body products and markets dietary supplements through our Creative Beauty Innovations, Inc. (CBI) subsidiary. CBI also manufactures the lotion we use in our SoftLight hair-removal and skin-resurfacing processes. SoftLight Distribution Channels To provide our laser-based hair-removal services in the United States, ThermoLase developed two distribution channels: a network of high-end, company-owned spas called Spa Thira, and a physician-licensing program. ThermoLase opened its first Spa Thira location in late 1995 and its fourteenth spa was opened in October 1997. We have since closed three spas and currently operate 11 domestic Spa Thira locations. The company's spas currently offer a variety of pricing programs, including a fixed fee for a single treatment as well as a fixed fee for multiple treatments during specified time periods. In June 1996, ThermoLase began a program to license our technology to physicians and others who wanted to offer the SoftLight process as part of their practices. We provide licensees with the lasers and lotion necessary to perform the service, as well as training and marketing support. In the original program, ThermoLase received a one-time fee and per-procedure royalty that varied depending on the anatomical site treated and pricing plan selected by the client. In response to feedback from licensees and customers, we have begun to modify the terms of our physician-licensing program. More details on these modifications are discussed below. ThermoLase has also entered into a variety of joint ventures and licensing agreements to bring the SoftLight technology to international markets, including: - Japan January 1996 - France and Saudi Arabia November 1996 - The United Arab Emirates and Oman March 1997 - Switzerland April 1997 - Brazil June 1997 - The United Kingdom and Ireland September 1997 - Australia, New Zealand, South Africa, Germany, Spain, Greece, and Cyprus October 1997 2 The first international spa opened in Paris, France, in May 1997; a Lugano, Switzerland, spa opened in October 1997; and another opened in Dubai, in the United Arab Emirates, in December 1997. The spa in France was subsequently closed as discussed below. Company Efforts to Improve Operations Our revenues from hair-removal services decreased in fiscal 1998* from fiscal 1997. When we introduced the SoftLight laser hair-removal process and opened our first spa, we believed that our services would command a premium price in the marketplace. However, market acceptance of the SoftLight laser hair-removal process has been disappointing to date. We have examined our premium pricing structure and our overall strategy. We have taken steps to restructure our company and reposition our offerings to help improve the profitability of our business. In April 1998, we repositioned SoftLight as an effective hair-management strategy, significantly reducing prices for SoftLight treatments at our spas in an effort to find an optimal price point that would increase demand for our services and produce higher revenues. To appeal to a broader scope of clients and increase traffic at the spas, we also began offering traditional spa services, such as massages and European facials. An important part of our strategy was to acquire the management expertise we needed to diversify the products and services we offer at the spas. In June 1998, ThermoLase acquired The Greenhouse Spa, Inc. for 1,000,000 shares of ThermoLase common stock, valued at $7,975,000 at the time of the transaction, and the repayment of $4,180,000 in Greenhouse debt. The Greenhouse Spa operates a luxury destination spa in Arlington, Texas, well-known for its innovative spa programs and services. Our goal is to apply The Greenhouse name to our network of spas and provide traditional day spa, hair-removal, and skin-resurfacing services. To this end, we evaluated each of our domestic Spa Thira locations to determine which could be converted into full-service, luxury day spas and, in September 1998, decided to close three of our fourteen domestic spas - our original spa in La Jolla, California, which was too small to be economically viable as a full-service facility, and the spas in Palm Beach, and Miami Beach, Florida, markets that can be served by our spa in Boca Raton. The 11 remaining domestic Spa Thira day spa locations are slated to open as Greenhouse spas by the end of December 1998. We are transforming the existing spa lobbies to include retail space, where we will feature Greenhouse products designed by our CBI subsidiary, in addition to CBI's own line and other beauty products as well. We are also converting excess office space into additional treatment rooms. We plan to offer a full menu of Greenhouse beauty services and restorative body treatments, along with our laser hair-removal and skin-resurfacing technologies. We expect that product and gift certificate sales will be critical in our efforts to improve the profitability of the spas. Changes to the Physician-licensing Program In addition, in response to the decrease in revenues and in an attempt to establish price points and other conditions designed to increase demand and revenues, we significantly reduced treatment prices at our Spa Thira locations and have begun modifying the terms and conditions of our physician-licensing program. Under the modified licenses, per-procedure royalties are reduced or eliminated and a minimum royalty and/or flat periodic fee requirement has been introduced. In addition, we began offering licensees the opportunity to purchase or lease SoftLight lasers instead of paying ongoing royalties or periodic fees. - -------------------- * Reference to fiscal 1998, 1997, and 1996, herein are for the years ended October 3, 1998, September 27, 1997, and September 28, 1996, respectively. 3 International SoftLight Distribution We also faced a number of challenges internationally, as each country's regulatory structure and business climate varies significantly. For example, in 1996, the company established a joint venture to commercialize the SoftLight laser hair-removal process in Japan and since that time has been seeking the approval of the Japanese Ministry of Health to commercialize the SoftLight process in that country. We have submitted information requested by the Japanese Ministry of Health, including the results of clinical trials performed in Japan, and we continue to await a decision by Japanese Ministry of Health. Our business in England, operating in a more flexible regulatory environment, has been more successful. We have more than 25 licensees in operation there, primarily electrologists and cosmetologists, and continue to add licensees. Our business in England is operating ahead of budget. We are cautiously moving ahead with plans to develop new distribution channels for the SoftLight system in other international markets. Stock Ownership On October 3, 1998, our parent company, ThermoTrex Corporation owned 27,960,996 shares of our common stock. This amount represented 71% of ThermoLase's outstanding shares on that date. During fiscal 1998 ThermoTrex purchased 2,000,000 of ThermoLase's common stock in the open market for $10,000,000. ThermoTrex is a majority-owned public subsidiary of Thermo Electron Corporation. In addition to the products and services that ThermoLase offers, ThermoTrex, through its majority-owned and wholly owned subsidiaries, manufactures mammography and other specialized and general-purpose X-ray equipment, as well as digital breast-biopsy systems. ThermoTrex also conducts advanced-technology research in communications, avionics, X-ray detection, signal processing, and lasers. On October 3, 1998, Thermo Electron owned 2,620,608 shares of ThermoLase's common stock, representing 7% of our outstanding stock on that date. Thermo Electron purchased 1,839,400 shares of ThermoLase's common stock in the open market during fiscal 1998 for $12,832,000. Thermo Electron is a world leader in monitoring, analytical, and biomedical instrumentation; biomedical products including heart-assist devices, respiratory-care equipment, and mammography systems; and paper recycling and papermaking equipment. Thermo Electron also develops alternative-energy systems and clean fuels, provides a range of services including industrial outsourcing and environmental-liability management, and conducts research and development in advanced imaging, laser communications, and electronic information-management technologies. ThermoTrex intends to maintain at least 50% ownership of ThermoLase for the foreseeable future. This may require ThermoTrex to purchase additional shares of ThermoLase common stock from time to time if the number of outstanding shares issued by ThermoLase increases. ThermoTrex or Thermo Electron may purchase these shares either on the open market or directly from ThermoLase. Please refer to Notes 6 and 9 to the Consolidated Financial Statements in our Fiscal 1998 Annual Report to Shareholders for a description of outstanding stock options and subordinated convertible debentures. We purchased our SoftLight laser systems and components from Trex Medical Corporation, another majority-owned ThermoTrex subsidiary, at an aggregate cost of $2,902,000 in fiscal 1998, $11,390,000 in fiscal 1997, and $8,549,000 in fiscal 1996. Forward-looking Statements We make forward-looking statements throughout this document. We typically use the words, "believe," "anticipate," "plan," "expect," "seek," "estimate," and similar expressions to identify forward-looking statements. Unless a passage describes an historical event, you should consider it to be a forward-looking statement. As you make 4 decisions about your investments in ThermoLase, we caution you, in keeping with the "Safe Harbor" provision of the Private Securities Litigation Reform Act of 1995, that forward-looking statements regarding the company's future expectations and projections are not guarantees of future performance. They involve risks, uncertainties, and assumptions, and many of the factors that will determine the company's future results are beyond our ability to control or predict. Therefore, our actual results may differ significantly from those suggested by forward-looking statements. You can find these risk factors detailed under the heading "Forward-looking Statements" immediately following the Management's Discussion and Analysis of Financial Condition and Results of Operations in our Fiscal 1998 Annual Report to Shareholders, which is incorporated in this document by reference. (b) Financial Information About Industry Segments ThermoLase conducts business in one industry segment. (c) Description of Business (i) Principal Products and Services ThermoLase operates 11 domestic day spas and a domestic destination spa and offers the following products and services: Laser-based Hair Removal The patented SoftLight system uses a low-energy, dermatology laser in combination with a specially developed lotion that directs and absorbs the laser's energy to impact hair follicles. Unlike electrolysis, the SoftLight system can disable numerous hair follicles at one time. As a result, we can treat large areas, such as the legs or back. The lasers, which are similar to those used for removing tattoos and birthmarks, are manufactured for us by Trex Medical Corporation. Our CBI subsidiary manufactures the lotion used in the hair-removal process. During a typical treatment, the SoftLight technician gently cleanses the area from which hair is to be removed, applies the lotion, which penetrates the hair duct, and then scans the area several times with the laser beam. The laser energy is absorbed by the lotion, causing the temperature of the lotion to increase to a level that impacts the hair follicles. The laser treatment most effectively impacts hair follicles in the active growing stage of development, and at any given time, a certain percentage of hair follicles are in the resting stage. Therefore, to obtain the maximum benefit, we recommend clients return for multiple treatments. The number of follow-up sessions recommended and the time interval between treatment varies depending on the particular characteristics of the client and the anatomical site being treated. Creative Beauty Innovations, Inc. In December 1993, the company acquired CBI, Inc., (renamed Creative Beauty Innovations, Inc. in 1998). CBI has built its reputation as a leading manufacturer of private-label and custom-designed personal-care products by combining European herbalist traditions with botanical-based technology. CBI develops, manufactures, and packages most of its products, which include shampoos, lotions, shower creams, bath salts, and facial treatments. CBI also sells dietary supplements under its own brand name that it purchases from a third party. It does not manufacture packaging materials, such as containers and boxes, but contracts with third parties for these supplies. CBI sales accounted for 57%, 53%, and 83% of our total revenue in fiscal 1998, 1997, and 1996, respectively. During fiscal 1998, CBI began to diversify from being primarily a private-label manufacturer to marketing products under its own brand names. 5 (ii) New Products SoftLight Laser Peel In May, 1998, the FDA cleared our SoftLight laser for cosmetic skin resurfacing. We began marketing this process under the name SoftLight Laser Peel in September 1998. We began development of the process after many of our hair-removal clients reported improvement in their skin's texture and appearance. The process uses the same laser as our hair-removal process in combination with a different formulation of the activating lotion. The laser's energy passes through the skin's surface and reacts with the lotion, creating heat and mechanical energy that remove the tough outer layer of dead skin to reveal the younger skin beneath. We offer the SoftLight Laser Peel through our spas and participating licensees. Traditional Spa Services With the transformation of our spas into Greenhouse spas, we are introducing a wide range of traditional spa services, including a variety of facials and massage treatments, as well as manicures and pedicures, makeup application, and other beauty treatments. Creative Beauty Innovations Product Lines During the summer of 1998, CBI launched three major product lines under its own brand name, two of them completely new: "I/O Inner Resources/Outer Results," a line of vitamins, energy drinks, and topical skin-care products that will be sold through dermatologists, plastic surgeons, and high-end salons; and "State of Mind," a retail mass market product line designed to be sold through drug stores and large discount chains. The third line, "Glycolique Options," is a reformulated skin-care line marketed through the professional beauty industry. CBI beauty and personal-care products will also be sold at our spas. (iii) Raw Materials The raw materials, components, and supplies we purchase are available from a number of different suppliers. If necessary, we believe that we could develop alternative sources without a material adverse effect on our results. To date, we have not experienced any difficulty in obtaining materials, components, or supplies. (iv) Patents, Licenses, and Trademarks Our policy is to protect our intellectual property rights relating to our work on the SoftLight system, including, if appropriate, applying for patents in the United States and in foreign countries. We have been issued one U.S. patent and some foreign patents related to our hair-removal system, including a patent issued by the European Patent Office. We also have various patents pending that would extend the coverage of the issued patents in this country and in certain foreign countries. In addition, we have reserved our rights to file further corresponding patent applications in countries that are members of the Patent Cooperation Treaty (PCT). We have been issued one U.S. patent related to the SoftLight laser used in our skin-resurfacing system. We have corresponding patent applications pending in numerous foreign countries and have reserved our rights to file further corresponding patent applications in PCT-member countries. In addition, we have a patent application pending in the United States and have reserved our rights to file patent applications in PCT-member countries related to a laser-based drug-delivery system using a concept similar to our laser-based hair-removal system. 