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The following is an excerpt from a 10-K SEC Filing, filed by THERMOLASE CORP on 12/18/1998.
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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


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.


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


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.


(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.


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.


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.


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
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


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.

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