SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
(Mark one)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period from to
----------- -----------
Commission file number 0-18643
Lunar Corporation
-------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1200501
------------------------------------ ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
313 West Beltline Highway
Madison, Wisconsin 53713
- --------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (including area code): (608) 274-2663
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate 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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of September 26, 1996, there were issued and outstanding 8,536,065
shares of Common Stock; the aggregate market value of the shares of such stock
held by nonaffiliates of the registrant was $178,691,770 as of the same date,
assuming solely for purposes of this calculation that all directors and
executive officers of the Registrant are "affiliates." This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Lunar Corporation Proxy Statement for its 1996 Shareholders Meeting
to be held on November 21, 1996 (Part III)
LUNAR CORPORATION
---------------------
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED JUNE 30, 1996
Page
- ----
Part I
Item 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2 Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Item 3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . .9
Item 4 Submission of Matters to a Vote of Security Holders . . . . . . 10
Executive Officers of the Registrant. . . . . . . . . . . . . . 10
Part II
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . 11
Item 6 Selected Financial Data . . . . . . . . . . . . . . . . . . . . 11
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . 13
Item 8 Financial Statements and Supplementary Data . . . . . . . . . . 17
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . 33
Part III
Item 10 Directors and Executive Officers
of the Registrant . . . . . . . . . . . . . . . . . . . . . . . 33
Item 11 Executive Compensation. . . . . . . . . . . . . . . . . . . . . 34
Item 12 Security Ownership of Certain
Beneficial Owners and Management. . . . . . . . . . . . . . . . 34
Item 13 Certain Relationships and Related Transactions. . . . . . . . . 34
Part IV
Item 14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 34
Index to Consolidated Financial Statements and
Financial Statement Schedule . . . . . . . . . . . . . . . . . . . . . . . . 35
Report of Independent Auditors on Financial
Statement Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Schedule II - Valuation and Qualifying Accounts
for each of the years ended June 30, 1996,
1995, and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Index to Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
PART I
ITEM 1. BUSINESS
- -----------------
INTRODUCTION
Lunar Corporation develops products for the diagnosis and monitoring of
osteoporosis and other metabolic bone diseases. Except as the context otherwise
requires, as used herein the terms "Lunar" and the "Company" mean Lunar
Corporation, its wholly owned subsidiaries Lunar GmbH, Lunar Europe, N.V., Bona
Fide, Ltd., and Lunar FSC, Inc. On May 8, 1996, the Company distributed to its
shareholders of record as of April 24, 1996 all of the shares of common stock
owned by Lunar of Lunar's 97% owned subsidiary, Bone Care International, Inc.
("Bone Care"), and its subsidiary, Continental Assays Corporation. The Company
develops and sells bone densitometers, which are specialized scanning systems
used to aid in the diagnosis and monitoring of bone disease by measuring the
density of the bone. The Company is also the exclusive distributor in the
United States of the Artoscan extremity Magnetic Resonance Imaging ("MRI")
scanner. The Artoscan is manufactured by ESAOTE Biomedica SPA, a medical device
company based in Italy.
BACKGROUND ON OSTEOPOROSIS
Osteoporosis is a disease generally associated with aging and characterized
by excessive loss of bone mineral, resulting in decreased bone density over
time. Demineralization weakens bone so that minor physical stress can cause
debilitating fractures, usually in the wrists, hips, and spine. These fractures
can result in disfigurement, decreased mobility, and, in some cases, extensive
hospitalization and chronic nursing home care.
Osteoporosis is a major and growing public health problem in the United
States and worldwide. In the United States, 25% of women over age 60 develop
vertebral fractures related to osteoporosis, and as many as 50% of women will
develop vertebral fractures by age 75. According to the National Institutes of
Health, there are currently more than 10 million adults affected by osteoporosis
in the United States. Factors contributing to bone loss include age- and
sex-related hormonal changes, low calcium intake, excessive alcohol consumption,
and certain drug therapies.
An estimated 1.3 million osteoporosis-related fractures occur each year in
the United States. The Scientific Advisory Board of the National Osteoporosis
Foundation ("NOF") estimated the annual direct and indirect costs of
osteoporosis-related fractures in the United States in 1984 to be over $7
billion, with the costs related to hip fractures being a major component of the
aggregate cost. Without effective diagnosis and treatment, the medical and
social consequences of such fractures will worsen as the population ages.
Osteoporosis is at least partially preventable if individuals at the greatest
risk of fracture are diagnosed and treated in the early stages.
DIAGNOSIS AND MONITORING. Relatively few people are diagnosed in time for
effective therapy since there are no obvious symptoms of osteoporosis in the
early stages. Often the first symptom is a debilitating fracture. Studies show
that bone mineral density is correlated highly with bone strength. Since bone
strength is a determinant of an individual's susceptibility to fracture (along
with the likelihood of sustaining sufficient trauma), bone mineral density
indicates fracture risk. Bone mineral density can be measured with accuracy
(referring to how well the scanners measure the actual bone density) and
precision (referring to whether the scanners yield the same result upon multiple
scans of the same bone) using dual-photon absorptiometry ("DPA") or dual-energy
x-ray absorptiometry ("DEXA") techniques.
Bone densitometer technology is based on the fact that bone absorbs x-ray
photons at a different rate than does soft tissue. Photons are directed at the
body, and their differential absorption is measured. Single-photon
absorptiometry ("SPA") scanners have been available since 1972 to measure bone
density at the extremities, such as the forearm and heel bone. In the 1980s,
DPA and DEXA scanners have been developed to measure bone density in the spine
and the hip, which are more clinically significant areas of the skeleton. SPA
and DPA scanners employ a radioactive source; DEXA scanners generate radiation
using a conventional x-ray tube. DEXA scanners are accurate, have a low
precision error, are safe because they emit low radiation, have scanning times
of approximately 5 minutes, and have a low operating cost.
In recent years, ultrasound technology has been developed to measure the
bone density of certain extremity sites. Ultrasound bone densitometers are less
expensive than DEXA bone densitometers, and since they use nonionizing
radiation, ultrasound bone densitometers encounter fewer regulatory and
licensing requirements as compared to DEXA bone densitometers.
REIMBURSEMENT. To achieve broad acceptance and qualify for third-party
reimbursement, diagnostic products not only must be safe and efficacious, but
also must be deemed cost-effective by public and private health care payors.
Sales of bone densitometers are also dependent upon the level of reimbursement
provided by public and private health care payors. Reimbursement for DEXA scans
has been approved in several countries. Reimbursement for ultrasound scans is
generally not provided by public health systems.
In the United States, the Health Care Finance Administration ("HCFA") has
been reviewing the status of reimbursement for DEXA scans. In December 1993,
HCFA published proposed reimbursement rates for DEXA scans. However, HCFA has
not set national policy at this time requiring the Medicare carriers to adopt
reimbursement. However, all Medicare carriers have elected to implement
reimbursement for DEXA scans.
While many private insurance carriers have elected to provide reimbursement
for DEXA scans, a significant number of private carriers, including many of the
Blue Cross/Blue Shield organizations in the most populous states, do not
currently provide reimbursement for DEXA scans. California, Florida, Oklahoma,
Tennessee and Texas have passed legislation requiring that all private insurance
carriers cover DEXA scans. The Company believes that if HCFA decides to set a
national policy requiring reimbursement for DEXA scans throughout the United
States, those private carriers not covering DEXA might reconsider their policy.
THERAPIES. The demand for bone densitometers sold by the Company is
dependent on the availability of therapies for the treatment of postmenopausal
osteoporosis. The Company does not sell any of the therapies discussed in this
subsection.
Estrogen replacement therapies ("ERT") are approved for marketing and sale
in the United States for the treatment of postmenopausal osteoporosis. ERT is
currently believed to be an effective means to prevent bone loss and related
fractures, but does not stimulate bone formation. In the United States, ERT
most often is used to relieve symptoms related to menopause; however, usage for
osteoporosis is steadily increasing.