6 The technology underlying the SoftLight system, including all patents issued relating to the system, belong to us by virtue of a license agreement executed in February 1993 between ThermoLase and the inventor of the system. This agreement grants us an irrevocable, exclusive, worldwide perpetual license to the technology in exchange for a $100,000 commitment fee and a royalty equal to .25 percent of revenues generated from the sale or use of the SoftLight system through February 10, 2010. CBI relies primarily on trade secret protection for the proprietary formulations that form its products. CBI generally retains the proprietary rights to the formulations it develops, either for itself or for a specific customer. The company has registered trademarks and service marks in the United States for "SoftLight." The company also has trademark and service mark applications pending for "SoftLight" in various foreign countries. No assurance can be given that any pending trademark or service mark application will be granted. (v) Seasonal Influences Sales of CBI's products increase during the December holiday season, and revenues from our hair-removal services are highest during the early spring. (vi) Working Capital Requirements There are no special inventory requirements or credit terms extended to customers that would have a material adverse effect on our working capital. (vii) Dependency on a Single Customer No single customer accounted for more than 10% of our total revenues in fiscal 1998. (viii)Backlog Our backlog of firm orders was $4,116,000 at October 3, 1998, compared with $2,820,000 at September 27, 1997, which consisted exclusively of orders for CBI's products. We anticipate that substantially all of our fiscal 1998 backlog will be shipped or completed during fiscal 1999. (ix) Government Contracts ThermoLase does not have government contracts. (x) Competition When we first introduced our SoftLight laser hair-removal system, we were the only company to have FDA clearance and thus, electrologists were our principal competitors. Since then, a number of other companies have received FDA clearance for laser hair removal. We believe additional companies are working to develop similar technologies and products that may compete directly with the SoftLight hair-removal system. We believe that the SoftLight hair-removal system competes primarily on the basis of safety, effectiveness, and price. Because the SoftLight system reacts with the lotion instead of the native structures of the skin, we are able to use an energy level significantly lower than competing products. We expect that our principal competition for our skin-resurfacing treatment will be providers of carbon dioxide and erbium laser skin resurfacing, as well as chemical peels. We believe the SoftLight Laser Peel will compete primarily based on effectiveness, safety, comfort, and price. 7 The professional skin-care, bath-and-body product, and dietary supplement markets are highly competitive and fragmented, with no single competitor dominating the market. Many small manufacturers, as well as divisions of larger companies, may have substantially greater financial, marketing, and research and development resources than ThermoLase. CBI competes primarily on the basis of quality and price. (xi) Research and Development During fiscal 1998, we spent approximately $3,028,000 on research and development. Research and development funds also supported development of our SoftLight Laser Peel and CBI's new product lines. We spent $5,704,000 on research and development during fiscal 1997 and $3,470,000 during fiscal 1996. (xii) Environmental Protection Regulations We believe that compliance with federal, state, and local environmental regulations will not have a material adverse effect on our capital expenditures, earnings, or competitive position. (xiii)Number of Employees As of October 3, 1998, ThermoLase employed 486 people. (d) Financial Information about Exports by Domestic Operations We summarize financial information about exports by domestic operations in Note 12 to Consolidated Financial Statements in ThermoLase's Fiscal 1998 Annual Report to Shareholders, which is incorporated in this document by reference. (e) Executive Officers of the Registrant Name Age Present Title (Fiscal Year First Became Executive Officer) ---------------------------- ------ ------------------------------------- Gerald Feldman 48 President and Chief Executive Officer (1998) John N. Hatsopoulos* 64 Chief Financial Officer and Senior Vice President (1992) Gina M. Goodrich 39 Vice President, Licensees (1998) Silvia Carnini-Pulino 35 Vice President, International (1998) Richard E. Weitzel 50 Vice President, Marketing (1998) Wayne W. Wetterlund 44 Vice President, Finance (1998) Paul F. Kelleher 56 Chief Accounting Officer (1992) -------------------- * John N. Hatsopoulos will retire as chief financial officer and senior vice president effective December 31, 1998. Theo Melas-Kyriazi has been appointed to succeed Mr. Hatsopoulos as chief financial officer. Each executive officer serves until his or her successor is chosen or appointed by the board of directors and qualified, or until earlier resignation, death, or removal. Mr. Hatsopoulos and Mr. Kelleher have held comparable positions for at least five years with Thermo Electron. Mr. Feldman has been president and chief executive officer of the company since August 1998. He came to ThermoLase from International Technidyne Corporation (ITC), a maker of near-patient, whole-blood coagulation testing equipment and related disposables, where he served as president since 1987. ITC has been a Thermo Electron company since 1991. Ms. Goodrich has been ThermoLase's vice president, licensees since August 1998, and has worked for the company since 1996. Prior to joining the company, Ms. Goodrich held various positions with Nutri/System, a national chain of weight loss centers. Ms. Carnini-Pulino was appointed vice president, international in August 1998 and has worked for the company since 1997. Prior to joining the company Ms. Carnini-Pulino was the founder and chief executive officer of GAMMATel, Inc., a telecommunications company. Mr. Weitzel was appointed vice president, marketing in 1998. Prior to joining ThermoLase, Mr. Weitzel was 8 employed at Arthur Andersen LLP, where he served as the director of business development. Mr. Wetterlund was appointed vice president, finance in 1998. He came to ThermoLase from Urban Outfitter, Inc., where he served as controller since 1993. Mr. Melas-Kyriazi joined Thermo Electron in 1986 as assistant treasurer, and became treasurer in 1988. He was named president and chief executive officer of ThermoSpectra Corporation, a public subsidiary of Thermo Instrument Systems Inc., in 1994. In 1997, he became vice president of corporate strategy for Thermo Electron. Mr. Melas-Kyriazi will remain a full-time employee of Thermo Electron, and, when he succeeds Mr. Hatsopoulos as chief financial officer, will also devote such time to the affairs of the company as the company's needs reasonably require. Item 2. Properties ThermoLase occupies approximately 213,000 square feet of office and manufacturing space in Carrollton, Texas, under a lease expiring in 2004, through its CBI subsidiary. ThermoLase also leases approximately 77,000 square feet of retail space for its Spa Thira salons, under leases expiring from 2000 through 2013. In addition, we own a 60,000 square foot building in Arlington, Texas, which is used for the Greenhouse Spa operations. We believe that these facilities are in good condition and are suitable and adequate to meet our current needs. Item 3. Legal Proceedings Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Information concerning the market and market price for the Registrant's Common Stock, $.01 par value, and dividend policy is included under the sections labeled "Common Stock Market Information" and "Dividend Policy" in the Registrant's Fiscal 1998 Annual Report to Shareholders and is incorporated in this document by reference. Item 6. Selected Financial Data The information required under this item is included under the sections labeled "Selected Financial Information" and "Dividend Policy" in the Registrant's Fiscal 1998 Annual Report to Shareholders and is incorporated in this document by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required under this item is included under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's Fiscal 1998 Annual Report to Shareholders and is incorporated in this document by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information required under this item is included under the caption "Market Risk" in the Registrant's Fiscal 1998 Annual Report to Shareholders and is incorporated in this document by reference. 9 Item 8. Financial Statements and Supplementary Data The Registrant's Consolidated Financial Statements and Supplementary Data are included in the Registrant's Fiscal 1998 Annual Report to Shareholders and are incorporated in this document by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant The information concerning directors required under this item is incorporated in this document by reference from the material contained under the heading "Election of Directors" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. The information concerning delinquent filers pursuant to Item 405 of Regulation S-K is incorporated in this document by reference from the material contained under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" under the caption "Stock Ownership" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. Item 11. Executive Compensation The information required under this item is incorporated in this document by reference from the material contained under the caption "Executive Compensation" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required under this item is incorporated in this document by reference from the material contained under the caption "Stock Ownership" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. Item 13. Certain Relationships and Related Transactions The information required under this item is incorporated in this document by reference from the material contained under the caption "Relationship with Affiliates" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. 10 PART IV Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K (a, d) Financial Statements and Schedules (1) The consolidated financial statements set forth in the list below are filed as part of this Report. (2) The consolidated financial statement schedule set forth in the list below is filed as part of this Report. (3) Exhibits filed herewith or incorporated in this document by reference are set forth in Item 14(c) below. List of Financial Statements and Schedules Referenced in this Item 14 Information incorporated by reference from Exhibit 13 filed herewith: Consolidated Statement of Operations Consolidated Balance Sheet Consolidated Statement of Cash Flows Consolidated Statement of Shareholders' Investment Notes to Consolidated Financial Statements Report of Independent Public Accountants Financial Statement Schedules filed herewith: Schedule II: Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or not required, or because the required information is shown either in the financial statements or in the notes thereto. (b) Reports on Form 8-K On September 30, 1998, ThermoLase filed a Current Report on Form 8-K, dated September 29, 1998, with respect to restructuring and other charges recorded during the fourth quarter of fiscal 1998. (c) Exhibits See Exhibit Index on the page immediately preceding exhibits. 11 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned, thereunto duly authorized. Date: December 14, 1998 THERMOLASE CORPORATION By:/s/ Gerald Feldman Gerald Feldman President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, as of December 14, 1998. Signature Title By: /s/ Gerald Feldman President, Chief Executive Officer, and Gerald Feldman Director By: /s/ John N. Hatsopoulos Senior Vice President and Chief John N. Hatsopoulos Financial Officer By: /s/ Paul F. Kelleher Chief Accounting Officer and Director Paul F. Kelleher By: /s/ Gary S. Weinstein Chairman of the Board and Director Gary S. Weinstein By: /s/ Carliss Y. Baldwin Director Carliss Y. Baldwin By: /s/ Elias P. Gyftopoulos Director Elias P. Gyftopoulos By: /s/ John T. Keiser Director John T. Keiser By: /s/ Melissa F. Riordan Director Melissa F. Riordan By: /s/ Nicholas T. Zervas Director Nicholas T. Zervas 12 Report of Independent Public Accountants To the Shareholders and Board of Directors of ThermoLase Corporation: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in ThermoLase Corporation's Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated November 9, 1998, (except with respect to the matter discussed in Note 15 as to which the date is November 24, 1998). Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14 on page 11 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states, in all material respects, the consolidated financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. Arthur Andersen LLP Boston, Massachusetts November 9, 1998 13 SCHEDULE II THERMOLASE CORPORATION Valuation and Qualifying Accounts (In thousands)
Balance at Provision Accounts Other Balance Beginning Charged Written at End of Year to Off of Year Description Expense - ------------------------------------------------------------------------------------------------------------- Allowance for Doubtful Accounts Year Ended October 3, 1998 $ 402 $ 88 $ - $ - $ 490 Year Ended September 27, 1997 $ 319 $ 83 $ - $ - $ 402 Year Ended September 28, 1996 $ 256 $ 63 $ - $ - $ 319 Balance at Restructuring Assets Cash Balance Beginning Costs Written Payments at End of Year Charged to Off of Year Description Expense - ------------------------------------------------------------------------------------------------------------- Accrued Restructuring Costs (a) Year Ended October 3, 1998 $ - $10,155 $(4,193) $ (809) $ 5,153
(a) The nature of activity in this account is described in Note 13 to Consolidated Financial Statements in the Registrant's Fiscal 1998 Annual Report to Shareholders. 14 EXHIBIT INDEX Exhibit Number Description of Exhibit 3.1 Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-78052] and incorporated herein by reference). 3.2 By-Laws of the Registrant, as amended and restated (filed as Exhibit 3.2 to the Registrant's Transition Report on Form 10-K for the transition period January 1, 1995, through September 30, 1995 [File No. 1-13104] and incorporated herein by reference). 4.1 Form of Unit Certificate (filed as Exhibit 4.1 to the Registrant's Registration Statement on Form S-4 [Reg. No. 333-19633] and incorporated herein by reference). 4.2 Guaranty Agreement between the Registrant and Thermo Electron Corporation dated March 5, 1997 (filed as Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 29, 1997, and incorporated herein by reference). 4.3 Fiscal Agency Agreement dated as of August 12, 1997, among the Registrant, Thermo Electron Corporation, and Bankers Trust Company as Fiscal Agent, relating to $115,000,000 principal amount of 4 3/8% Convertible Subordinated Debentures due 2004 (filed as Exhibit 4.3 to the Registrants Annual Report on Form 10-K for the fiscal year ended September 27, 1997 [File No. 1-13104] and incorporated herein by reference). 10.1 Corporate Services Agreement dated as of January 13, 1993, between Thermo Electron Corporation and the Registrant (filed as Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-78052] and incorporated herein by reference). 10.2 Thermo Electron Corporate Charter, as amended and restated effective January 3, 1993 (filed as Exhibit 10.1 to Thermo Electron's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 [File No. 1-8002] and incorporated herein by reference). 10.3 Tax Allocation Agreement dated as of January 13, 1994, between ThermoTrex Corporation and the Registrant (filed as Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-78052] and incorporated herein by reference). 10.4 License Agreement dated as of February 10, 1993, between the Registrant and Nicolai I. Tankovich (filed as Exhibit 10.4 to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-78052] and incorporated herein by reference). 10.5 Amended and restated Master Repurchase Agreement dated as of December 12, 1997, between the Registrant and Thermo Electron Corporation (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended January 3, 1998 [File No. 1-13104] and incorporated herein by reference). 10.6 Amended and restated Master Guarantee Reimbursement Agreement dated as of December 12, 1997, among Thermo Electron Corporation, ThermoTrex Corporation, and the Registrant (filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended January 3, 1998 [File No. 1-13104] and incorporated herein by reference). 15 Exhibit Number Description of Exhibit 10.7 Lease Agreement dated March 11, 1994, between Lincoln Property Company Acquisition Fund Limited Partnership and CBI Laboratories, Inc. (filed as Exhibit 10.7 to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-78052] and incorporated herein by reference). 10.8 Form of Indemnification Agreement for Officers and Directors (filed as Exhibit 10.12 to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-78052] and incorporated herein by reference). 10.9 Nonqualified Stock Option Plan of the Registrant (filed as Exhibit 10.8 to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-78052] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Registrant's Incentive Stock Option plan is 2,800,000 shares, after adjustment to reflect share increase approved in 1993 and 2-for-1 stock splits effected in March 1994 and June 1995.) 10.10 Incentive Stock Option Plan of the Registrant (filed as Exhibit 10.9 to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-78052] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Registrant's Nonqualified Stock Option Plan is 2,800,000 shares, after adjustment to reflect share increase approved in 1993 and 2-for-1 stock splits effected in March 1994 and June 1995.) 10.11 Equity Incentive Plan of the Registrant (filed as Exhibit 10.81 to Thermo TerraTech Inc.'s (formerly Thermo Process Systems Inc.) Annual Report on Form 10-K for the fiscal year ended April 1, 1995 [File No. 1-9549] and incorporated herein by reference). 10.12 Deferred Compensation Plan for Directors of the Registrant (filed as Exhibit 10.10 to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-78052] and incorporated herein by reference). 10.13 Directors' Stock Option Plan of the Registrant (filed as Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 [File No. 1-13104] and incorporated herein by reference). In addition to the stock-based compensation plans of the Registrant, the executive officers of the Registrant may be granted awards under stock-based compensation plans of Thermo Electron for services rendered to the Registrant. The terms of such plans are substantially the same as those of the Registrant's Equity Incentive Plan. 10.14 Amended and Restated Stock Holding Assistance Plan and Form of Promissory Note (filed as Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 27, 1997 [File No. 1-13104] and incorporated herein by reference). 10.15 Operating Agreement of ThermoLase Japan L.L.C. dated as of January 22, 1996, between the Registrant and Fox River Japan Partners, L.P. (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 30, 1995 [File No. 1-13104] and incorporated herein by reference). 10.16 License Agreement dated as of January 22, 1996, between the Registrant and ThermoLase Japan L.L.C. (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 30, 1995 [File No. 1-13104] and incorporated herein by reference). 16 Exhibit Number Description of Exhibit 10.17 Option Agreement dated as of January 22, 1996, between the Registrant and Fox River Japan Partners, L.P. (filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 30, 1995 [File No. 1-13104] and incorporated herein by reference). 10.18 License Agreement dated as of October 30, 1995, between the Registrant and Ronald G. Wheeland, M.D., Professional Corporation (filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 30, 1995 [File No. 1-13104] and incorporated herein by reference). 10.19 Management Agreement dated as of October 30, 1995, between the Registrant and Ronald G. Wheeland, M.D., Professional Corporation (filed as Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 30, 1995 [File No. 1-13104] and incorporated herein by reference). 10.20 Sublease Agreement dated as of October 30, 1995, between the Registrant and Ronald G. Wheeland, M.D., Professional Corporation (filed as Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 30, 1995 [File No. 1-13104] and incorporated herein by reference). 10.21 Lease dated as of April 12, 1995, between the Registrant and The Goldberg Family Trust (filed as Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 30, 1995 [File No. 1-13104] and incorporated herein by reference). 10.22 Lease dated as of December 8, 1995, between the Registrant and Canon Properties (filed as Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 30, 1995 [File No. 1-13104] and incorporated herein by reference). 10.23 Lease dated as of January 17, 1996, between the Registrant and Trammell Crow Equity Partners (filed as Exhibit 10.9 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 30, 1995 [File No. 1-13104] and incorporated herein by reference). 10.24 Master Joint Venture Agreement dated as of October 30, 1996, among the Registrant, Franklin Holdings, S.A. and Yves Micheli (filed as Exhibit No. 26 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 28, 1996, and incorporated herein by reference). 10.25 SoftLight and Spa Thira Franchise and License Agreement dated as of November 8, 1996, between the Registrant and Medical Supply & Service Co. (filed as Exhibit No. 27 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 28, 1996, and incorporated herein by reference). 10.26 Equipment Lease Agreement for SoftLight Lasers dated as of November 8, 1996, between the Registrant and Medical Supply & Service Co. (filed as Exhibit No. 28 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 28, 1996, and incorporated herein by reference). 10.27 Loan Agreement between the Registrant and Thermo Electron Corporation dated July 30, 1997 (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 28, 1997, and incorporated herein by reference). 17 Exhibit Number Description of Exhibit 10.28 Franchise Agreement with the Effective Date of December 31, 1996, between the Company and Yves Micheli (filed as Exhibit 10.1 to the Registrant's Annual Report on Form 10-Q for the quarter ended December 28, 1996, and incorporated herein by reference). 10.29 Amendment to Operating Agreement of ThermoLase Japan L.L.C. dated as of May 1, 1996, by and among the Registrant, Fox River Partners L.P., and ThermoLase Japan L.L.C (filed as Exhibit 10.29 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 27, 1997 [File No. 1-13104] and incorporated herein by reference). 10.30 Form of Terms and Conditions for Purchases of Lasers from Trex Medical Corporation (filed as Exhibit 10.30 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 27, 1997[File No. 1-13104] and incorporated herein by reference). 10.31 Agreement between the Registrant and John C. Hansen (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended January 3, 1998 [File No. 1-13104] and incorporated herein by reference). 10.32 Agreement and Plan of Merger dated June 12, 1998, by and among the company, G Acquisition Corp., a Pennsylvania corporation and wholly owned subsidiary of the company, The Greenhouse Spa, Inc., a Pennsylvania corporation, SMK Group LLC, a Delaware limited liability company, The Stuart Katzoff Trust, a Pennsylvania trust, and Lydia Katzoff (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 4, 1998 [File No. 1-13104] and incorporated herein by reference). 13 Annual Report to Shareholders for the fiscal year ended October 3, 1998 (only those portions incorporated herein by reference). 21 Subsidiaries of the Registrant. 23 Consent of Arthur Andersen LLP. 27 Financial Data Schedule. 18 EX-13 2 Exhibit 13 ThermoLase Corporation Consolidated Financial Statements Fiscal Year 1998
ThermoLase Corporation 1998 Financial Statements Consolidated Statement of Operations Year Ended ------------------------------- (In thousands except per share amounts) Oct. 3, Sept. 27, Sept. 28, 1998 1997 1996 - -------------------------------------------------------------------------- ---------- ---------- --------- Revenues (Note 12) Product revenues $ 22,765 $ 24,196 $ 23,165 Service revenues 17,326 21,037 4,647 --------- --------- --------- 40,091 45,233 27,812 --------- --------- --------- Costs and Operating Expenses: Cost of product revenues 15,590 16,499 15,063 Cost of service revenues 22,285 19,628 4,964 Selling, general, and administrative expenses (Note 8) 22,306 22,972 9,761 Research and development expenses 3,028 5,704 3,470 Restructuring costs (Note 13) 10,155 - - --------- --------- --------- 73,364 64,803 33,258 --------- --------- --------- Operating Loss (33,273) (19,570) (5,446) Interest Income 4,512 2,110 3,482 Interest Expense (Note 9) (5,343) (637) - Equity in Losses of Joint Ventures (Note 4) (1,203) (700) - Gain on Sale of Investments (Note 2) - - 115 --------- --------- --------- Loss Before Income Taxes (35,307) (18,797) (1,849) Income Tax (Provision) Benefit (Note 7) (5,879) 6,392 463 --------- --------- --------- Net Loss $ (41,186) $ (12,405) $ (1,386) ========= ========= ========= Basic and Diluted Loss per Share $ (1.07) $ (.31) $ (.03) ========= ========= ========= Basic and Diluted Weighted Average Shares 38,528 40,075 40,353 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 2
ThermoLase Corporation 1998 Financial Statements Consolidated Balance Sheet (In thousands) Oct. 3, Sept. 27, 1998 1997 - -------------------------------------------------------------------------------------- ---------- ---------- Assets Current Assets: Cash and cash equivalents (includes $51,246 and $49,291 under repurchase $ 52,831 $ 87,843 agreement with affiliated company) Available-for-sale investments, at quoted market value (amortized cost 3,072 12,493 of $3,072 and $12,509; Note 2) Accounts receivable, less allowances of $490 and $402 4,339 5,863 Inventories 6,825 3,248 Prepaid expenses 698 1,718 Prepaid income taxes (Note 7) - 1,687 --------- --------- 67,765 112,852 --------- --------- Property, Plant, and Equipment, at Cost, Net 43,430 39,737 --------- --------- Long-term Prepaid Income Taxes (Note 7) - 6,412 --------- --------- Other Assets (includes note receivable from joint venture of $1,667 in 7,531 7,498 fiscal 1998; Note 8) --------- --------- Cost in Excess of Net Assets of Acquired Companies (Note 3) 15,489 8,096 --------- --------- $ 134,215 $ 174,595 ========= ========= 3 ThermoLase Corporation 1998 Financial Statements Consolidated Balance Sheet (continued) (In thousands except share amounts) Oct. 3, Sept. 27, 1998 1997 - -------------------------------------------------------------------------------------- ---------- ---------- Liabilities and Shareholders' Investment Current Liabilities: Accounts payable $ 3,221 $ 5,163 Accrued payroll and employee benefits 1,633 2,590 Deferred revenue 659 1,355 Accrued restructuring costs (Note 13) 5,153 - Other accrued expenses 5,302 5,722 Due to parent company and affiliated companies 3,200 2,553 --------- --------- 19,168 17,383 --------- --------- Long-term Obligations: 4 3/8% Subordinated Convertible Debentures (includes $4,500 of 115,000 115,000 related-party debt in fiscal 1998; Note 9) Other 66 - --------- --------- 115,066 115,000 --------- --------- Deferred Lease Liability 1,172 1,379 --------- --------- Common Stock Subject to Redemption (Note 1) 40,500 40,500 --------- --------- Commitments and Contingencies (Notes 4, 8, and 10) Shareholders' Investment (Notes 5 and 6): Common stock, $.01 par value, 100,000,000 shares authorized; 40,829,132 408 408 and 40,807,932 shares issued Capital in excess of par value 36,279 46,379 Accumulated deficit (57,107) (15,921) Treasury stock at cost, 1,531,025 and 2,129,549 shares (21,271) (30,523) Net unrealized loss on available-for-sale investments (Note 2) - (10) --------- --------- (41,691) 333 --------- --------- $ 134,215 $ 174,595 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 4
ThermoLase Corporation 1998 Financial Statements Consolidated Statement of Cash Flows Year Ended ------------------------------- (In thousands) Oct. 3, Sept. 27, Sept. 28, 1998 1997 1996 - --------------------------------------------------------------------------- ---------- ---------- ---------- Operating Activities Net loss $ (41,186) $ (12,405) $ (1,386) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 7,234 4,345 1,482 Provision for losses on accounts receivable 88 83 63 Decrease (increase) in prepaid income taxes 5,567 (6,236) (999) Increase in deferred lease liability 71 885 494 Equity in losses of joint ventures (Note 4) 1,203 700 - Noncash restructuring costs (Note 13) 4,193 - - Gain on sale of investments (Note 2) - - (115) Changes in current accounts, excluding the effects of acquisition: Accounts receivable 1,275 (1,374) (380) Inventories (3,450) 1,021 934 Other current assets 1,158 (714) 331 Accounts payable (2,426) (16) 1,774 Other current liabilities 1,804 3,767 2,205 --------- --------- --------- Net cash provided by (used in) operating activities (24,469) (9,944) 4,403 --------- --------- --------- Investing Activities Acquisition, net of cash acquired (Note 3) (4,180) - - Purchases of available-for-sale investments (4,000) (10,400) (49,500) Proceeds from maturities of available-for-sale investments 13,400 41,500 56,525 Proceeds from sale of available-for-sale investments - - 615 Purchases of property, plant, and equipment (4,513) (26,807) (13,230) Investment in other assets (Notes 1 and 4) (983) (1,144) (4,400) Advance under a note receivable from related party (Note 8) (1,667) - - Other 230 - - --------- --------- --------- Net cash provided by (used in) investing activities (1,713) 3,149 (9,990) --------- --------- --------- Financing Activities Net proceeds from issuance of subordinated convertible - 112,551 - debentures (Note 9) Purchases of Company common stock (8,806) (26,072) - Net proceeds from issuance of Company common stock and sale of 776 625 2,591 put options (Note 5) Payment of withholding taxes related to stock option exercises (792) (891) (2,227) Net proceeds from common stock exchange offer (Notes 1 and 5) - 502 - Other (8) - - --------- --------- --------- Net cash provided by (used in) financing activities $ (8,830) $ 86,715 $ 364 --------- --------- --------- 5 ThermoLase Corporation 1998 Financial Statements Consolidated Statement of Cash Flows (continued) Year Ended ------------------------------- (In thousands) Oct. 3, Sept. 27, Sept. 28, 1998 1997 1996 - --------------------------------------------------------------------------- ---------- ---------- ---------- Increase (Decrease) in Cash and Cash Equivalents $ (35,012) $ 79,920 $ (5,223) Cash and Cash Equivalents at Beginning of Year 87,843 7,923 13,146 --------- --------- --------- Cash and Cash Equivalents at End of Year $ 52,831 $ 87,843 $ 7,923 ========= ========= ========= Cash Paid For Income taxes $ - $ 70 $ 12 Interest $ 5,074 $ - $ - Noncash Activities Fair value of assets of acquired company $ 17,128 $ - $ - Cash paid for acquired company (4,180) - - Issuance of Company common stock for acquired company (7,975) - - --------- --------- --------- Liabilities assumed of acquired company $ 4,973 $ - $ - ========= ========= ========= Exchange of common stock for common stock subject to redemption $ - $ 40,500 $ - (Notes 1 and 5) ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 6
ThermoLase Corporation 1998 Financial Statements Consolidated Statement of Shareholders' Investment Year Ended ------------------------------- (In thousands) Oct. 3, Sept. 27, Sept. 28, 1998 1997 1996 - --------------------------------------------------------------------------- ---------- ---------- ---------- Common Stock, $.01 Par Value Balance at beginning of year $ 408 $ 408 $ 401 Issuance of stock under employees' and directors' stock plans - - 7 --------- --------- --------- Balance at end of year 408 408 408 --------- --------- --------- Capital in Excess of Par Value Balance at beginning of year 46,379 85,813 84,354 Activity under employees' and directors' stock plans (3,986) (2,969) 1,459 Issuance of Company common stock for acquisition (Note 3) (6,114) - - Effect of common stock exchange offer (Notes 1 and 5) - (36,759) - Net proceeds from sale of common stock and put options (Note 5) - 294 - --------- --------- --------- Balance at end of year 36,279 46,379 85,813 --------- --------- --------- Accumulated Deficit Balance at beginning of year (15,921) (3,516) (2,130) Net loss (41,186) (12,405) (1,386) --------- --------- --------- Balance at end of year (57,107) (15,921) (3,516) --------- --------- --------- Treasury Stock Balance at beginning of year (30,523) (3,621) (415) Activity under employees' and directors' stock plans 3,969 2,409 (3,206) Issuance of Company common stock for acquisition (Note 3) 14,089 - - Purchases of Company common stock (8,806) (26,072) - Effect of common stock exchange offer (Notes 1 and 5) - (3,239) - --------- --------- --------- Balance at end of year (21,271) (30,523) (3,621) --------- --------- --------- Net Unrealized Gain (Loss) on Available-for-sale Investments Balance at beginning of year (10) (47) 8 Change in net unrealized gain (loss) on available-for-sale 10 37 (55) investments (Note 2) --------- --------- --------- Balance at end of year - (10) (47) --------- --------- --------- Total Shareholders' Investment $ (41,691) $ 333 $ 79,037 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 7 ThermoLase Corporation 1998 Financial Statements Notes to Consolidated Financial Statements 1. Nature of Operations and Summary of Significant Accounting Policies Nature of Operations ThermoLase Corporation (the Company) has developed a laser-based system called SoftLight(R) for the removal of unwanted hair. The SoftLight system uses a low-energy, dermatology laser in combination with a lotion that absorbs the laser's energy to impact hair follicles. In May 1998, the Company received clearance from the U.S. Food and Drug Administration to market laser-based skin-resurfacing services. The Company markets the SoftLight hair-removal and the SoftLight Laser Peel skin-resurfacing services in the United States through its Spa Thira locations and through a network of independent doctors who pay the Company a one-time licensing fee and a per-procedure or minimum royalty, as well as internationally through joint ventures and other licensing arrangements. During fiscal 1998, the Company acquired The Greenhouse Spa, Inc. (Note 3), a luxury, destination spa located in Texas. In connection with this acquisition, ThermoLase is converting all of its domestic Spa Thira locations into facilities that provide both traditional day spa and hair-removal and skin-resurfacing services. The converted spas will be operated under The Greenhouse Spa name. The Company also manufactures and markets skin-care and bath-and-body products and markets dietary supplements through its Creative Beauty Innovations, Inc. (CBI) subsidiary. CBI also manufactures the lotion used in the SoftLight hair-removal process. Principles of Consolidation and Relationship with ThermoTrex Corporation The Company was incorporated in January 1993 as a wholly owned subsidiary of ThermoTrex Corporation. As of October 3, 1998, ThermoTrex owned 27,960,996 shares of the Company's common stock, representing 71% of such stock outstanding. ThermoTrex is a 62%-owned subsidiary of Thermo Electron Corporation. As of October 3, 1998, Thermo Electron owned 2,620,608 shares of the Company's common stock, representing 7% of such stock outstanding. The accompanying financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated. The Company accounts for investments in joint ventures in which it owns between 20% and 50% using the equity method. Under the equity method, the Company records its initial investment in each joint venture at cost, and adjusts the carrying value of the investment to recognize its proportionate share of the joint venture's earnings or losses. In instances where the Company has no obligation to provide additional funding to a joint venture, the Company discontinues applying the equity method when its investment has been reduced to zero. Fiscal Year The Company has adopted a fiscal year ending the Saturday nearest September 30. References to fiscal 1998, 1997, and 1996 are for the years ended October 3, 1998, September 27, 1997, and September 28, 1996, respectively. Fiscal 1998 included 53 weeks; 1997 and 1996 each included 52 weeks. Revenue Recognition The Company generally recognizes product revenues upon shipment of its products. The Company offers a variety of treatment plans for its spa-based services, which include one-time services and multiple treatment plans that provide for varying numbers of treatments or treatment periods. The Company recognizes revenue from the one-time treatment plan upon performance of the related service. Revenues from multiple treatment plans are recognized over the anticipated treatment period, which was six months in each period based upon the average service pattern for customers treated. Deferred revenue in the accompanying balance sheet represents unearned revenue from treatments that will be recognized in the subsequent fiscal year. The Company earns an initial technology licensing fee and ongoing royalties from licensing its SoftLight technology to a network of independent physicians. Initial nonrefundable technology licensing fees are recorded as revenue at the time the technology is transferred to the practitioner. Royalties arising from hair-removal and skin-resurfacing procedures performed by these physicians are recognized when such procedures are performed. 