Calcitonins are approved for marketing and sale in the United States for
the treatment of osteoporosis. Calcitonins seem to prevent further bone loss,
but do not stimulate bone formation. Miacalcin nasal spray, by Sandoz
Pharmaceuticals, is a nasal delivery formulation which was approved for sale by
the Food and Drug Administration ("FDA") in the United States in 1995.
A bisphosphonate (Fosamax) was recently approved for marketing and sale in
the United States for the treatment of osteoporosis. Studies have shown that
bisphosphonates appear to inhibit bone resorption without interrupting normal
bone formation, thereby increasing bone mass and possibly reducing vertebral
fractures. Merck & Co., Inc., developed a bisphosphonate called Fosamax which
was approved by the FDA for treatment of osteoporosis in the United States in
1995.
Calcium supplements have not been approved for marketing and sale in the
United States for the treatment of osteoporosis. Calcium supplements are often
recommended for postmenopausal women, but evidence of their efficacy in
treatment and prevention of osteoporosis is controversial. Calcium supplements
are also recommended for use with bisphosphonates and ERT.
Fluoride preparations have not been approved for marketing and sale in the
United States for the treatment of osteoporosis. Fluoride preparations are
known to increase bone density in the spine (the most common site of
osteoporosis fractures), but have little effect on bone density in the hip (the
most debilitating site of osteoporosis fractures). A recent clinical trial on
time-released sodium fluoride demonstrated a positive effect on spinal bone
density in those patients studied.
In Japan and Europe, there is an active market for osteoporosis therapies.
In Japan, available therapies include vitamin D-3 compounds, calcitonin, and
ipriflavone. In Europe, available therapies include estrogens, calcitonins,
vitamin D-3 compounds, ipriflavone, and sodium fluoride. Vitamin D-3 compounds,
primarily 1-alpha-D-3, which are available in Japan and Europe, are activated by
the body into hormones which help regulate blood levels of calcium required for
essential body functions, including normal bone growth. Studies have shown that
low dosages of 1-alpha-D-3 have little efficacy as an osteoporosis therapy, but
at higher dosages, bone mineral content increased and bone fracture rates
decreased.
THE COMPANY'S PRODUCTS
BONE DENSITOMETER SYSTEMS
The first commercial bone densitometers utilized SPA, a method which was
developed at the University of Wisconsin - Madison, Department of Medical
Physics, by investigators including Drs. Richard B. Mazess, James Sorenson, and
John Cameron. SPA, which uses photons at a single-energy level, became
commercially available in 1972 and was widely utilized in research. During the
1970s, Dr. Richard B. Mazess, James A. Hanson, Philip Judy, Walter Peppler,
Charles Wilson, and other researchers at the University of Wisconsin - Madison,
Department of Medical Physics, developed a DPA scanner which used photons of two
energy levels. Dr. Mazess organized Lunar to focus on the diagnosis and
monitoring of osteoporosis and to market bone densitometers using DPA. Lunar
sold approximately 700 DPA scanners from 1981 to 1988, which the Company
believes constituted a majority of the worldwide sales of DPA scanners during
that period. In June 1988, Lunar introduced its DEXA system, the DPX, which
replaced the radioactive source with an x-ray source thereby allowing for faster
scan times and improved precision. In March 1990, Lunar began shipping the
DPX-L, an enhanced version of the DPX. In February 1991, Lunar began shipping
the DPX-alpha, a smaller "compact" version of the DPX-L, designed for clinics
and private hospitals. In October 1991, Lunar began international shipment of
the Achilles ultrasound device, a lower-cost bone densitometer which uses
ultrasound technology to measure the bone density of the heel bone. In 1993,
the Company commercially introduced the EXPERT, a high-end imaging bone
densitometer. In 1995, the Company introduced the DPX-SF, the smallest
spine/femur DEXA densitometer. DPX-SF is compact and mobile, yet produces the
precise AP spine and proximal femur scans preferred by researchers and
clinicians. In April 1996, the Company introduced the DPX-IQ densitometer,
which offers better image quality and a tenfold lower radiation dose than
competitive densitometers.
The DPX product line is sold to leading medical institutions, hospitals,
and radiological and other specialty group practices. Pharmaceutical companies
and orthopedic implant manufacturers investigating bone also purchase systems
for research and clinical trials.
Historically, densitometry has used ionizing radiation, which is carefully
regulated in the United States and most nations in the world. The Company's
researchers have investigated the possibility of using ultrasound rather than
x-rays or radioisotopes for more than five years. In 1991, this research
culminated in development of the reliable and relatively low-cost Achilles
densitometer. In 1995, the Company introduced the Achilles+. This new
ultrasound densitometer has the same performance features as its predecessor
with increased ease of operation and reduced patient measurement time.
The development of an ultrasound bone densitometer enables diverse medical
specialties, such as endocrinology, gynecology, and family practice, to make use
of densitometry. The Achilles can measure bone using either speed of sound or
broadband ultrasound attenuation. It is the first densitometer to combine both
of these ultrasound measurements in one device. Although leading researchers
have recognized the safety and efficacy of our ultrasound technique, the FDA is
requiring that the Company conduct clinical trials before allowing commercial
sales in the United States. The Company is currently marketing the Achilles in
select international countries.
In 1993, the Company commercially introduced the EXPERT imaging
densitometer. The EXPERT is an improvement on previous densitometers because of
its better speed (10X faster) and spatial resolution (3X finer). The EXPERT
uses a high-capacity x-ray tube with a rotating anode and a solid-state,
high-resolution detector. The spatial resolution with the EXPERT is at least
two to
three times that of existing densitometers, allowing it to provide much better
images. This enables the physician to identify artifacts that may be in the
field and to exclude them if need be. It also provides better visual
identification of the region of interest and eliminates anatomical blurring at
key areas (for example, the intervertebral spaces.)
In addition, the imaging capability of the EXPERT allows determinations of
the entire lateral spine to be achieved in less than a minute. This can be done
with the patient lying comfortably in the supine position because the EXPERT's
C-arm can be rotated under motor control for lateral imaging. Morphometry of
individual vertebra can be readily done with standardized, semiautomated
algorithms. EXPERT morphometry, compared to conventional radiographs, provides
uniformity in geometry; there is no distortion along the axis of the spine,
leading to exact values for vertebral height. The Company has received United
States patents covering morphometry on densitometers, and has applied for
similar patents in Europe and Asia.
FLUOROSCOPIC C-ARM. The Company introduced a fluoroscopic C-arm for
extremity imaging at the 1996 Conference of the American Academy of Orthopedic
Surgeons. ORCA utilizes digital imaging capabilities coupled with proprietary
processing techniques to produce distortion-free images, particularly of bone.
ORCA is designed for the orthopedic and radiology market.
CUSTOMERS, SALES, AND MARKETING. Lunar's bone densitometers are sold to
leading medical institutions, hospitals, pharmaceutical companies active in the
field of bone mineral metabolism, and radiological and other specialty group
practices. Lunar densitometer sales are dependent upon competition,
reimbursement levels, and availability of therapies on a country-by-country
basis. Lunar bone densitometers carry a one-year warranty. Extended service
contracts are also available.
In the United States, Lunar markets and sells its bone densitometers
through a direct sales force and one independent sales representative. Lunar
had 99 employees engaged in the marketing, sales support, and service of bone
densitometry equipment as of June 30, 1996.
Outside of the United States, Lunar markets and sells its bone
densitometers primarily through independent distributors, all of whom offer
sales and technical support. Employees of these distributors have undergone
product and technical training related to the Company's systems. The Company's
wholly owned German and Belgian subsidiaries provides direct sales and service
support to German and Belgian customers. The Company also maintains offices in
Brussels, Belgium, and Sydney, Australia, to support its distributors with
marketing, sales support, and service.
Lunar markets its bone densitometers through advertising in medical
journals, direct mailings of brochures, attendance of and presentations at
medical seminars and trade shows, and personal visits by sales representatives
with customers.