8 1. Nature of Operations and Summary of Significant Accounting Policies (continued) The Company has initiated the process of modifying the terms of its physician-licensing program under which per-procedure royalties have been reduced or eliminated and a minimum royalty and/or flat periodic fee is required. Minimum royalties and flat fees are recognized monthly. The Company earns an initial technology licensing fee and ongoing technology licensing royalties from its international arrangements. Initial nonrefundable technology licensing fees are recorded as revenue at the time the technology is transferred. Ongoing technology licensing royalties are recorded when earned in accordance with contractual terms. The accompanying statement of operations includes international licensing fees of $2,760,000, $4,195,000, and $2,000,000 in fiscal 1998, 1997, and 1996, respectively. Pre-opening Spa Costs The Company expensed all pre-opening costs associated with the establishment and startup of its Spa Thira salons as such costs were incurred. Concentration of Credit Risk The Company sells its skin-care and other personal-care products primarily to regional and national stores and salons. As a result, a majority of the Company's receivables are with these customers. Management does not believe that this concentration of credit risk has, or will have, a significant negative impact on the Company. The Company does not typically require collateral on its credit sales. Stock-based Compensation Plans The Company applies Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock-based compensation plans (Note 6). Accordingly, no accounting recognition is given to stock options granted at fair market value until they are exercised. Upon exercise, net proceeds, including tax benefits realized, are credited to equity. Income Taxes In accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," the Company recognizes deferred income taxes based on the expected future tax consequences of differences between the financial statement basis and the tax basis of assets and liabilities calculated using enacted tax rates in effect for the year in which the differences are expected to be reflected in the tax return, subject to determination of the need for a valuation allowance for any deferred tax assets. Loss per Share During the first quarter of fiscal 1998, the Company adopted SFAS No. 128, "Earnings per Share." As a result, all previously reported losses per share have been restated; however, basic loss per share equals the Company's previously reported loss per share for the fiscal 1997 and 1996 periods. Basic loss per share has been computed by dividing net loss by the weighted average number of shares outstanding during the period. Diluted loss per share does not differ from basic loss per share because the effect of assuming the conversion of convertible obligations and the elimination of the related interest expense, the exercise of stock options, and the effect of redeemable common stock would be antidilutive, due to the Company's net loss in the periods presented. As of October 3, 1998, there were outstanding options to purchase 2,545,910 shares of Company common stock at prices ranging from $1.75 to $29.55 per share, and the Company had outstanding $115,000,000 principal amount of 4 3/8% subordinated convertible debentures, convertible at $17.385 per share. 9 1. Nature of Operations and Summary of Significant Accounting Policies (continued) Cash and Cash Equivalents At fiscal year-end 1998 and 1997, $51,246,000 and $49,291,000, respectively, of the Company's cash equivalents were invested in a repurchase agreement with Thermo Electron. Under this agreement, the Company in effect lends excess cash to Thermo Electron, which Thermo Electron collateralizes with investments principally consisting of corporate notes, U.S. government-agency securities, commercial paper, money market funds, and other marketable securities, in the amount of at least 103% of such obligation. The Company's funds subject to the repurchase agreement are readily convertible into cash by the Company. The repurchase agreement earns a rate based on the 90-day Commercial Paper Composite Rate plus 25 basis points, set at the beginning of each quarter. Cash equivalents at September 27, 1997, included government-agency securities purchased with an original maturity of three months or less. These investments are carried at cost, which approximates market value. Inventories Inventories are stated at the lower of cost (on a first-in, first-out basis) or market value and include materials, labor, and manufacturing overhead. The components of inventories are as follows:
(In thousands) 1998 1997 - ---------------------------------------------------------------------------------- ----------- ----------- Raw Materials and Supplies $2,771 $1,343 Work in Process 759 430 Finished Goods 3,295 1,475 ------ ------ $6,825 $3,248 ====== ====== Property, Plant, and Equipment The costs of additions and improvements are capitalized, while maintenance and repairs are charged to expense as incurred. The Company provides for depreciation and amortization using the straight-line method over the estimated useful lives of the property as follows: building, 40 years; machinery and equipment, 3 to 10 years; and leasehold improvements, the shorter of the term of the lease or the life of the asset. Property, plant, and equipment consist of the following: (In thousands) 1998 1997 - ---------------------------------------------------------------------------------- ----------- ----------- Land $ 730 $ - Building 7,494 - Machinery and Equipment 30,773 28,641 Leasehold Improvements 15,709 17,151 ------- ------- 54,706 45,792 Less: Accumulated depreciation and amortization 11,276 6,055 ------- ------- $43,430 $39,737 ======= =======
Other Assets In June 1996, the Company purchased $4,400,000 of convertible preferred stock of AntiCancer Inc., representing an approximate 10% equity interest in AntiCancer on a diluted basis. AntiCancer is a San Diego-based company that is developing a new chemotherapeutic drug for cancer patients, and is also developing certain 10 1. Nature of Operations and Summary of Significant Accounting Policies (continued) technologies that may be relevant to the SoftLight hair-removal process and other personal-care applications. The Company has the option to purchase for $2,500,000 an additional 5% equity interest in AntiCancer on a diluted basis, exercisable at any time before the earlier of June 19, 2011, or AntiCancer's initial public offering of stock. This investment is being accounted for under the cost method of accounting. In addition, the Company has licensed certain technology from AntiCancer (Note 10). Cost in Excess of Net Assets of Acquired Companies The excess of cost over the fair value of net assets of the acquired companies is amortized using the straight-line method over 40 years. Accumulated amortization was $1,187,000 and $894,000 at fiscal year-end 1998 and 1997, respectively. The Company assesses the future useful life of this asset whenever events or changes in circumstances indicate that the current useful life has diminished. The Company considers the future undiscounted cash flows of the acquired businesses in assessing the recoverability of this asset. If impairment has occurred, any excess of carrying value over fair value is recorded as a loss. Deferred Lease Liability Deferred lease liability in the accompanying balance sheet represents facilities rent that is being recognized ratably over the respective lease terms. Common Stock Subject to Redemption In April 1997, the Company completed an exchange offer whereby its shareholders had the opportunity to exchange one share of existing Company common stock and $3.00 (in cash or Company common stock) for a new unit consisting of one share of Company common stock and one redemption right. The redemption right entitles the holder to sell the related share of common stock to the Company for $20.25 during the period from April 3, 2001, through April 30, 2001. The redemption right will expire and become worthless if the closing price of Company common stock is at least $26.00 for 20 of any 30 consecutive trading days. The redemption rights are guaranteed on a subordinated basis by Thermo Electron. ThermoTrex has agreed to reimburse Thermo Electron in the event Thermo Electron is required to make a payment under the guarantee. In connection with this offer, in April 1997, the Company issued 2,000,000 units in exchange for 2,261,706 shares of Company common stock and $502,000 in cash, net of expenses. As a result of these transactions, the Company reclassified $40,500,000 from "Shareholders' investment" to "Common stock subject to redemption," based on the issuance of 2,000,000 redemption rights, each carrying a maximum liability to the Company of $20.25. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. Available-for-sale Investments In accordance with SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities," the Company's debt securities are considered available-for-sale investments in the accompanying balance sheet and are carried at market value, with the difference between cost and market value, net of related tax effects, recorded as a component of shareholders' investment titled "Net unrealized loss on available-for-sale investments." 11 2. Available-for-sale Investments (continued) Available-for-sale investments in the accompanying balance sheet represents investments in government-agency securities. At October 3, 1998, the cost of available-for-sale investments approximated market value. At September 27, 1997, the difference between the market value and the cost basis of available-for-sale investments was $16,000, which represents gross unrealized losses on those investments. Available-for-sale investments in the accompanying fiscal 1998 balance sheet have a contractual maturity of less than one year. The cost of available-for-sale investments that were sold was based on specific identification in determining realized gains and losses recorded in the accompanying statement of operations. Gain on sale of investments in the accompanying fiscal 1996 statement of operations represents the gross realized gains relating to the sale of available- for-sale investments. 3. Acquisition In June 1998, a wholly owned subsidiary of the Company merged with The Greenhouse Spa, Inc., exchanging 1,000,000 shares of Company common stock, valued at $7,975,000 at the time of the transaction, and the repayment of $4,180,000 of debt for all of the outstanding stock of The Greenhouse Spa. The Greenhouse Spa operates a luxury, destination spa in Arlington, Texas. The acquisition has been accounted for using the purchase method of accounting, and results of its operations have been included in the accompanying financial statements from the date of acquisition. The cost of this acquisition exceeded the estimated fair value of the acquired net assets by $7,686,000, which is being amortized over 40 years. Allocation of the purchase price was based on an estimate of the fair value of the net assets acquired. Pro forma data is not presented as this acquisition was not material to the Company's results of operations. 4. Joint Ventures The Company has entered into joint venture arrangements to market its SoftLight system internationally. The Company currently holds between a 35% and 50% stake in each joint venture, but may increase its ownership to above 50% pursuant to fair-value purchase options included in each agreement. Certain of the joint venture agreements provide that the Company's joint venture partners may, under certain conditions, elect to sell all or part of their ownership interest back to the Company at the fair value of such interest at the time the election is made. Amounts advanced under such arrangements totaled $2,650,000 in fiscal 1998, including funding pursuant to a $1,667,000 note receivable to ThermoLase U.K. (Note 8), and $1,144,000 in fiscal 1997. As of October 3, 1998, the Company had no material obligation for further funding of such arrangements. The accompanying fiscal 1998 and 1997 statement of operations includes $1,203,000 and $700,000, respectively, of equity in losses of joint ventures, reflecting the Company's share of losses from joint venture operations. During fiscal 1998, the Company closed its spa in France, liquidated its French joint venture, and wrote-off its remaining investment. The Company recorded costs of $3,600,000 associated with terminating this arrangement, which are included in restructuring costs in the accompanying statement of operations (Note 13). 5. Common Stock In April 1997, the Company completed an exchange offer whereby the Company received 2,261,706 shares of its common stock and $502,000 in cash, net of expenses, from its shareholders in exchange for 2,000,000 units of common stock subject to redemption (Note 1). At October 3, 1998, the Company had reserved 11,854,104 unissued shares of its common stock for possible issuance under stock-based compensation plans and possible issuance upon conversion of its subordinated convertible debentures. 12 6. Employee Benefit Plans Stock-based Compensation Plans Stock Option Plans The Company has stock-based compensation plans for its key employees, directors, and others. Two of these plans, adopted in 1993, permit the grant of nonqualified and incentive stock options. Two other plans, adopted in fiscal 1997 and 1995, permit the grant of a variety of stock and stock-based awards as determined by the human resources committee of the Company's Board of Directors (the Board Committee), including restricted stock, stock options, stock bonus shares, or performance-based shares. To date, only nonqualified stock options have been awarded under these plans. The option recipients and the terms of options granted under these plans are determined by the Board Committee. Generally, options granted to date are exercisable immediately, but are subject to certain transfer restrictions and the right of the Company to repurchase shares issued upon exercise of the options at the exercise price, upon certain events. The restrictions and repurchase rights lapse over various periods ranging from one to ten years after the first anniversary of the grant date, depending on the term of the option, which may range from five to twelve years. Nonqualified stock options may be granted at any price determined by the Board Committee, although incentive stock options must be granted at not less than the fair market value of the Company's stock on the date of grant. To date, all options have been granted at fair market value. The Company also has a directors' stock option plan that provides for the grant of stock options to outside directors pursuant to a formula approved by the Company's shareholders. Options awarded under this plan are exercisable six months after the date of grant and expire three to seven years after the date of grant. In addition to the Company's stock-based compensation plans, certain officers and key employees may also participate in the stock-based compensation plans of Thermo Electron and ThermoTrex. A summary of the Company's stock option information is as follows:
1998 1997 1996 ------------------- ------------------ ------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Price Price Price Number Number Number of of of (Shares in thousands) Shares Shares Shares - ----------------------------------------------- --------- ---------- -------- ---------- --------- --------- Options Outstanding, Beginning of Year 2,888 $ 8.72 2,820 $ 7.50 3,341 $5.16 Granted 972 7.51 341 14.97 339 25.46 Exercised (358) 2.12 (173) 1.91 (746) 3.48 Forfeited (1,010) 12.74 (100) 7.33 (114) 20.53 ------ ----- ----- Options Outstanding, End of Year 2,492 $ 7.56 2,888 $ 8.72 2,820 $7.50 ===== ====== ===== ====== ===== ===== Options Exercisable 2,492 $ 7.56 2,888 $ 8.72 2,820 $7.50 ===== ====== ===== ====== ===== ===== Options Available for Grant 548 410 451 ===== ===== =====