No individual end user accounted for more than 2% of Lunar's sales for the
fiscal year ended June 30, 1996. For the years ended June 30, 1994, 1995, and
1996, approximately 75%, 73%, and 55% of sales, respectively, were to customers
located in foreign countries. For the fiscal years ended June 30, 1994, 1995,
and 1996, sales to the Company's distributor in Japan accounted for 17%
($5,086,848), 21% ($9,170,611), and 13% ($8,580,406) of the Company's sales in
the respective years. Since a significant amount of the Company's sales are
made to distributors, the loss at any time of a distributor accounting for 10%
or more of the Company's sales could have a material adverse effect on the
Company.
As of June 30, 1996, substantially all of the Company's backlog was
deliverable within 120 days. Orders included in backlog may generally be
canceled or rescheduled by customers, without significant penalty, and therefore
cannot be considered firm. Also, the Company's revenues tend to be somewhat
seasonal, generally being lower in the first fiscal quarter due primarily to
lower activity in Europe in the summer months.
MANUFACTURING. Lunar's manufacturing operations consist primarily of
assembly, testing, and quality control. Lunar purchases a majority of the parts
and peripheral components for its systems and manufactures certain subsystems,
such as the x-ray tube head, from basic components. Parts and materials are
generally readily available from several supply sources.
SPINOFF OF BONE CARE
From its inception, Bone Care has focused on the development of one-alpha
D-2, a vitamin D compound. Lunar independently researched and patented several
other novel vitamin D compounds from 1988 to 1995. In October 1995, Lunar
contributed its ownership of Continental Assays Corporation, and all of its
vitamin D-related assets with a book value of $175,867, and forgave intercompany
loans receivable of $634,683 in exchange for 1,806,075 shares of Bone Care
common stock. Lunar also contributed $10,000,000 in exchange for 1,698,674
shares of Bone Care common stock on May 8, 1996 and reimbursed Bone Care
$725,000 for tax savings realized in prior years when Bone Care losses were
included in Lunar's consolidated tax returns. On May 8, 1996, Lunar distributed
all of its shares of Bone Care to Lunar shareholders of record as of April 24,
1996 in a transaction intended to qualify as a tax-free distribution. The
shares distributed to Lunar shareholders represent 97% of the total outstanding
Bone Care shares as of the date of the distribution.
Bone Care entered into a Transition Agreement with the Company, pursuant to
which certain employees of the Company will perform administrative services for
Bone Care. Such services include legal, treasury, accounting, insurance and
employee benefit administration. As compensation, Bone Care pays the Company a
monthly fee of $7,000. The Company leases 3,000 square feet of office space to
Bone Care for $2,000 per month under the Transition Agreement. The term of the
Transition Agreement is three years; however, Bone Care may terminate the
agreement by giving the Company 90 days advance written notice.
MAGNETIC RESONANCE IMAGING SYSTEM
On September 21, 1993, the Company signed an exclusive distributor
agreement with ESAOTE Biomedica Spa, a medical device manufacturer based in
Italy, to distribute the Artoscan dedicated MRI system in the United States and
Canada. The Artoscan is a specialized MRI scanner suitable for imaging
extremities such as knees, wrists, and ankles. The Company sells the Artoscan
in the United States for less than $350,000, which is significantly below
competitive whole body MRI systems. The Company believes that this lower price,
and the fact that installation and siting costs associated with the Artoscan are
minimal may be attractive to radiologists, orthopedists, sports medicine
specialists, and other MRI users to buy the product. Under the agreement with
ESAOTE Biomedica, Lunar is required to meet certain minimum annual purchase
commitments.
PATENTS AND PROPRIETARY RIGHTS
Lunar relies in part upon know-how, trade secrets, trademarks and
copyrights, and patents to protect technology which it considers important to
the development of its business.
Although the Company believes patents are not critical in protecting its
competitive advantage in x-ray bone densitometry, it has obtained a number of
United States patents relating to its technology. A United States patent has
been issued to the Company on the Company's patient position holder which is
used to perform lateral scans of the spine with the patient in the lateral
decubitus position. A foreign counterpart application is pending in Europe.
The Company has received a United States patent relating to the measurement of
bone mineral density in bone adjacent to a prothesis. Several United States
patents have been issued which are related to the Company's new EXPERT
densitometer. Several of these patents relate to the morphometric capabilities
of EXPERT and EXPERT's ability to identify osteophytes. Foreign counterpart
applications are pending for all of these patents. The Company has received a
U.S. design patent covering the unique appearance of EXPERT.
The Company has had issued a number of United States patents relating to
various aspects of its ultrasound bone densitometry technology. Foreign
counterparts to these United States patents are pending in Europe and Japan. The
Company has filed U.S. patent applications covering unique features of ORCA.
The Company intends to file foreign counterpart applications covering the ORCA.
The Company has obtained United States and foreign trademark registrations
for "LUNAR," "DPX," and "Achilles." Applications for trademark registration are
being sought worldwide for "EXPERT," "LUNAR Expert," "DPX-IQ," and "ORCA."
The Company claims international copyright in its software, user's manuals,
customer brochures, and advertising materials.
The Company also relies on unpatented trade secrets. The Company requires
its employees, consultants, and advisors to execute confidentiality agreements
upon the commencement of an employment or a consulting relationship with the
Company. The agreements provide that all confidential information developed or
made known to the individual during the course of the relationship shall be kept
confidential and not disclosed to third parties except in specified
circumstances. The agreements also provide that all inventions conceived by the
individual during his employment and relating to the business of the Company
shall be the exclusive property of the Company. There can be no assurance,
however, that these agreements will provide meaningful protection for the
Company's trade secrets in the event of unauthorized use or disclosure of such
information. Additionally, others may independently develop substantially
equivalent proprietary information and techniques, or otherwise gain access to
the Company's trade secrets or disclose such technology.
For information regarding patent litigation, see Item 3 below.
COMPETITION
The medical instrumentation industry is highly competitive and
characterized by continual change and improvement in technology. Many of the
companies in the medical instrumentation industry have significantly greater
research, manufacturing, marketing, and financial resources than the Company.
To date, the market for bone densitometer systems has been characterized by
companies such as Lunar which specialize in instruments for bone density
measurement.
Hologic, Inc., based in Massachusetts, and Ostech B.V., based in
Switzerland, the parent company of Stratec Medizintechnik GmbH and Norland
Corporation, based in Fort Atkinson, Wisconsin, sell bone densitometer scanners
which compete directly with the DPX. Two Japanese companies and an Italian
company are developing or have introduced x-ray bone densitometers in their
respective countries. Lunar expects additional competitors to enter the bone
densitometry market, both in the United States and foreign countries.
Competition has intensified as new models have been introduced by competitors.
DEXA scanners compete with specially equipped computer tomographic ("CT")
scanners which can make bone density measurements of the spine. Lunar believes
the use of CT scanners for measuring bone density will remain limited because of
its higher radiation exposure to patients, higher examination expense, and lower
precision and accuracy. In addition, there are other noninvasive bone density
measurement methods currently on the market and under development.
At least three companies have commercially introduced devices which compete
with the Lunar Achilles ultrasound bone densitometer. Lunar is aware of several
other companies developing ultrasound bone densitometers.
In addition to competition from other medical equipment manufacturers and
devices, biochemical markers have gained increased interest among researchers
for the detection of high bone turnover which can lead to osteoporosis. Such
markers could be used as an adjunct to bone densitometry.
REGULATION
The Company's bone densitometry devices are subject to regulation by the
FDA and by many foreign governments. Under the United States Food, Drug, and
Cosmetic Act ("FDA Act"), manufacturers of medical devices must comply with
certain regulations governing the testing, manufacturing, packaging, and
marketing of medical devices. The DPX is also subject to the Radiation Control
for Health and Safety Act, administered by the FDA, which imposes performance
standards and record keeping, reporting, product testing, and product labeling
requirements for devices using radiation, such as x-rays. Lunar believes it is
in compliance in all material respects with these various laws and regulations.