13 6. Employee Benefit Plans (continued) A summary of the status of the Company's stock options at October 3, 1998, is as follows:
Options Outstanding and Exercisable ---------------------------------------------- Range of Exercise Prices Number Weighted Weighted of Average Average Shares Remaining Exercise (In thousands) Contractual Life Price - ------------------------------------------------------------- -------------- ---------------- -------------- $ 1.75 - $ 8.66 1,912 5.1 years $ 3.97 8.67 - 15.56 254 6.4 years 12.98 15.57 - 22.47 37 5.4 years 16.34 22.48 - 29.38 289 7.2 years 25.46 ----- $ 1.75 - $29.38 2,492 5.5 years $ 7.56 =====
Employee Stock Purchase Program Substantially all of the Company's full-time employees are eligible to participate in an employee stock purchase program sponsored by the Company and Thermo Electron, under which employees can purchase shares of the Company's and Thermo Electron's common stock. Prior to November 1, 1996, the program was sponsored by ThermoTrex and Thermo Electron. Under this program, the applicable shares of common stock can be purchased at the end of a 12-month period at 95% of the fair market value at the beginning of the period, and the shares purchased are subject to a six-month resale restriction. Beginning November 1998, the applicable shares of common stock can be purchased at 85% of the lower of the fair market value at the beginning or end of the period, and the shares purchased are subject to a one-year resale restriction. Shares are purchased through payroll deductions of up to 10% of each participating employee's gross wages. Pro Forma Stock-based Compensation Expense In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-based Compensation," which sets forth a fair-value based method of recognizing stock-based compensation expense. As permitted by SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account for its stock-based compensation plans. Had compensation cost for awards granted after fiscal 1995 under the Company's stock-based compensation plans been determined based on the fair value at the grant dates consistent with the method set forth under SFAS No. 123, the effect on the Company's net loss and loss per share would have been as follows:
(In thousands except per share amounts) 1998 1997 1996 - -------------------------------------------------------------------------- ----------- ---------- ---------- Net Loss: As reported $(41,186) $(12,405) $ (1,386) Pro forma (41,910) (12,848) (1,534) Basic and Diluted Loss per Share: As reported (1.07) (.31) (.03) Pro forma (1.09) (.32) (.04)
14 6. Employee Benefit Plans (continued) Because the method prescribed by SFAS No. 123 has not been applied to options granted prior to October 1, 1995, the resulting pro forma compensation expense may not be representative of the amount to be expected in future years. Pro forma compensation expense for options granted is reflected over the vesting period; therefore, future pro forma compensation expense may be greater as additional options are granted. The weighted average fair value per share of options granted was $3.84, $8.34, and $14.83 in fiscal 1998, 1997, and 1996, respectively. The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:
1998 1997 1996 - ----------------------------------------------------------------------- ----------- ----------- ------------ Volatility 51% 50% 50% Risk-free Interest Rate 5.6% 6.3% 6.3% Expected Life of Options 5.1 years 6.1 years 6.8 years
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions including expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 401(k) Savings Plan Effective January 1, 1995, the majority of the Company's full-time employees are eligible to participate in Thermo Electron's 401(k) savings plan. Contributions to the Thermo Electron 401(k) savings plan are made by both the employee and the Company. Company contributions are based upon the level of employee contributions. The Company contributed and charged to expense for this plan $220,000, $207,000, and $144,000 in fiscal 1998, 1997, and 1996, respectively. 7. Income Taxes The components of the income tax (provision) benefit are as follows:
(In thousands) 1998 1997 1996 - ----------------------------------------------------------------------- ----------- ----------- ------------ Currently (Payable) Refundable: Federal $ - $ - $ 80 State - (27) 25 ------- ------- ------- - (27) 105 ------- ------- ------- (Deferred) Prepaid: Federal (5,879) 6,226 328 State - 193 30 ------- ------- ------- (5,879) 6,419 358 ------- ------- ------- $(5,879) $ 6,392 $ 463 ======= ======= ======= 15 7. Income Taxes (continued) The income tax (provision) benefit in the accompanying statement of operations differs from the amounts calculated by applying the statutory federal income tax rate of 34% to loss before income taxes due to the following: (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------- ----------- ----------- ----------- Income Tax Benefit at Statutory Rate $ 12,004 $ 6,391 $ 629 Differences Resulting From: State income taxes, net of federal tax - 110 36 Nondeductible expenses (120) (109) (202) Increase in valuation allowance (17,763) - - ========= ======== ======== $ (5,879) $ 6,392 $ 463 ========= ======== ========
Prepaid income taxes in the accompanying balance sheet consist of the following:
(In thousands) 1998 1997 - ----------------------------------------------------------------------- ----------- ----------- Prepaid Income Taxes: Net operating loss carryforward $ 19,634 $ 8,232 Inventory basis differences 409 534 Accruals and other reserves 2,598 411 Accrued compensation 280 647 Fixed assets (3,609) - Other, net 511 95 ------- ------- 19,823 9,919 Less: Valuation allowance 19,823 1,820 ------- ------- $ - $ 8,099 ======= =======
The fiscal 1998 valuation allowance relates primarily to previously benefited loss carryforwards and the tax loss arising in fiscal 1998. The increase in the valuation allowance in fiscal 1998 is a result of the Company's increased operating losses, uncertainty concerning the Company's ability to successfully convert its existing spas to Greenhouse spas (Note 1), and resulting uncertainty concerning realization of the tax asset. The allowance also includes the tax effect of employee exercises of stock options of $2,059,000 for which no tax benefit was recognized, and will be used to increase capital in excess of par value when the tax benefit is realized. As of October 3, 1998, the Company had federal tax net operating loss carryforwards of approximately $59,000,000 that will begin to expire in fiscal 2009. 8. Related-party Transactions Corporate Services Agreement The Company and Thermo Electron have a corporate services agreement under which Thermo Electron's corporate staff provides certain administrative services, including certain legal advice and services, risk management, certain employee benefit administration, tax advice and preparation of tax returns, centralized cash management, and certain financial and other services, for which the Company currently pays Thermo Electron annually an amount equal to 0.8% of the Company's revenues. In calendar years 1997 and 1996, the Company paid an amount equal to 1.0% of 16 8. Related-party Transactions (continued) the Company's revenues. Prior to January 1996, the Company paid an annual fee equal to 1.2% of the Company's revenues. For these services, the Company was charged $348,000, $452,000, and $293,000 in fiscal 1998, 1997, and 1996, respectively. The annual fee is reviewed and adjusted annually by mutual agreement of the parties. Management believes that the service fee charged by Thermo Electron is reasonable and that such fees are representative of the expenses the Company would have incurred on a stand-alone basis. The corporate services agreement is renewed annually but can be terminated upon 30 days' prior notice by the Company or upon the Company's withdrawal from the Thermo Electron Corporate Charter (the Thermo Electron Corporate Charter defines the relationship among Thermo Electron and its majority-owned subsidiaries). For additional items such as employee benefit plans, insurance coverage, and other identifiable costs, Thermo Electron charges the Company based upon costs attributable to the Company. Other Related-party Services ThermoTrex provided personnel administration, accounting, data processing, and general administrative management services to the Company, which were charged to the Company based on actual usage. This agreement was terminated during fiscal 1997 and services are no longer being provided. For these services, the Company was charged $144,000 and $327,000 in fiscal 1997 and 1996, respectively. Operating Leases The Company subleases office and research facilities from ThermoTrex and is charged for the actual square footage occupied at approximately the same cost-per-square-foot paid by ThermoTrex under its prime lease. The accompanying statement of operations includes expenses from this sublease of $306,000, $296,000, and $125,000 in fiscal 1998, 1997, and 1996, respectively. During fiscal 1998, the Company relocated its operations and will not be paying for this space after October 3, 1998. Laser Manufacturing Arrangement During fiscal 1998, 1997, and 1996, the Company purchased laser systems and components at an aggregate cost of $2,902,000, $11,390,000, and $8,549,000, respectively, from Trex Medical Corporation, a majority-owned subsidiary of ThermoTrex. Other Related-party Purchases During fiscal 1998, the Company purchased products totaling $241,000 from Bird Products Corporation, a wholly owned subsidiary of Thermo Electron. Note Receivable In October 1997, the Company advanced $1,667,000 to ThermoLase U.K. under a note receivable, due December 31, 2003, and bearing interest at 8.0%, payable annually. ThermoLase U.K., a subsidiary of a joint venture that is 50%-owned by the Company, is marketing the Company's SoftLight system in England. The note receivable is included in other assets in the accompanying fiscal 1998 balance sheet. Subordinated Convertible Debentures See Note 9 for subordinated convertible debentures of the Company that are held by Thermo Electron. Repurchase Agreement The Company invests excess cash in a repurchase agreement with Thermo Electron as discussed in Note 1. 17 9. Subordinated Convertible Debentures In August 1997, the Company issued and sold at par value $115,000,000 principal amount of 4 3/8% subordinated convertible debentures due 2004. The debentures are convertible into shares of the Company's common stock at a conversion price of $17.385 per share and are guaranteed on a subordinated basis by Thermo Electron. ThermoTrex has agreed to reimburse Thermo Electron in the event Thermo Electron is required to make a payment under the guarantee. During fiscal 1998, Thermo Electron purchased $4,500,000 principal amount of such debentures in the open market. See Note 11 for fair value information pertaining to these debentures. 10. Commitments and Contingencies Operating Leases In addition to the leases described in Note 8, the Company occupies office, manufacturing, warehouse, and service facilities under various operating lease arrangements. The accompanying statement of operations includes expenses from operating leases of $4,867,000, $3,806,000, and $915,000 in fiscal 1998, 1997, and 1996, respectively. Future minimum payments due under noncancellable operating leases as of October 3, 1998, are $3,588,000 in fiscal 1999; $3,681,000 in fiscal 2000; $3,674,000 in fiscal 2001; $3,731,000 in fiscal 2002; $3,802,000 in fiscal 2003; and $14,963,000 in fiscal 2004 and thereafter. Total future minimum lease payments are $33,439,000, of which $2,121,000 relates to lease payments for the three Spa Thira facilities that have been closed, net of assumed sublease receipts, and which amount is included in accrued restructuring costs in the accompanying fiscal 1998 balance sheet (Note 13). Technology License Agreements In June 1996, the Company purchased an approximate 10% equity interest in AntiCancer (Note 1). In addition, the Company has licensed from AntiCancer certain technology related to hair removal, stimulation of hair growth, suppression of hair growth, and hair coloring under an agreement that calls for up to $1,500,000 in future payments by the Company upon the attainment of certain milestones by AntiCancer. In addition to such future payments, the Company will be substantially responsible for development costs incurred after the attainment of such milestones. In the event that the funded development efforts result in commercially viable products that the Company elects to market, the Company will pay AntiCancer a royalty based on sales, subject to certain minimum payments. In February 1993, the Company entered into an irrevocable exclusive technology license agreement for the use of the laser-based hair-removal system technology. Under the terms of the agreement, the Company will pay a royalty equal to 0.25% of the revenues recorded from the sale or use of the laser-based hair-removal system through February 10, 2010. No material amounts have been incurred under this agreement. Contingencies The Company has from time to time received allegations that its SoftLight laser-based hair-removal system infringes the intellectual property rights of others, and the Company may continue to receive such allegations in the future. In general, an owner of intellectual property can prevent others from using such property and is entitled to damages for unauthorized past usage. The Company has investigated the bases of the allegations it has received to date and, based on opinions of its counsel, believes that if it were sued on these bases it would have meritorious defenses. The Company is contingently liable with respect to lawsuits and other matters that arose in the ordinary course of business. In the opinion of management, these contingencies will not have a material adverse effect upon the financial position of the Company or its results of operations. 18 11. Fair Value of Financial Instruments The Company's financial instruments consist primarily of cash and cash equivalents, available-for-sale investments, accounts receivable, accounts payable, amounts due to parent company and affiliated companies, subordinated convertible debentures, and common stock subject to redemption. The carrying amounts of the Company's cash and cash equivalents, accounts receivable, accounts payable, and amounts due to parent company and affiliated companies approximate fair value due to their short-term nature. Available-for-sale investments are carried at fair value in the accompanying balance sheet. The fair values were determined based on quoted market prices. See Note 2 for information pertaining to the fair value of available-for-sale investments. The fair value of the Company's subordinated convertible debentures, based on quoted market prices, was $95,519,000 and $123,165,000 at October 3, 1998, and September 27, 1997, respectively. The fair value is less than the carrying amount in fiscal 1998 primarily due to a decrease in the market price of the Company's common stock relative to the conversion price of the debentures. The fair value of the Company's common stock subject to redemption, based upon quoted market prices was $30,750,000 and $37,000,000 at October 3, 1998, and September 27, 1997, respectively. 12. Export Sales Export sales, including revenues earned from the Company's international licensing arrangements, were less than 10% of the Company's total revenues in fiscal 1998 and 1997, and were $2,820,000 in fiscal 1996. In general, export sales are denominated in U.S. dollars. 13. Restructuring Costs and Related Uncertainties Restructuring costs totaled $10,155,000 in fiscal 1998. These costs consist of $4,638,000 related to the closure of three domestic Spa Thira locations, including $2,429,000 for the write-off of leasehold improvements and related spa assets and $2,209,000 primarily for abandoned-facility payments, net of assumed sublease receipts. In addition, in connection with the closure of its spa in France, operated under a joint venture agreement, the Company recorded costs of $3,600,000, primarily to liquidate the joint venture and to write-off its remaining investment. Restructuring costs also include $1,917,000 related to certain actions including the relocation of the Company's corporate office to its CBI subsidiary in Carrollton, Texas. This amount primarily represents severance of $1,080,000 for 40 terminated employees and the write-off of fixed assets no longer of use. During fiscal 1998, the Company expended $809,000 for restructuring activities and the remaining obligation of $5,153,000 associated with these actions is included in accrued restructuring costs in the accompanying fiscal 1998 balance sheet. The Company's investment in leasehold improvements and related equipment at its remaining spas totaled $16,677,000 at October 3, 1998. The realizability of these assets is dependent on future cash flows from spa operations. The Company's future cash flows from operating its spas are dependent on the degree of success it experiences following the transition of the spas to Greenhouse spas as discussed in Note 1. It is reasonably possible that actual cash flows from spa operations will vary significantly from the Company's estimates of such cash flows. As a result, the carrying amount of spa assets could change significantly in the near term. Additionally, at October 3, 1998, the Company has operating lease commitments of $28,641,000 related to these spas. Were any additional spas to close in the future, the amount of lease obligation related to such spas in excess of income from subleasing the facilities would be recorded as a loss. 19 14. Unaudited Quarterly Information (In thousands except per share amounts)