The FDA generally must register the commercial sale of new medical devices.
Commercial sales of the Company's bone densitometry devices within the United
States must be preceded by either a premarket notification filing pursuant to
Section 510(k) of the FDA Act or the granting of premarket approval for a
particular medical device. The Section 510(k) notification filing must contain
information which establishes that the device is substantially equivalent to a
legally marketed device or to a device which was marketed prior to May 28, 1976.
The FDA may either deny the Section 510(k) submission or require further
information within 90 days of submission. Commercial marketing of the device
cannot begin until the 510(k) submission is cleared by the FDA. Because of
backlog presently existing in the FDA, 510(k) clearance now takes on the average
longer than 90 days. The premarket approval procedure involves a more complex
and lengthy review process by the FDA than the Section 510(k) premarket
notification procedure. The following table summarizes FDA Section 510(k)
clearance received by Lunar during the last 10 years:
DPX Bone Densitometer June 1988
DPX Total Body Software June 1989
Population Reference Data April 1990
DPX-L/DPX-alpha Bone Densitometers December 1990
Lateral Spine Software August 1991
Forearm February 1992
Orthopedics February 1992
EXPERT Bone Densitometer April 1995
Morphometry Software May 1995
ORCA May 1996
Lunar believes new products being developed in the DPX and EXPERT product
line will be eligible for a Section 510(k) marketing clearance; however, the
Achilles ultrasound densitometer will require premarket approval by the FDA in
the United States.
Lunar is also subject to regulation by the Nuclear Regulatory Commission
("NRC") as a result of its manufacturing of medical devices which use
radioactive materials and through its storage and handling of radioactive
materials used in the testing of such medical devices. The NRC regulates the
type, amount, form, storage, use, disposal, and handling of such radioactive
materials. Licenses from the NRC must be renewed every five years. Lunar has
in place a Radiation Safety Program and believes it is in compliance in all
material respects with NRC regulations.
The Company's product line is subject to approval by certain foreign
regulatory and safety agencies. Lunar believes it is currently in compliance
with all regulations in foreign countries applicable to its business.
As a manufacturer of medical devices, Lunar is subject to certain FDA
regulations which relate to its manufacturing processes and facilities, and
these processes and facilities are subject to continuing review by the FDA.
Lunar has had several FDA on-site inspections and has complied with FDA
regulations. Most states and certain foreign countries monitor and require
licensing of x-ray devices, such as DEXA scanners. Federal, state, and foreign
regulations regarding the manufacture and sale of medical devices are subject to
future change. Lunar cannot predict what impact, if any, such changes might
have on its business.
The Company is subject to various federal, state, and local laws and
regulations relating to the protection of the environment. Lunar believes its
current operations comply with all currently applicable environmental laws and
regulations. Lunar's expenditures for environmental compliance have not had,
nor are they expected to have, a material adverse effect on the Company.
Export clearance for the Company's products varies by country. Generally
if FDA 510(k) or premarket approval is received in the United States, there are
no other export clearances required. Even in the absence of the FDA clearances,
many countries generally only require the company to comply with safety
standards. An exception to the above requirements is Japan which requires
Ministry of Health and Welfare approval.
RESEARCH AND DEVELOPMENT
As of June 30, 1996, the Company had 42 employees engaged in research and
development. During fiscal 1994, 1995, and 1996, Lunar's research and
development expenses were $2.7 million, $4.3 million, and $5.6 million,
respectively.
PRODUCT LIABILITY INSURANCE
The Company maintains product liability insurance and considers its current
level of product liability insurance coverage to be adequate. While the Company
has not experienced any material product liability claims to date, if such
claims arise in the future, they could have a material adverse effect on the
Company.
EMPLOYEES
As of June 30, 1996, Lunar had 225 full-time employees, including 65 in
manufacturing operations; 42 in research and development; 99 in marketing, sales
support, and service; and 19 in finance and administration. None of the
Company's employees is represented by a union. The Company considers its
employee relations to be excellent.
GLOSSARY OF DEFINED TERMS
1-alpha-D-2 - one alpha hydroxyvitamin D-2
Bone Care - Bone Care International, Inc.
CT - computer tomographic
DEXA - dual-energy x-ray absorptiometry
DPA - dual-photon absorptiometry
ERT - estrogen replacement therapies
FDA - Food and Drug Administration
FDA Act - United States Food, Drug, and Cosmetic Act
HCFA - Health Care Finance Administration
Hologic - Hologic, Inc.
MRI - magnetic resonance imaging
NOF - National Osteoporosis Foundation
NRC - Nuclear Regulatory Commission
SPA - single-photon absorptiometry
ITEM 2. PROPERTIES
- -------------------
The Company occupies a building of approximately 70,000 square feet on
approximately 3 acres in Madison, Wisconsin. The Company's facilities were
acquired in 1986. During fiscal year 1994, the Company spent approximately
$1,120,000 to construct a 30,000-square-foot addition to its existing building.
The Company also leases office facilities in Germany and Belgium.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
PATENT LITIGATION: During fiscal 1995 and part of fiscal year 1996, the
Company was involved in patent litigation with Hologic, Inc., a
Massachusetts-based competitor. On November 22, 1995, the Company signed a
definitive agreement with Hologic settling all disputes between the parties.
The agreement provides for certain continuing payments between the companies
related to future sales, the net effect of which Lunar does not believe will be
material to its revenues or earnings. The agreement also provides that the
companies will not engage each other in patent litigation in the area of x-ray
densitometry and ultrasound for a ten-year period.
OTHER MATTERS: The Company is a defendant from time to time in actions
arising out of its ordinary business operations. There are no legal
proceedings known to the Company at this time which it believes would likely
have a material adverse impact on the financial condition of the Company. To
the Company's knowledge, there are no material legal proceedings to which any
director, officer, affiliate, or more than 5% shareholder of the Company (or any
associate of the foregoing persons) is a party adverse to the Company or any of
its subsidiaries or has a material interest adverse to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
- --------------------------------------------------------------
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------
As of September 25, 1996, the executive officers of the Registrant are as
follows:
NAME AGE TITLE
- ---- --- -----
Richard B. Mazess, Ph.D. 57 President
James A. Hanson, Ph.D. 46 Vice President - Marketing
Robert A. Beckman 42 Vice President - Finance
Carl E. Gulbrandsen, Ph.D., J.D. 49 Corporate General Counsel
and Secretary
Dr. Richard B. Mazess, the founder of the Company, has been President and a
director of the Company since its inception. Dr. Mazess became Professor
Emeritus of Medical Physics at the University of Wisconsin - Madison in 1985,
and has been on the faculty of the Department of Medical Physics since 1968.
Dr. Mazess has authored over 100 scientific publications on bone, bone
measurement, and body composition; he also has edited several books and has
served on the editorial boards of several medical journals. Dr. Mazess has
organized various international scientific meetings on bone measurement and
osteoporosis.
Dr. James A. Hanson, Vice President of Marketing, joined the Company in
September 1984. From July 1980 to August 1984, Dr. Hanson was on the faculty of
the Department of Radiology at the University of Washington, Seattle,
Washington, and from 1979 to 1980, he was a Researcher at the University of
Wisconsin - Madison, Department of Medical Physics.
Robert A. Beckman joined the Company in June 1986 as Controller, has been
Vice President of Finance since 1987. Mr. Beckman is a Certified Public
Accountant.
Carl E. Gulbrandsen, Ph.D., J.D., joined the Company in 1992 as Corporate
General Counsel and Secretary. From 1989 until 1992, Dr. Gulbrandsen was a
partner in the law firm of Stroud, Stroud, Willink, Thompson & Howard of
Madison, Wisconsin, where he specialized in patent law. From 1987 until 1989,
Dr. Gulbrandsen was a partner in the Madison office of Haight & Hofeldt, a
patent litigation firm based in Chicago, Illinois. Dr. Gulbrandsen received his
J.D. degree in 1981 from the University of Wisconsin School of Law and his Ph.D.
degree in physiology from the University of Wisconsin - Madison in 1978.