1998 First Second Third Fourth(a) - ---------------------------------------------------------------- ---------- ---------- ---------- ---------- Revenues $13,449 $ 8,092 $ 8,943 $ 9,607 Gross Profit 3,430 (1,339) 119 6 Net Loss (2,035) (8,535) (8,349) (22,267) Basic and Diluted Loss per Share (.05) (.22) (.22) (.57) 1997 First Second Third Fourth - ---------------------------------------------------------------- ---------- ---------- ---------- ---------- Revenues $ 8,610 $11,666 $12,900 $ 12,057 Gross Profit 1,783 2,022 2,935 2,366 Net Loss (1,389) (3,699) (3,733) (3,584) Basic and Diluted Loss per Share (.03) (.09) (.09) (.09)
(a) Reflects restructuring costs (Note 13) and establishment of a tax valuation allowance (Note 7). 15. Subsequent Event In November 1998, the Company's employees, excluding its officers and directors, were offered the opportunity to exchange previously granted options to purchase shares of Company common stock for an amount of options equal to half of the number of options previously held, exercisable at a price equal to the fair market value at the time of the exchange offer. Holders of options to acquire 465,000 shares at a weighted average exercise price of $13.62 elected to participate in this exchange and, as a result, received options to purchase 232,000 shares of Company common stock at $4.66 per share. The other terms of the new options are the same as the exchanged options except that the holders may not sell shares pursuant to such new options for six months from the exchange date. 20 Report of Independent Public Accountants To the Shareholders and Board of Directors of ThermoLase Corporation: We have audited the accompanying consolidated balance sheet of ThermoLase Corporation (a Delaware corporation and 71%-owned subsidiary of ThermoTrex Corporation) and subsidiaries as of October 3, 1998, and September 27, 1997, and the related consolidated statements of operations, shareholders' investment, and cash flows for each of the three years in the period ended October 3, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ThermoLase Corporation and subsidiaries as of October 3, 1998, and September 27, 1997, and the results of their operations and their cash flows for each of the three years in the period ended October 3, 1998 in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts November 9, 1998 (except with respect to the matter discussed in Note 15, as to which the date is November 24, 1998) 21 Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, are made throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed immediately after this Management's Discussion and Analysis of Financial Condition and Results of Operations under the heading "Forward-looking Statements." Overview The Company has developed a laser-based system called SoftLight(R) for the removal of unwanted hair. The SoftLight system uses a low-energy, dermatology laser in combination with a lotion that absorbs the laser's energy to disable hair follicles. In April 1995, the Company received clearance from the U.S. Food and Drug Administration (FDA) to commercially market hair-removal services using the SoftLight system. The Company began earning revenue from the SoftLight system in the first quarter of fiscal 1996 as a result of opening its first commercial location (Spa Thira) in November 1995. The Company opened a total of four spas during fiscal 1996, opened nine additional spas during fiscal 1997, and opened its fourteenth spa in October 1997. In May 1998, the Company received clearance from the FDA to market cosmetic skin-resurfacing services using the same laser as the Company's hair-removal system. In this process, the laser's energy reacts with an activating lotion, creating heat and mechanical energy that remove the tough outer layer of dead skin. The treatment, known as the SoftLight Laser Peel, is being offered at all of the Company's Spa Thira locations, as well as through its physician licensees. Rather than continuing to open additional Spa Thira locations, the Company is concentrating its resources on attempting both to increase the capacity utilization of its existing spas and to expand its physician-licensing program and international licensing arrangements, discussed below. In connection with its acquisition of The Greenhouse Spa, Inc. in June 1998 (Note 3), a full-service, luxury, destination spa, the Company evaluated which of its locations would be converted to Greenhouse spas and whether any of its Spa Thira locations should be closed or sold. As a result of this evaluation, the Company decided to close three of its domestic Spa Thira locations and convert its remaining eleven domestic spas into Greenhouse spas which, in addition to hair-removal and skin-resurfacing services, will offer more traditional day-spa services, such as massages and facials. The Company's future results of operations will be affected by the Company's ability to successfully convert the existing spas into Greenhouse spas (Note 13). The period through June 1999 will be critical in determining the economic viability of this strategy. Key to the success of this strategy will be whether the results of the Greenhouse spas reflect substantial progress toward breakeven operations in this timeframe. In June 1996, the Company commenced a program to license to physicians and others the right to perform the Company's patented SoftLight hair-removal procedure. The Company also provides the licensees with the lasers and lotion that are necessary to perform the service. In June 1998, the Company began to offer the SoftLight Laser Peel procedure through its spas and existing physician licensees. The Company has experienced a decrease in revenues from its hair-removal services, as discussed in the results of operations below. In response to this trend and in an attempt to establish price points and other conditions designed to increase demand and revenues, the Company significantly reduced treatment prices at its Spa Thira locations and is in the process of modifying the terms and conditions of its physician-licensing program. Under the terms of the modified licenses, per-procedure royalties have been reduced or eliminated and a minimum royalty and/or flat periodic fee requirement has been introduced. In addition, the Company has begun offering licensees the opportunity to purchase or lease SoftLight lasers in lieu of paying ongoing license fees. As a result of these changes and other factors, including the addition of new physician licensees in fiscal 1998, there has been a net reduction of 8% in the number of physician licensees, compared to the number under agreement at the end of fiscal 1997, and two contracts with other licensees that accounted for approximately 4% of the Company's total hair-removal revenues in fiscal 1997 were terminated. There can be no assurance that the strategies described above will be successful in improving the Company's results of operations. 22 Overview (continued) The Company is marketing the SoftLight system internationally through joint ventures and other licensing arrangements. In January 1996, the Company established a joint venture in Japan. During fiscal 1997, the Company established joint ventures in France in November 1996 and England in September 1997, and six additional licensing arrangements: in Saudi Arabia in November 1996; in Tunisia and Belgium in December 1996; in the United Arab Emirates and Oman in March 1997; in Switzerland in April 1997; in Brazil in June 1997; and in the United Kingdom (excluding England) and the Republic of Ireland in September 1997. In December 1997, the Company established a joint venture to market the SoftLight system in Australia, Cyprus, Germany, Greece, New Zealand, South Africa, and Spain. The Company's international arrangements resulted in the opening of spas in Paris in May 1997 and in Lugano, Switzerland, in October 1997. The Company has decided to close the spa in Paris and liquidate the joint venture (Note 13). The Company also manufactures and markets skin-care, bath-and-body products, and markets dietary supplements through its Creative Beauty Innovations, Inc. (CBI) subsidiary, which also manufactures the lotion used in the SoftLight hair-removal process. Results of Operations Fiscal 1998 Compared With Fiscal 1997 Revenues decreased to $40.1 million in fiscal 1998 from $45.2 million in fiscal 1997. The Company earned revenues from hair-removal services and related activities of $17.3 million in fiscal 1998, compared with $21.0 million in fiscal 1997. The decrease in revenues resulted in part from reduced demand and price reductions at the Company's Spa Thira locations in fiscal 1998 compared with fiscal 1997, offset in part by an increase in the number of U.S. spas to 14, compared with 13 spas open in fiscal 1997. As discussed in the overview above, the Company will close three of its domestic spas (Note 13). Revenues from the Company's physician-licensing program decreased in fiscal 1998 compared with fiscal 1997, due to a reduction in royalty rates and other changes to the financial terms of the licenses and the termination of two significant licensing contracts, described above, as well as a decrease in one-time fees due to a decline in the number of new physician licensees. Revenues from hair-removal services and related activities included $2.8 million in fiscal 1998 and $4.2 million in fiscal 1997 for minimum guaranteed payments recorded upon granting technology rights under the Company's international licensing arrangements. The amount of minimum guaranteed payments recorded by the Company will vary depending on the Company's ability to enter into additional international licensing arrangements, the availability of additional territories, and the terms of any such arrangements. Revenues at CBI decreased to $22.8 million in fiscal 1998 from $24.2 million in fiscal 1997, primarily due to a shift by certain of its retail customers away from health- and beauty-aid sales. These decreases were offset in part by the inclusion of $0.8 million of revenues from The Greenhouse Spa, acquired in June 1998 (Note 3). The gross profit margin in fiscal 1998 was 6%, compared with 20% in fiscal 1997. The Company's hair-removal business reported gross profit of negative $5.0 million in fiscal 1998, compared with gross profit of $1.4 million in fiscal 1997. Each period was impacted by the operations of the Spa Thira business, which has been operating below maximum capacity as the Company seeks to develop its client base, expand its product lines, and refine its operating procedures. This negative impact was offset in part by the effect of physician-licensing fees and minimum guaranteed payments relating to international licensing arrangements, which have a relatively high gross profit margin. In addition, fiscal 1997 was negatively impacted by pre-opening costs incurred in connection with new spa openings. The gross profit margin decreased in fiscal 1998, primarily due to decreased revenues at the Company's Spa Thira locations and the physician-licensing program, as well as increased fixed costs associated with operating more spas in fiscal 1998. The Company believes that increasing spa utilization by broadening the array of spa-related services and products offered, through conversion of the remaining Spa Thiras into Greenhouse spas, is critical to its ability to improve the profitability of its spas. The degree to which the Company's recent changes in pricing structure are successful will also affect the Company's gross profit margin. The gross profit margin at CBI was 32% in both periods. 23 Fiscal 1998 Compared With Fiscal 1997 (continued) Selling, general, and administrative expenses as a percentage of revenues increased to 56% in fiscal 1998 from 51% in fiscal 1997, primarily due to a decrease in revenues. Research and development expenses decreased to $3.0 million in fiscal 1998 from $5.7 million in fiscal 1997, primarily due to a reduction in the number of outside testing facilities and consultants used by the Company, as well as a reduction in payroll costs. During fiscal 1998, the Company recorded restructuring costs of $10.2 million, primarily related to closing three of its domestic spas, closing its spa in France and liquidating the related French joint venture, and relocating its corporate office to its CBI subsidiary in Carrollton, Texas. The degree to which the Company is successful in improving its profitability will affect the future of its remaining spas and the realizability of its related assets (Note 13). Interest income increased to $4.5 million in fiscal 1998 from $2.1 million in fiscal 1997, primarily due to interest income earned on the invested proceeds from the Company's August 1997 issuance of $115.0 million principal amount of 4 3/8% subordinated convertible debentures, offset in part by cash used to fund the Company's loss. Interest expense increased to $5.3 million in fiscal 1998 from $0.6 million in fiscal 1997, primarily due to the inclusion of a full period of interest expense on the subordinated convertible debentures. Equity in losses of joint ventures in the accompanying statement of operations represents the Company's proportionate share of losses from its international joint ventures, beginning in the third quarter of fiscal 1997 (Note 4). The provision for income taxes in fiscal 1998 reflects the establishment of a valuation allowance for the tax asset associated with previously benefited loss carryforwards and the tax loss arising in fiscal 1998. The Company establishes valuation allowances in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The increase in the valuation allowance in fiscal 1998 is a result of the Company's increased operating losses, uncertainty concerning the Company's ability to successfully convert its existing spas to Greenhouse spas (Note 1), and resulting uncertainty concerning realization of the tax asset (Note 7). In May 1998, a complaint, filed as a class action, was filed in California Superior Court against the Company alleging that certain advertisements and representations made by the Company and/or its licensees relating to the Company's SoftLight laser hair-removal process were misleading. The Company has settled this lawsuit for a nominal amount, subject to court approval. Fiscal 1997 Compared With Fiscal 1996 Revenues increased to $45.2 million in fiscal 1997 from $27.8 million in fiscal 1996. The Company earned revenues from hair-removal services and related activities of $21.0 million in fiscal 1997, compared with $4.6 million in fiscal 1996. The increase in revenues resulted primarily from an increase in the number of U.S. spas to 13, nine of which opened in fiscal 1997, compared with four spas open during fiscal 1996. Revenues also increased as a result of fees from the Company's physician-licensing program, which was started in the third quarter of fiscal 1996 and did not produce significant revenues during fiscal 1996. In addition, revenues from hair-removal services and related activities in fiscal 1997 included $4.2 million of minimum guaranteed payments recorded upon granting technology rights under the Company's international licensing arrangements, compared with $2.0 million in fiscal 1996. Revenues at CBI increased slightly to $24.2 million in fiscal 1997 from $23.2 million in fiscal 1996. A portion of CBI's revenues are derived from sales to large retailers, which have a relatively long buying cycle that results in periodic variations in revenues. The gross profit margin in fiscal 1997 was 20%, compared with 28% in fiscal 1996. The Company's hair-removal business reported gross profit of $1.4 million in fiscal 1997, compared with gross profit of negative $0.3 million in fiscal 1996. Each period was impacted by the early operations of the Spa Thira business, which has been operating below maximum capacity as discussed in the results of operations for fiscal 1998, and pre-opening costs incurred in connection with new spa openings, offset in part by the effect of physician-licensing fees and minimum guaranteed payments relating to international licensing arrangements, which have a relatively high gross profit margin. The gross profit margin at CBI declined to 32% in fiscal 1997 from 35% in fiscal 1996, as a result of a continued shift to lower-margin products. 