Officers are elected to serve, subject to the discretion of the Board of
Directors, until their successors are appointed.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
- ----------------------------------------------------------------------
The following table sets forth high and low sales prices as reported on the
NASDAQ National Market System for fiscal year 1996 and 1995. These prices have
been adjusted for the December 1995 3-for-2 stock split.
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
---- ------- ------- ------- -------
High $22.83 $29.33 $49.50 $48.25
Low 17.00 20.58 25.50 32.75
1995
----
High 12.17 12.83 13.67 18.83
Low 7.50 10.58 10.00 12.50
On June 30, 1996, the Company's common stock was held by approximately
1,750 stockholders of record or through nominee or street name accounts with
brokers.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The following selected consolidated financial data for each of the five
years in the period ended June 30, 1996 have been derived from the audited
consolidated financial statements of LUNAR. The consolidated financial
statements for the fiscal years ended June 30, 1992 through 1996 have been
audited by KPMG Peat Marwick LLP, independent public accountants. References to
a year are to LUNAR's fiscal year ended June 30, unless otherwise designated.
The following data should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Annual Report
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
STATEMENTS OF INCOME
Year Ended June 30,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands, except per-share data)
REVENUES
Equipment sales and other
revenue $66,859 $44,572 $30,027 $24,654 $22,155
Licensing revenue 0 0 0 1,489 1,861
- --------------------------------------------------------------------------------
66,859 44,572 30,027 26,143 24,016
OPERATING EXPENSES
Cost of sales 30,236 18,871 11,720 8,743 8,359
Research and development 5,610 4,349 2,744 3,348 2,461
Sales and marketing 14,447 9,813 6,783 6,049 4,557
General and administrative 4,731 4,327 2,532 2,073 2,129
- --------------------------------------------------------------------------------
55,024 37,360 23,779 20,213 17,506
- --------------------------------------------------------------------------------
Income from operations 11,835 7,212 6,248 5,930 6,510
OTHER INCOME (EXPENSE)
Interest income 1,549 1,312 1,229 1,046 887
Interest expense 0 0 0 (5) (29)
Settlement of lawsuit 0 0 0 0 (175)
Other (238) 328 178 4 (40)
- --------------------------------------------------------------------------------
1,311 1,640 1,407 1,045 643
- --------------------------------------------------------------------------------
Income before income taxes 13,146 8,852 7,655 6,975 7,153
Income tax expense 3,910 2,151 1,849 1,793 1,837
- --------------------------------------------------------------------------------
Net income before
extraordinary item 9,236 6,701 5,806 5,182 5,316
Extraordinary item - utilization
of tax loss carryforward 0 0 0 0 436
- --------------------------------------------------------------------------------
NET INCOME $9,236 $6,701 $5,806 $5,182 $5,752
================================================================================
PER COMMON AND COMMON EQUIVALENT SHARE
Net income before
extraordinary item 1.04 .76 .68 .61 .62
Extraordinary item - utilization
of tax loss carryforward 0 0 0 0 .05
- --------------------------------------------------------------------------------
NET INCOME PER SHARE $1.04 $.76 $.68 $.61 $.67
================================================================================
Weighted average shares
outstanding 8,908 8,824 8,526 8,474 8,570
BALANCE SHEETS
As of June 30,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
Working capital $38,999 $33,140 $17,603 $29,531 $26,971
Total assets 62,872 56,700 45,515 38,369 33,336
Long-term liabilities 0 0 0 0 433
Shareholders' equity 52,405 48,096 40,451 34,437 29,101
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
STATEMENTS OF INCOME (percent of sales)
Year Ended June 30,
1996 1995 1994
----- ----- -----
REVENUES 100% 100% 100%
OPERATING EXPENSES
Cost of sales 45 42 39
Research and development 8 10 9
Sales and marketing 22 22 23
General and administrative 7 10 8
- -----------------------------------------------------------------------------
82 84 79
- -----------------------------------------------------------------------------
Income from operations 18 16 21
OTHER INCOME (EXPENSE)
Interest income 2 3 4
Other, net 0 1 0
- -----------------------------------------------------------------------------
2 4 4
- -----------------------------------------------------------------------------
Income before income taxes 20 20 25
Income tax expense 6 5 6
- -----------------------------------------------------------------------------
NET INCOME 14% 15% 19%
=============================================================================
YEAR ENDED JUNE 30, 1996 VERSUS 1995 -- Equipment sales and other revenue
increased 50% to $66,859,000 in fiscal year 1996, from $44,572,000 in fiscal
year 1995. Sales by product line are summarized as follows:
Revenues by Product
(in thousands)
Fiscal Year Fiscal Year
1996 1995
----- ----
DPX $41,048 $24,231
EXPERT 10,351 5,269
Achilles 5,054 7,211
Artoscan 6,245 5,320
Other 4,161 2,541
------- -------
$66,859 $44,572
======= =======
The increase in DPX sales in the current fiscal year is primarily
attributable to increased shipments in the United States, which the Company
believes are related to the introduction of several new drug therapies during
the last 12 months. The increase in EXPERT shipments is the result of solving
several problems related to detector production experienced in prior fiscal
years. Achilles sales decreased in fiscal year 1996 as compared to fiscal year
1995 due to lower sales in Japan caused by cutbacks in government-sponsored
programs to support low-cost densitometry. The increase in Artoscan sales is a
result of increased acceptance of the system, particularly by
orthopedic surgeons.
Cost of sales as a percentage of equipment sales increased to 45% in the
year ended June 30, 1996 from 42% in the year ended June 30, 1995. This increase
is primarily a result of increased sales of the lower-margin EXPERT and Artoscan
extremity MRI products, and proportionately less sales of the
higher-margin Achilles.
Research and development expenditures increased to $5,610,000 in fiscal
year 1996 from $4,349,000 in fiscal year 1995. This increase is primarily
attributable to expenditures related to the development of the DPX-IQ bone
densitometer and the ORCA mini C-arm. Bone Care, the Company's 97.3% owned
pharmaceutical development subsidiary, also increased expenditures for clinical
testing of 1-alpha D2 in the treatment of secondary hyperparathyroidism
associated with end-stage renal disease. The Company spun off Bone Care to its
shareholders on May 8, 1996 in a transaction intended to qualify as a tax-free
distribution. The future costs of these clinical trials and any other costs
related to the research and development of vitamin D compounds will therefore no
longer be included in the Company's consolidated net income. Vitamin D-related
expenses were $972,000 in fiscal year 1996 and $882,000 in fiscal year 1995.
Sales and marketing expenses increased to $14,447,000 in fiscal year 1996
from $9,812,000 in fiscal year 1995, representing 22% of equipment sales in both
years. During fiscal 1996, LUNAR expanded the number of direct sales
representatives and sales and marketing administration staff in the United
States in response to higher customer demand levels.
General and administrative expenses increased to $4,731,000 in fiscal year
1996 from $4,327,000 in fiscal year 1995. This increase is primarily
attributable to higher legal expenses. LUNAR had been involved in several patent
lawsuits initiated in September 1994 with Hologic, Inc., a Massachusetts-based
competitor, related to x-ray and ultrasound densitometers. These lawsuits were
settled on November 22, 1995.
Interest income increased to $1,550,000 in fiscal year 1996 from $1,313,000
in fiscal year 1995. In fiscal year 1996, increased interest income from the
Company's higher level of financed trade receivables in South America more than
offset the decreased interest income from a lower level of
marketable securities. In connection with the Bone Care spin-off the Company
transferred $10,725,000 to Bone Care. This transfer will reduce the Company's
interest income in future periods.
The effective tax rate averaged 30% in fiscal year 1996 and 24% in fiscal
year 1995. The Company's effective rate is below the 34% federal statutory rate
as a result of the tax benefit from the Company's foreign sales corporation,
Lunar FSC, Inc., and tax-exempt interest income. The effective tax rate was
higher in the current fiscal year due to increased profits from sales within the
United States, which do not benefit from foreign sales corporation treatment.
YEAR ENDED JUNE 30, 1995 VERSUS 1994 -- Equipment sales and other revenue
increased 48% to $44,572,000 in fiscal year 1995, from $30,027,000 in fiscal
year 1994. Sales by product line are summarized as follows:
Revenues by Product
(in thousands)
Fiscal Year Fiscal Year
1995 1994
---- ----
DPX $24,231 $ 22,554
EXPERT 5,269 588
Achilles 7,211 3,733
Artoscan 5,320 1,135
Other 2,541 2,017
------- -------
$44,572 $30,027
======= =======
Equipment sales continued to benefit from growing acceptance of bone
densitometers as a method to diagnose patients for osteoporosis. EXPERT
shipments were limited to some extent due to difficulties in obtaining adequate
supplies of a component. The DPX bone densitometer also experienced higher
sales, but, due to competitive pressures, the average selling price per unit
decreased. Geographically, sales increases were particularly strong in North
America and Asia.
Cost of sales as a percentage of equipment sales increased to 42% in the
year ended June 30, 1995 from 39% in the year ended June 30, 1994. This increase
is primarily a result of increased competition in the DPX product line, and
increased sales of the lower-margin EXPERT and Artoscan extremity MRI products.
Research and development expenditures increased to $4,349,000 in fiscal
year 1995 from $2,744,000 in fiscal year 1994. This increase is primarily
attributable to expenditures related to the EXPERT bone densitometer. The
Company also incurred increased research and development costs to develop
Achilles+, an improved version of the Achilles ultrasound bone densitometer.
LUNAR spent approximately $882,000 on vitamin D-related research in fiscal year
1995 compared to approximately $636,000 in fiscal year 1994. These expenditures
were targeted toward the development of 1a-OH-D2 for secondary
hyperparathyroidism associated with end-stage renal disease and preliminary
investigation of other vitamin D compounds.
Sales and marketing expenses increased to $9,813,000 in fiscal year 1995
from $6,783,000 in fiscal year 1994, representing a decrease to 22% of fiscal
year 1995 equipment sales from 23% in fiscal 1994. This decrease is primarily
attributable to lower average selling costs associated with sales of
Achilles densitometers.
General and administrative expenses increased to $4,327,000 in fiscal year
1995 from $2,532,000 in fiscal year 1994. This increase is primarily
attributable to higher legal expenses. LUNAR had been involved in several patent
lawsuits with Hologic, Inc., a Massachusetts-based competitor, related to x-ray
and ultrasound densitometers. These lawsuits resulted in approximately
$1,100,000 in legal expenses in fiscal year 1995.
Interest income increased to $1,312,000 in fiscal year 1995 from $1,229,000
in fiscal year 1994. In fiscal year 1995, increased interest income from the
Company's higher level of financed trade receivables in South American more than
offset the decreased interest income from a lower level of marketable
securities. Interest income in fiscal year 1994 includes $65,000 of nonrecurring
interest income related to an income tax recovery from the final settlement of a
prior year tax issue with the Internal Revenue Service.
The effective tax rate averaged 24% in both fiscal year 1995 and 1994. The
provision for income taxes for fiscal year 1995 includes research and
development credits of approximately $215,000 due to higher research and
development expenditures during the fiscal year. The provision for income taxes
for fiscal year 1994 is net of a $235,000 income tax recovery related to the
final settlement of a prior year tax issue with the Internal Revenue Service.
The Company's effective rate is below the 34% federal statutory rate as a result
of the benefit if Lunar FSC, Inc. but is partially offset by the provision for
state income taxes.
LIQUIDITY AND CAPITAL RESOURCES -- Total cash and cash equivalents and
marketable securities decreased from $18,547,000 at June 30, 1995 to $11,377,000
at June 30, 1996 primarily as a result of the transfer of assets in connection
with the Bone Care spin-off.
Trade accounts receivable increased 51% to $35,625,000 at the year ended
June 30, 1996 from $23,606,000 at the year ended June 30, 1995. This increase is
primarily due to a 59% increase in sales in the fourth quarter of fiscal year
1996 as compared to the fourth quarter of fiscal year 1995. Financed accounts
receivable relating to certain sales in South America (primarily Brazil and
Argentina), and extended terms for certain ARTOSCAN system sales also
contributed to the increase in trade accounts receivable. Factors affecting the
economies of Brazil, Argentina, or other South American countries could affect
the Company's collection experience related to the financed accounts receivable
from customers in these countries. The increase in trade accounts receivable was
financed in part by cash generated from maturities of marketable securities.
Inventories increased 30% to $8,675,000 on June 30, 1996 from $6,651,000 on
June 30, 1995. This increase is primarily attributable to increased sales.
LUNAR does not have any pending material commitments for capital
expenditures. LUNAR believes the existing cash balances and cash generated from
operations will be sufficient to fund its operations through fiscal 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF INCOME
LUNAR CORPORATION AND SUBSIDIARIES
Years ended June 30, 1996 1995 1994
---- ---- ----
REVENUES $66,859,196 $44,571,992 $30,027,152
OPERATING EXPENSES
Cost of sales 30,236,372 18,871,021 11,719,686
Research and development 5,610,321 4,349,414 2,744,090
Sales and marketing 14,446,553 9,812,468 6,782,800
General and administrative 4,731,340 4,327,424 2,532,715
- --------------------------------------------------------------------------------
55,024,586 37,360,327 23,779,291
- --------------------------------------------------------------------------------
INCOME FROM OPERATIONS 11,834,610 7,211,665 6,247,861
OTHER INCOME (EXPENSE)
Interest income 1,549,786 1,312,500 1,228,905
Other (237,952) 327,600 178,485
- --------------------------------------------------------------------------------
1,311,834 1,640,100 1,407,390
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 13,146,444 8,851,765 7,655,251
INCOME TAX EXPENSE (BENEFIT)
Currently payable 4,714,000 2,448,503 1,745,264
Deferred (804,000) (298,000) 104,000
- --------------------------------------------------------------------------------
3,910,000 2,150,503 1,849,264
- --------------------------------------------------------------------------------
NET INCOME $9,236,444 $6,701,262 $5,805,987
================================================================================
NET INCOME PER COMMON
AND COMMON
EQUIVALENT SHARE $1.04 $0.76 $0.68
================================================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
LUNAR CORPORATION AND SUBSIDIARIES ASSETS
June 30, 1996 1995
---- ----
CURRENT ASSETS
Cash and cash equivalents $ 8,001,582 $ 2,577,655
Marketable securities 2,347,400 11,647,041
Receivables:
Trade, less allowance for doubtful
accounts of $2,235,000 in 1996 and
$1,150,000 in 1995 27,966,620 19,109,561
Other 328,662 422,728
- -------------------------------------------------------------------------------
28,295,282 19,532,289
Inventories:
Finished goods and work in process 3,920,431 2,388,407
Materials and purchased parts 4,755,056 4,262,319
- -------------------------------------------------------------------------------
8,675,487 6,650,726
Prepaid expenses 161,829 156,451
Deferred income taxes 1,984,000 1,180,000
- -------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 49,465,580 41,744,162
PROPERTY, PLANT AND EQUIPMENT AT COST
Buildings and improvements 2,203,036 2,219,148
Furniture and fixtures 669,284 582,206
Machinery and other equipment 3,554,535 3,043,258
- -------------------------------------------------------------------------------
6,426,855 5,844,612
Less accumulated depreciation and amortization 2,977,468 2,456,356
- -------------------------------------------------------------------------------
3,449,387 3,388,256
Land 138,858 138,858
- -------------------------------------------------------------------------------
3,588,245 3,527,114
Long-term trade accounts receivable 7,658,079 4,496,457
Long-term marketable securities 1,028,088 4,322,629
Excess of cost over fair value of
net assets of subsidiary acquired,
net of accumulated amortization of
$464,064 in 1995 0 895,853
Patents and other intangibles, net
of accumulated amortization of $832,573
in 1996 and $682,995 in 1995 990,382 1,371,269
Other 141,556 342,484
- -------------------------------------------------------------------------------
$62,871,930 $56,699,968
===============================================================================
See accompanying notes to consolidated financial statements.