24 Fiscal 1997 Compared With Fiscal 1996 (continued) Selling, general, and administrative expenses as a percentage of revenues increased to 51% in fiscal 1997 from 35% in fiscal 1996. The increase was primarily due to costs related to expanding the Company's administrative and management efforts for its Spa Thira business and domestic and international licensing programs; increased marketing efforts, including national advertising costs for the physician-licensing program; and legal costs associated with obtaining and protecting the Company's patent rights. Research and development expenses increased to $5.7 million in fiscal 1997 from $3.5 million in fiscal 1996, primarily due to continued pre-clinical and clinical research related to improving the effectiveness of the Company's hair-removal process and developing its SoftLight Laser Peel skin-resurfacing process, and the investigation of other health and beauty applications for its proprietary laser technology. Interest income decreased to $2.1 million in fiscal 1997 from $3.5 million in fiscal 1996, primarily as a result of lower average invested balances, which resulted primarily from property and equipment expenditures for the Company's Spa Thira locations and licensing programs and cash used to fund the Company's operating loss. Interest expense in fiscal 1997 represents interest associated with the $115.0 million principal amount of 4 3/8% subordinated convertible debentures issued in August 1997. Equity in losses of joint ventures in the accompanying statement of operations represents the Company's proportionate share of losses from its international joint ventures, beginning in the third quarter of fiscal 1997. The effective tax rate approximates the statutory federal income tax rate in fiscal 1997 due to nondeductible amortization of cost in excess of net assets of acquired company offset by a state income tax benefit arising from operating losses in certain states. The effective tax rate is less than the statutory federal income tax rate in fiscal 1996 due to nondeductible amortization of cost in excess of net assets of acquired company and the impact of a provision for state income taxes. Liquidity and Capital Resources Consolidated working capital was $48.6 million at October 3, 1998, compared with $95.5 million at September 27, 1997. Included in working capital are cash, cash equivalents, and available-for-sale investments of $55.9 million at October 3, 1998, compared with $100.3 million at September 27, 1997. Operating activities used $24.5 million of cash during fiscal 1998. Cash was used primarily to fund the Company's loss, excluding noncash items. Cash of $3.5 million was used to fund an increase in inventories due to the development of new branded product lines at CBI, introduced in the fourth quarter of fiscal 1998. A decrease in accounts payable used $2.4 million of cash, primarily due to the timing of payments. Excluding available-for-sale investment activity, the Company's investing activities in fiscal 1998, consisted primarily of $4.5 million of expenditures for purchases of property, plant, and equipment, including the purchase of laser systems and components from Trex Medical Corporation, a majority-owned subsidiary of ThermoTrex Corporation (Note 8). In June 1998, a wholly owned subsidiary of the Company merged with The Greenhouse Spa, exchanging 1,000,000 shares of Company common stock, valued at $8.0 million at the time of the transaction, and the repayment of $4.2 million of debt for all of the outstanding stock of The Greenhouse Spa (Note 3). In connection with certain of the Company's joint venture arrangements, the Company advanced $1.7 million under a note receivable (Note 8). The Company's financing activities during fiscal 1998 consisted primarily of repurchases of Company common stock. In September 1997, the Company's Board of Directors authorized the repurchase by the Company of up to 1,000,000 shares of Company common stock through September 4, 1998, in the open market, in negotiated transactions, or pursuant to the exercise by investors of standardized put options written on the Company's common stock. During fiscal 1998, the Company purchased 643,000 shares of its common stock for $8.8 million. 25 Liquidity and Capital Resources (continued) The Company's capital expenditures during fiscal 1999 will primarily be affected by the number of physicians and other domestic and international licensees engaged in its licensing programs and converting the remaining eleven domestic Spa Thira locations to Greenhouse spas. Depending on the extent of renovations necessary, the cost of converting each spa is expected to be approximately $50,000 to $150,000. In addition, the Company plans to expend approximately $900,000 to renovate the original Greenhouse Spa in Arlington, Texas. The Company expects that it will finance its capital requirements through its internal funds. The Company's ongoing operating losses are continuing to consume significant amounts of the Company's working capital. Market Risk The Company is exposed to market risk from changes in interest rates and equity prices, which could affect its future results of operations and financial condition. The Company manages its exposure to these risks through its regular operating and financing activities. Interest Rates The Company's available-for-sale investments and long-term obligations are sensitive to changes in interest rates. Interest rate changes would result in a change in the fair value of these financial instruments due to the difference between the market interest rate and the rate at the date of purchase or issuance of the financial instrument. A 10% decrease in year-end fiscal 1998 market interest rates would result in a negative impact of $1.2 million on the net fair value of the Company's interest-sensitive financial instruments. Equity Prices The Company's 4 3/8% subordinated convertible obligation is sensitive to fluctuations in the price of Company common stock into which it is convertible. In addition, the Company's common stock subject to redemption is sensitive to fluctuations in the price of the Company's units. Changes in equity prices would result in changes in the fair value of the Company's convertible obligation and common stock subject to redemption due to the difference between the current market price and the market price at the date of issuance of the financial instrument. A 10% increase in the year-end fiscal 1998 market equity prices would result in a negative impact of $13.9 million on the net fair value of the Company's price-sensitive equity financial instruments. Year 2000 The Company continues to assess the potential impact of the year 2000 on the Company's internal business systems and operations. The Company's year 2000 initiatives include (i) testing and upgrading internal business systems and facilities; (ii) contacting key suppliers, vendors, and customers to determine their year 2000 compliance status; and (iii) developing contingency plans. The Company's State of Readiness The Company has tested and evaluated its critical information-technology systems for year 2000 compliance. The Company plans to upgrade or replace its noncompliant systems. The Company expects that all of its material information-technology systems will be year 2000 compliant by the end of 1999. The Company is also evaluating the potential year 2000 impact on its facilities, including its buildings and utility systems. Any problems that are identified will be prioritized and remediated based on their assigned priority. The Company will continue periodic testing of its critical internal business systems and facilities in an effort to minimize operating disruptions due to year 2000 issues. 26 Year 2000 (continued) Contingency Plan The Company intends to develop a contingency plan that will allow its primary business operations to continue despite disruptions due to year 2000 issues. This plan may include identifying and securing alternative suppliers, increasing inventories, and modifying production facilities and schedules. As the Company continues to evaluate the year 2000 readiness of its business systems and facilities, significant suppliers, vendors, and customers, it will modify and adjust its contingency plan as may be required. Estimated Costs to Address the Company's Year 2000 Issues The Company does not expect total year 2000 remediation costs to be material, but there can be no assurance that the Company will not encounter unexpected costs or delays in achieving year 2000 compliance. The Company does not track costs incurred for its year 2000 compliance project. Such costs are principally the related payroll costs for its information systems employees. Risks of the Company's Year 2000 Issues While the Company is attempting to minimize any negative consequences arising from the year 2000 issue, there can be no assurance that year 2000 issues will not have a material adverse impact on the Company's business, operations, or financial condition. If any of the Company's material suppliers, vendors, or customers experience business disruptions due to year 2000 issues, the Company might also be materially adversely affected. There is expected to be a significant amount of litigation relating to the year 2000 issue and there can be no assurance that the Company will not incur material costs in defending or bringing lawsuits. Any unexpected costs or delays arising from the year 2000 issue could have a significant adverse impact on the Company's business, operations, and financial condition. 27 Forward-looking Statements In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company wishes to caution readers that the following important risk factors, among others, in some cases have affected, and in the future could affect, the Company's actual results and could cause its actual results in fiscal 1999 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Recent Operating Losses of the Company. The Company incurred losses of approximately $41.2 million, $12.4 million, $1.4 million, and $1.7 million in fiscal 1998, 1997, 1996, and 1995, respectively. At October 3, 1998, the Company's accumulated deficit was $57.1 million. There can be no assurance that the Company will achieve profitable operations in any future period. Difficulty in Retaining Qualified Management. The Company has had difficulty in retaining management, technical, marketing, and sales personnel, due in part to the relocation of the Company headquarters to Carrollton, Texas. The Company's future success depends in part on whether the Company can attract and retain highly qualified management, technical, marketing, and sales personnel. The Company faces significant competition for the services of such personnel. There can be no assurance that the Company will attract and retain personnel with the background and expertise necessary to support the development of the Company's businesses. The failure to hire and retain such personnel could materially adversely affect the financial position and results of operations of the Company. The Company continues to employ The Greenhouse Spa management and other personnel and will rely on such management and personnel to operate The Greenhouse Spa and assist in the conversion of the Spa Thira locations to Greenhouse spas. There can be no assurance that the Company will be able to continue to retain the services of The Greenhouse Spa management and other personnel on terms acceptable to the Company. Conversion of Spa Thiras; Focus of Business; Absence of Experience Relating to Day-Spa Operations. The Company is in the process of converting its domestic Spa Thira locations to Greenhouse luxury day spas. The Company has minimal experience relating to the ownership, operation, or marketing of spas providing traditional day spa services or, with the exception of the Greenhouse management, relating to the ownership, operation, or marketing, of a destination spa. In connection with the conversions, the Company is refocusing its laser hair-removal spa business to include a broader range of day-spa services such as skin resurfacing (including the Company's SoftLight Laser Peel), traditional day-spa services, and an expanded line of beauty and personal care products. The Company will try to identify a mix of spa services and products and prices that will lead to profitable operations. There can be no assurance that these efforts will be successful. Future Significant Expenditures Required. Continued development of the Company's business will require significant expenditures. There can be no assurance that the balance of the Company's working capital will be sufficient to fund its planned operations. The Company's financing requirements will depend on many factors, including the progress of its licensing program, development efforts, the refocusing of its business on traditional spa services as well as additional services and products, and its ability to limit its expenses and reduce operating losses. The Company may need to raise additional funds and if needed, such funds may not be available on acceptable terms or at all. Neither the Company's ultimate parent, Thermo Electron Corporation, nor any of its subsidiaries, including ThermoTrex Corporation, has any obligation to supply any funds to the Company. The inability of the Company to raise needed funds would have a material adverse effect on the Company's financial condition and results of operations. Potential for Customer Claims; Insurance. The Company has received complaints from several of its physician licensees, joint venture partners, and consumers stating that that the Company's SoftLight hair-removal process has not met their expectations. Some of these parties have filed lawsuits against the Company. The Company may receive similar allegations and/or become subject to similar lawsuits in the future. There can be no assurance that 28 additional litigation relating to such claims will not be brought against the Company, or that the Company would prevail in any or all such cases, if brought. The Company has no insurance coverage for such claims. In addition, the laser hair-removal and skin-resurfacing market involves the treatment of persons who could be harmed by or have an adverse reaction to the SoftLight laser resulting in liability claims against the Company. Such claims could result in damages against the Company and negative publicity. The Company currently carries general liability, product liability, and other insurance coverage. There can be no assurance that such coverage will be adequate to cover all losses arising from such claims or that in the future such insurance will be available to the Company at reasonable cost or at all. Disappointing Market Acceptance; Need for Improved SoftLight Laser Hair-Removal Process. Market acceptance of the SoftLight laser hair-removal process has been disappointing to date. The Company continues to study the SoftLight laser hair-removal process to better understand the effects of the process. Failure to improve the process, including extending the duration of time for which hair is removed using the SoftLight process, will continue to limit the Company's ability to successfully commercialize the SoftLight laser hair-removal process. The Company continues to have difficulty demonstrating to consumers that the SoftLight laser hair-removal process offers advantages over traditional methods of hair-removal and alternative laser and other types of hair-removal systems. There can be no assurance that the Company will be successful in its efforts to improve the SoftLight laser hair-removal process or the market acceptance thereof. Uncertain Market Acceptance of SoftLight Laser Peel. The SoftLight Laser Peel for skin resurfacing is a new application of the SoftLight process and differs from alternative methods of skin resurfacing. Consumers may not accept or be receptive to the potential benefits of the SoftLight Laser Peel. Market acceptance of the SoftLight Laser Peel will depend in large part upon the ability of the Company to demonstrate to consumers the safety and effectiveness of the SoftLight Laser Peel and its advantages over other methods of skin resurfacing, including carbon dioxide and erbium skin-resurfacing lasers and chemical peels. There can be no assurance that the SoftLight Laser Peel will achieve sufficient market acceptance in order to permit the Company to successfully commercialize the SoftLight Laser Peel. Dependence Upon Proprietary Technology. There can be no assurance that other companies or individuals are not investigating, developing, or using other technologies that are similar to the Company's technology, that the Company will be awarded any additional patents, or that the Company's patents or any additional patents, if issued, will provide the Company with sufficiently broad patent coverage to provide any significant deterrent to competitive products or services. The Company knows of several companies that are commercializing other laser-based hair- removal systems and skin-resurfacing techniques. If the Company becomes involved in a patent infringement claim, the expense of litigating such claim may be costly. In addition, there may be patents or intellectual property rights owned by persons other than the Company, which, if infringed by the Company, would permit the owner to prevent the Company from marketing, licensing, or using the SoftLight hair-removal and skin-resurfacing processes and entitle the owner to damages for past infringement. The Company has from time to time received allegations that the SoftLight hair-removal process infringes the intellectual property rights of others, and the Company may receive similar allegations in the future. There can be no assurance that litigation relating to such a claim will not be brought against the Company, or that the Company would prevail in any or all such cases, if brought. The Company's financial position and results of operations would be materially adversely affected if the Company devotes substantial financial or management resources to intellectual property litigation. The Company has pending patent applications relating to laser hair removal in various countries outside the United States. There can be no assurance that any of these patent applications will result in any patents being issued. In September 1998, the European Patent Office issued a patent to the Company for its SoftLight laser hair-removal process. That patent is being challenged. The issuance of additional patents to the Company with respect to any technological improvements or new products and the validity and enforceability of such patents may be essential to the success of the Company. There can be no assurance that the Company will be able to obtain such patent protection. 