LUNAR CORPORATION AND SUBSIDIARIES
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, 1996 1995
---- ----
CURRENT LIABILITIES
Accounts payable $ 3,508,804 $ 2,258,695
Customer advances and deferred income 565,364 462,050
Income taxes payable 551,852 2,201,898
Accrued liabilities:
Commissions payable 2,502,323 1,767,139
Compensation payable 205,236 89,532
Property, payroll, and other taxes 331,139 146,219
Accrued warranty and installation expenses 2,570,000 1,555,000
Other 231,809 123,669
- -------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 10,466,527 8,604,202
SHAREHOLDERS' EQUITY
Common stock authorized 25,000,000 shares
of $.01 par value; issued and outstanding,
8,486,250 shares in 1996 and 7,988,190
shares in 1995 84,863 53,255
Capital in excess of par value 22,802,103 15,438,402
- -------------------------------------------------------------------------------
22,886,966 15,491,657
Retained earnings 29,420,314 32,622,240
Unrealized appreciation in
marketable securities 29,122 0
Cumulative translation adjustment 69,001 (18,131)
- -------------------------------------------------------------------------------
52,405,403 48,095,766
- -------------------------------------------------------------------------------
$62,871,930 $56,699,968
===============================================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY
LUNAR CORPORATION AND SUBSIDIARIES
Years ended June 30, 1996,
Unrealized
1995, and 1994 Number Capital in
appreciation Cumulative
of Common excess of Retained
in marketable translation
shares stock par value earnings
securities adjustment Total
-------- ------- ----------- -----------
- ---------- ----------- -----------
BALANCE AT JUNE 30, 1993 7,795,170 $51,968 $14,274,540 $20,114,991
$0 ($4,890) $34,436,609
Issuance of shares under
stock option plans 42,000 280 118,982 0
0 0 119,262
Tax benefit from issuance
of shares under
stock option plans 0 0 76,186 0
0 0 76,186
Issuance of stock awards 900 6 6,894 0
0 0 6,900
Net income for the year ended
June 30, 1994 0 0 0 5,805,987
0 0 5,805,987
Translation adjustment 0 0 0 0
0 5,720 5,720
- --------------------------------------------------------------------------------
- ---------------------------------------
BALANCE AT JUNE 30, 1994 7,838,070 52,254 14,476,602 25,920,978
0 830 40,450,664
Issuance of shares under
stock option plans 149,145 994 497,907 0
0 0 498,901
Tax benefit from issuance
of shares under
stock option plans 0 0 454,149 0
0 0 454,149
Issuance of stock awards 975 7 9,744 0
0 0 9,751
Net income for the year ended
June 30, 1995 0 0 0 6,701,262
0 0 6,701,262
Translation adjustment 0 0 0 0
0 (18,961) (18,961)
- --------------------------------------------------------------------------------
- ---------------------------------------
BALANCE AT JUNE 30, 1995 7,988,190 53,255 15,438,402 32,622,240
0 (18,131) 48,095,766
Issuance of shares under
stock option plans 497,315 4,421 2,085,272 0
0 0 2,089,693
Effect of 3 for 2 stock split 0 27,180 (27,180) 0
0 0 0
Payment of fractional shares
resulting from stock split (30) 0 (875) 0
0 0 (875)
Tax benefit from issuance
of shares under
stock option plans 0 0 5,280,585 0
0 0 5,280,585
Issuance of stock awards 775 7 25,899 0
0 0 25,906
Net income for the year ended
June 30, 1996 0 0 0 9,236,444
0 0 9,236,444
Spin-off of Bone Care
International, Inc. 0 0 0 (12,438,370)
0 0 (12,438,370)
Unrealized appreciation in
marketable securities 0 0 0 0
29,122 0 29,122
Translation adjustment 0 0 0 0
0 87,132 87,132
- --------------------------------------------------------------------------------
- ---------------------------------------
BALANCE AT JUNE 30, 1996 8,486,250 $84,863 $22,802,103 $29,420,314
$29,122 $69,001 $52,405,403
================================================================================
=======================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
LUNAR CORPORATION AND SUBSIDIARIES
Years ended June 30, 1996 1995 1994
---- ---- ----
CASH FLOWS
FROM OPERATING ACTIVITIES
Net income $9,236,444 $6,701,262 $5,805,987
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH
PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Depreciation and amortization 1,365,348 1,383,151 921,873
Minority interest in
net income (loss)
of subsidiary 79,983 (38,160) (43,657)
Changes in assets and liabilities:
Receivables (11,727,295)(10,288,014) (5,075,422)
Inventories (2,024,761) (3,360,842) (1,433,392)
Prepaid expenses (52,094) (32,808) (86,766)
Deferred income taxes (804,000) (298,000) 104,000
Accounts payable 1,436,573 1,206,842 55,124
Customer advances and
deferred income 103,314 206,081 36,845
Accrued liabilities 2,164,204 1,151,630 794,400
Income taxes payable (1,650,046) 1,003,846 302,503
- ---------------------------------------------------------------------------
NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES (1,872,330) (2,365,012) 1,381,495
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (cont.)
LUNAR CORPORATION AND SUBSIDIARIES
Years ended June 30, 1996 1995 1994
---- ---- ----
CASH FLOWS
FROM INVESTING ACTIVITIES
Purchases of
marketable securities ($700,000) ($1,042,910) ($5,754,964)
Sales and maturities
of marketable securities 13,132,594 5,786,129 5,886,150
Additions to property,
plant, and equipment (839,703) (1,155,586) (2,018,097)
Patents and other intangibles (303,664) (300,597) (1,249,532)
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY
(USED IN) INVESTING ACTIVITIES 11,289,227 3,287,036 (3,136,443)
CASH FLOWS
FROM FINANCING ACTIVITIES
Proceeds from exercise of
stock options 2,114,724 498,901 119,262
Income tax benefit
from stock option exercises 5,280,585 454,149 76,186
Cash distributed with Bone
Care spin-off (11,388,279) 0 0
- -------------------------------------------------------------------------------
NET CASH PROVIDED BY
(USED IN) FINANCING ACTIVITIES (3,992,970) 953,050 195,448
- -------------------------------------------------------------------------------
Net increase (decrease)
in cash and cash equivalents 5,423,927 1,875,074 (1,559,500)
Cash and cash equivalents
at beginning of year 2,577,655 702,581 2,262,081
- -------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 8,001,582 $ 2,577,655 $ 702,581
===============================================================================
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION
Income taxes paid $ 1,083,461 $ 987,990 $1,302,887
===============================================================================
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LUNAR CORPORATION AND SUBSIDIARIES
(1) Summary of Accounting Policies
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Lunar Corporation (the Company) and its wholly owned
subsidiaries, Lunar GmbH, Lunar Europe, N.V., Bona Fide, Ltd., and Lunar FSC,
Inc. In May 1996, the Company spun-off its 97% owned subsidiary, Bone Care
International, Inc. (Bone Care), and its subsidiary, Continental Assays
Corporation (note 2). The accompanying consolidated financial statements
reflect the results of operations of Bone Care prior to the date of the
spin-off. All significant intercompany accounts and transactions have been
eliminated in consolidation.
DESCRIPTION OF BUSINESS: Lunar Corporation develops products for the
diagnosis and monitoring of osteoporosis and other metabolic bone diseases. The
Company develops and sells bone densitometers, which are specialized scanning
systems used to aid in the diagnosis of bone disease by measuring the density of
bone. Lunar GmbH supports customers and sells LUNAR's products in Germany.