29 The Company has registered trademarks and service marks in the United States and certain foreign countries for "SoftLight". The Company also has trademark and service mark applications for the "SoftLight" marks in various other foreign countries. No assurance can be given that any pending trademark or service mark application will be granted. Need to Comply with FDA Regulations. The laser used in the SoftLight hair-removal and skin-resurfacing process must comply with United States Food and Drug Administration (FDA) regulations governing the use and marketing of medical devices. The Company's hair-removal system received FDA clearance in April 1995 and its SoftLight Laser Peel skin-resurfacing procedure received FDA clearance in May 1998. In addition, the Company is subject to regulatory requirements in foreign countries where the Company conducts its business or advertises its services and products. Obtaining regulatory approvals is a lengthy, expensive, and uncertain process. There can be no assurance that foreign regulatory agencies will grant the necessary clearances or that the process to obtain such clearances will not be excessively expensive or lengthy. For example, in 1996 the Company established a joint venture to commercialize the SoftLight laser hair-removal process in Japan and since that time has been seeking the approval of the Japanese Ministry of Health to commercialize the SoftLight process in Japan. We have submitted information requested by the Japanese Ministry of Health, including the results of clinical trials performed in Japan, and the Company continues to await a decision by the Japanese Ministry of Health. Most of CBI's products are classified as cosmetics, which are regulated by the FDA, and are subject to inspection by the FDA. Furthermore, CBI manufactures a few preparations, principally sunscreens and skin-bleaching agents, that are classified as over-the-counter drugs, and CBI has an FDA license for this purpose. This license requires, among other things, that CBI adhere to the FDA's Good Manufacturing Practices procedures for finished pharmaceuticals, and subjects CBI's facility to inspection by the FDA. CBI also markets nutritional supplements which are also subject to FDA regulations. The FDA also imposes various requirements on manufacturers and sellers of products under its jurisdiction such as labeling, manufacturing practices, record keeping, and reporting. The FDA may also require post-market testing and surveillance programs of drugs or devices to monitor a product's effects. Failure to comply with applicable regulatory requirements can result in, among other things, civil and criminal fines, suspensions of approvals, recalls of products, seizures, injunctions, and/or criminal prosecutions. Compliance with State and Foreign Regulations. The extent to which a physician must be involved in the performance of SoftLight laser hair-removal and skin-resurfacing procedures, including a physician's ability to delegate to nonphysicians responsibility for performing particular services, depends upon applicable laws and regulations. Many jurisdictions have taken the position that the use of lasers for hair-removal constitutes the practice of medicine. In those jurisdictions, responsibility for performing laser hair-removal procedures must be in accordance with applicable laws and regulations relating to the performance and/or delegation of medical acts. Some jurisdictions have also imposed limitations on the classes of persons to whom laser hair-removal procedures can be delegated and the conditions under which such delegation is permissible. Regulatory authorities in some jurisdictions have taken, and other regulatory agencies may take, some or all of the following positions: (i) that a physician must evaluate each person for whom laser hair-removal procedures are performed, (ii) that a supervising physician must be present at all times at the site where such procedures are being performed, (iii) that only a physician may use a laser for hair- removal, or (iv) that persons performing laser hair-removal procedures must have particular licenses or qualifications and may perform laser hair-removal procedures only under particular conditions. The adoption of these or similar regulatory requirements may have a material adverse impact on the Company's operations and ability to conduct operations in jurisdictions in which such requirements are imposed. For example, a requirement in a particular jurisdiction that a physician must personally perform laser hair-removal procedures would significantly limit the potential providers of SoftLight laser hair-removal procedures in that jurisdiction and may materially affect the costs associated with the performance of SoftLight laser hair-removal procedures in that jurisdiction. The use of lasers for hair-removal is a new use for lasers, and there can be no assurance that review by regulatory authorities on matters 30 such as the practice of medicine, the licensure of facilities, equipment or personnel, and franchising, will not result in decisions that could adversely affect the operations of the Company. Furthermore, interpretations of current laws and regulations or changes in current laws and regulations could make compliance by the Company more difficult or expensive. The SoftLight Laser Peel may be subject to similar regulatory risks. The Company's SoftLight laser hair-removal and skin-resurfacing procedures have been performed, under varying degrees of physician supervision, by registered nurses, licensed practical nurses, cosmetologists, aestheticians, and electrologists. The Company believes that the exercise of judgment by the Company and supervising physicians with respect to delegation of responsibility for performing SoftLight laser hair-removal and skin-resurfacing procedures complies with applicable requirements. However, there can be no assurance that regulatory agencies or courts will agree with such judgments. Limited Operating History; Need to Develop New Marketing Strategy. The Company has been in business a short time. The Company began commercial sales of services using the SoftLight hair-removal process through its spas in November 1995 and through its physician network in June 1996. The Company began to offer its SoftLight Laser Peel skin-resurfacing procedure in June 1998. The Company's initial marketing and commercialization strategy was centered around a belief that the Company's services would command a premium price in the marketplace. Based on feedback from customers, the Company has shifted away from premium pricing. The Company is currently revising its marketing and commercialization strategy including refocusing its spa operations to include more traditional spa services and expanding beauty and personal care product offerings. As part of these efforts, the Company will be converting its remaining Spa Thira spas into Greenhouse luxury day spas. The Company is restructuring its U.S. licensing program to, among other things, require licensees to pay a fixed monthly fee (rather than an initial fee and per treatment fee) and to charge licensees for various other products and services. The Company now seeks to establish relationships with distributors who would sell SoftLight lasers and the Company's other products and services in new markets outside of the United States. The Company would derive one-time sale revenues from such relationships rather than initial and per-procedure royalty fees. No assurance can be given that this revised marketing and commercialization strategy will be successful. Intense Competition. Competition in the market for personal-care products and services is intense. The SoftLight hair-removal process competes with electrolysis and other traditional methods of hair removal, as well as other lasers which have been or in the future may be cleared by the FDA for hair removal. Competition limits the prices the Company is able to charge for its services. In addition, the Company's services could become obsolete or uneconomical if a competitor introduces a new product or process accomplishing the same objective. Dependence on International Relationships. The Company depends on its foreign joint venture partners and licensees who provide the SoftLight hair-removal and skin-resurfacing processes in foreign countries to provide the Company with knowledge and expertise in such countries relating to business, cultural, legal, and regulatory matters that may impact the establishment and operation of SoftLight hair-removal and skin-resurfacing businesses in those countries. There can be no assurance that the SoftLight hair-removal and skin-resurfacing processes themselves or the Company's business models will (i) be acceptable to foreign regulatory authorities or (ii) achieve consumer acceptance in such countries. In addition, there can be no assurance that the Company will be able to effectively manage the non-U.S. businesses without devoting additional resources to working with the Company's foreign joint venture partners and licensees to ensure compliance with the Company's standards and the performance by such partners of legal and contractual obligations owed to the Company. 31 Potential Impact of Year 2000 on Processing of Date-sensitive Information. The Company believes its products are not year 2000 sensitive. While the Company is attempting to minimize any negative consequences arising from the year 2000 issue, there can be no assurance that year 2000 issues will not have a material adverse impact on the Company's business, operations, or financial condition. While the Company expects that upgrades to its internal business systems will be completed in a timely fashion, there can be no assurance that the Company will not encounter unexpected costs or delays. If any of the Company's material suppliers or vendors experience business disruptions due to year 2000 issues, the Company may be materially adversely affected. There is expected to be a significant amount of litigation relating to the year 2000 issue and there can be no assurance that the Company will not incur material costs in defending or bringing lawsuits. Any unexpected costs or delays arising from the year 2000 issue could have a significant adverse impact on the Company's business, operations, and financial condition. 32 Selected Financial Information
Nine Months Year Year Ended Ended (a) Ended ----------------------------------------- ---------- ---------- (In thousands except per share amounts) Oct. 3, Sept. 27, Sept. 28, Sept. 30, Sept. 30, Dec. 31, 1998 (b) 1997 (c) 1996 1995 1995 (d) 1994 (e) - ------------------------------------------- ---------- --------- ---------- ---------- ---------- ---------- (Unaudited) Statement of Operations Data Revenues $ 40,091 $ 45,233 $ 27,812 $ 23,348 $ 17,544 $ 18,682 Income (Loss) Before Cumulative Effect (41,186) (12,405) (1,386) (1,675) (1,679) 6 of Change in Accounting Principle Net Income (Loss) (41,186) (12,405) (1,386) (1,675) (1,679) 15 Basic and Diluted Loss per Share (1.07) (.31) (.03) (.04) (.04) - Before Cumulative Effect of Change in Accounting Principle Basic and Diluted Loss per Share (1.07) (.31) (.03) (.04) (.04) - Balance Sheet Data Working Capital $ 48,597 $ 95,469 $ 47,197 $ 68,691 $ 16,235 Total Assets 134,215 174,595 95,520 89,463 33,570 Long-term Obligations 115,066 115,000 - - - Common Stock Subject to Redemption 40,500 40,500 - - - Shareholders' Investment (41,691) 333 79,037 82,218 28,997
(a) In September 1995, the Company changed its fiscal year end from the Saturday nearest December 31 to the Saturday nearest September 30. Accordingly, the Company's 39-week transition period ended September 30, 1995, is presented. (b) Reflects restructuring costs (Note 13) and establishment of a tax valuation allowance (Note 7). (c) Reflects the issuance of $115.0 million principal amount of 4 3/8% subordinated convertible debentures and the reclassification of $40.5 million to "Common stock subject to redemption" from "Shareholders' investment" due to the Company's stock exchange transaction. (d) Reflects the net proceeds of the Company's private placements and public offering of common stock. (e) Reflects the net proceeds of the Company's initial public offering and the adoption of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." 33 Common Stock and Unit Market Information The Company's common stock is traded on the American Stock Exchange under the symbol TLZ. The following table sets forth the high and low sale prices of the Company's common stock for 1998 and 1997, as reported in the consolidated transaction reporting system.
Common Stock Units --------------------- ---------------------- Fiscal 1998 High Low High Low - --------------------------------------------------------------- ---------- ---------- ---------- ----------- First Quarter $18 11/16 $10 1/2 $18 7/8 $17 Second Quarter 11 1/4 5 1/2 17 3/16 15 5/8 Third Quarter 8 1/2 5 1/8 16 1/2 15 5/8 Fourth Quarter 7 9/16 4 1/4 16 1/8 15 1/8 Fiscal 1997 - --------------------------------------------------------------- ---------- ---------- ---------- ----------- First Quarter $24 7/8 $15 7/8 $ - $ - Second Quarter 17 3/8 12 3/8 - - Third Quarter 14 7/8 9 1/4 18 1/4 16 1/8 Fourth Quarter 18 13 1/16 18 7/8 17 1/4
As of October 30, 1998, the Company had 375 holders of record of its common stock and 19 holders of record of its units. This does not include holdings in street or nominee names. The closing market prices on the American Stock Exchange for the Company's common stock and units on October 30, 1998, were $5 1/2 per share of common stock and $16 1/4 per unit. Transfer Agent American Stock Transfer & Trust Company is the transfer agent for the Company's common stock and units and maintains holders' activity records. The agent will respond to questions on issuance of stock and unit certificates, change of ownership, lost stock and unit certificates, and change of address. For these and similar matters, please direct inquiries to: American Stock Transfer & Trust Company Shareholder Services Department 40 Wall Street, 46th Floor New York, New York 10005 (718) 921-8200 Security Holder Services Holders of ThermoLase Corporation common stock and units who desire information about the Company are invited to contact the Investor Relations Department, ThermoLase Corporation, 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046, (781) 622-1111. A mailing list is maintained to enable holders whose stock or units is held in street name, and other interested individuals, to receive quarterly reports, annual reports, and press releases as quickly as possible. Quarterly distribution of printed reports is limited to the second quarter report only. All material is available from Thermo Electron's Internet site (http://www.thermo.com/subsid/tlz1.html). Dividend Policy The Company has never paid cash dividends and does not expect to pay cash dividends in the foreseeable future because its policy has been to use earnings to finance expansion and growth. Payment of dividends will rest within the discretion of the Board of Directors and will depend upon, among other factors, the Company's earnings, capital requirements, and financial condition. 34 Form 10-K Report A copy of the Annual Report on Form 10-K for the year ended October 3, 1998, as filed with the Securities and Exchange Commission, may be obtained at no charge by writing to the Investor Relations Department, ThermoLase Corporation, 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046. Annual Meeting The annual meeting of shareholders will be held on Thursday, March 11, 1999, at 10:00 a.m. at the Westin Hotel, 70 Third Avenue, Waltham, Massachusetts. EX-21 3 Exhibit 21 THERMOLASE CORPORATION SUBSIDIARIES As of November 19, 1998, the Registrant owned the following subsidiaries:
STATE OR JURISDICTION OF PERCENT OF NAME INCORPORATION OWNERSHIP Creative Beauty Innovations, Inc. Texas 100 The Greenhouse Spa, Inc. Pennsylvania 100 ThermoLase England L.L.C. Delaware 50* ThermoLase UK Limited United Kingdom 100 ThermoLase France L.L.C. Delaware 71* ThermoDess S.A.S. France 71* ThermoLase International L.L.C. Delaware 35* ThermoLase Japan L.L.C. Wyoming 50* Thira Japan, Inc. Japan 100
* Joint Venture/Partnership EX-23 4 Exhibit 23 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation by reference of our reports dated November 9, 1998, included in or incorporated by reference into ThermoLase Corporation's Annual Report on Form 10-K for the year ended October 3, 1998, into the Company's previously filed Registration Statements as follows: Registration Statement No. 33-88396 on Form S-8, Registration Statement No. 33-88398 on Form S-8, Registration Statement No. 33-88394 on Form S-8, Registration Statement No. 33-88400 on Form S-8, Registration Statement No. 33-80749 on Form S-8, Registration Statement No. 33-84516 on Form S-3, Registration Statement No. 33-94658 on Form S-3, Registration Statement No. 333-19633 on Form S-4, Registration Statement No. 333-34467 on Form S-3. Arthur Andersen LLP Boston, Massachusetts December 15, 1998 EX-27 5
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMOLASE CORPORATION REPORT ON FORM 10-K FOR THE YEAR ENDED OCTOBER 3, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR OCT-03-1998 OCT-03-1998 52,831 3,072 4,829 490 6,825 67,765 54,706 11,276 134,215 19,168 110,566 0 0 408 (42,099) 134,215 22,765 40,091 15,590 37,875 13,183 88 5,343 (35,307) 5,879 (41,186) 0 0 0 (41,186) (1.07) (1.07)
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