Lunar Europe, N.V. supports customers and sells LUNAR's products in Belgium and
supports customers in other European countries. Bona Fide, Ltd. reviews and
analyzes data from clinical trials. Lunar FSC, Inc. is a foreign sales
corporation responsible for the sale of LUNAR's products outside of the
United States.
REVENUE RECOGNITION: Revenue is recognized from sales when a product is
shipped. Amounts billed for service contracts are recognized as revenue
when earned.
CASH AND CASH EQUIVALENTS: For purposes of the consolidated statements of
cash flows, the Company considers all highly liquid debt instruments purchased
with original maturities of three months or less to be cash equivalents.
INVENTORIES: Inventories are stated at the lower of cost or market; cost is
determined principally by the first-in, first-out method.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization are provided
for in amounts sufficient to relate the cost of depreciable assets to operations
over their estimated service lives. A combination of straight-line and
accelerated methods of depreciation are used for financial and income tax
reporting purposes.
The cost of property and equipment are depreciated over the following
estimated useful lives:
Asset classification Estimated useful life
-------------------- ---------------------
Machinery, furniture, and fixtures 5-7 years
Building and improvements 19-39 years
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS OF SUBSIDIARY ACQUIRED: Excess
of cost over fair value of net assets of subsidiary acquired pertains to
Bone Care and was amortized on a straight-line basis over a 15-year period. Bone
Care was spun off to LUNAR shareholders in May 1996 (note 2). The excess of
cost over fair value of net assets of Bone Care was included in the
distribution.
RESEARCH AND DEVELOPMENT COSTS: Materials, labor, and overhead expenses
related to research and development projects are charged to operations
as incurred.
PROVISION FOR WARRANTIES: In the normal course of business, the Company
makes certain initial warranties as to material and workmanship. The estimated
costs associated with these warranties are accrued at the time of sale.
INCOME TAXES: Income taxes are accounted for in accordance with Statement
of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Under the asset and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered
or settled. Under SFAS No. 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
MARKETABLE SECURITIES: Marketable securities generally consist of state and
municipal bonds with original maturities generally ranging from less than one
year to four years. The Company accounts for its investments in accordance with
the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Under SFAS No. 115, the Company classifies its investment
securities as available-for-sale. Available-for-sale securities are reported at
fair value, with unrealized gains and losses excluded from earnings and reported
in a separate component of shareholders' equity. Interest income is recognized
when earned.
INCOME PER SHARE: Income per share is based on the weighted average number
of common and common equivalent shares outstanding during each year. Common
equivalent shares include stock options, which have been included using the
treasury stock method only when their effect is dilutive. Income per share is
based upon common and common equivalent shares of 8,907,823, 8,824,265, and
8,526,130 for the years ended June 30, 1996, 1995, and 1994, respectively.
FOREIGN CURRENCY TRANSLATION: For the Company's foreign subsidiaries, the
functional currency is its local currency. Accordingly, assets and liabilities
are translated into U.S. dollars using current exchange rates. Revenue and
expense accounts are translated at average exchange rates prevailing during the
year. The resulting translation gains and losses are included as a separate
component of shareholders' equity.
The Company uses forward currency contracts in its management of foreign
currency exposures. Realized gains and losses on such contracts are included in
other income in the consolidated financial statements. Unrealized gains and
losses, which were not significant at June 30, 1996 and 1995, are
not recognized.
USE OF ESTIMATES: In preparing the consolidated financial statements, the
Company's management makes estimates and assumptions that affect the reported
amounts of assets and liabilities and 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of financial
instruments, which consisted of cash and cash equivalents, marketable
securities, receivables, accounts payable, customer advances, and accrued
liabilities, approximated their carrying values at June 30, 1996 and 1995.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: SFAS No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed
Of," was issued in 1995. Implementation of SFAS No. 121 is required in the
fiscal year commencing July 1, 1996. SFAS No. 121 established accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill relating to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of. SFAS
No. 121 is not expected to have a significant impact on the Company's
consolidated financial statements.
SFAS No. 123, "Accounting for Stock-based Compensation," was issued in
1995. Implementation is required in the fiscal year commencing July 1, 1996.
SFAS No. 123 establishes a fair value-based method for financial accounting and
reporting for stock-based employee compensation plans. The new standard allows
compensation to continue to be measured by the intrinsic value-based method of
accounting prescribed by Accounting Principles Board No. 25, "Accounting for
Stock Issued to Employees," in the financial statements. However, expanded
disclosure of the impact of the fair value-based method is required. The
Company does not expect the adoption of SFAS No. 123 to have a material effect
on the Company's consolidated financial position or results of operations.
(2) Spin-off of Subsidiary
The Company distributed all of its shares of Bone Care to the Company's
shareholders on May 8, 1996 in a transaction intended to qualify as a tax-free
distribution. Previously in October 1995, the Company had contributed its
ownership of Continental Assays Corporation, and all other vitamin D-related
assets with a book value of $175,867, and forgave intercompany loans receivable
of $634,683 for 1,806,075 shares of Bone Care common stock. The Company also
contributed $10,000,000 for 1,698,674 shares of Bone Care common stock on May 8,
1996 and reimbursed Bone Care $725,000 for tax savings realized in prior years
when Bone Care losses were included in the Company's consolidated tax returns.
The shares distributed to the Company's shareholders represent 97% of the total
outstanding Bone Care shares as of the date of the distribution.
Bone Care entered into a Transition Agreement with the Company, pursuant to
which certain employees of the Company will perform administrative services for
Bone Care. Such services include legal, treasury, accounting, insurance and
employee benefit administration. As compensation, Bone Care pays the Company a
monthly fee of $7,000. The Company leases 3,000 square feet of office space to
Bone Care for $2,000 per month under the Transition Agreement. The term of the
Transition Agreement is three years; however, Bone Care may terminate the
agreement by giving the Company 90 days advance written notice.
(3) Incentive Compensation Programs
Lunar Corporation has granted options to key employees, directors, and
consultants under two separate programs. Options outstanding as of June 30,
1996 and 1995 are summarized as follows:
Program dateOption price 1996 1995
------------------------ ---- ----
September 1, 1984 $ .16 160,500 160,500
April 17, 1986 .64 135,245 322,815
5.66 60,700 166,350
6.16 220,510 363,405
7.00 10,200 33,000
7.33 81,300 103,500
7.50 100,950 127,500
7.66 51,000 68,400
7.83 48,860 58,200
10.00 36,000 50,550
11.50 2,500 3,000
13.00 18,000 18,750
14.33 6,750 6,750
17.50 15,000 0
20.58 119,500 0
24.66 19,500 0
25.50 3,100 0
30.00 30,000 0
32.00 1,000 0
32.75 10,500 0
--------- ----------
1,131,115 1,482,720
========= ==========
The option issued under the September 1, 1984 agreement to an
employee/officer is exercisable and will expire in the event of termination of
employment.
Under the second option program, titled the Non-Qualified Stock Option
program, a total of 3,000,000 shares of common stock were made available, of
which 460,890 remain available. Options granted under this program vest over a
three-year or five-year period. The options will expire ten years from the
granting date, or upon termination of employment.
The following is a summary of options related to these option programs as
of June 30, 1996, 1995, and 1994, respectively:
June 30, Option price June 30, Option price June 30, Option price
1996 per share 1995 per share 1994 per share
---- --------- ---- --------- ---- ---------
Options outstanding
at beginning
of year 1,482,720 $0.16-14.33 1,442,415 $0.16-14.33 1,295,565 $0.16-14.33
Granted 203,750 17.50-32.75 201,300 7.50-13.00 235,050 7.00-7.83
Exercised (497,315) 0.64-13.00 (149,145) 0.16-7.83 (42,000) 0.64-7.66
Expired (58,040) 6.16-24.66 (11,850) 6.16-7.83 (46,200) 0.64-7.66
- --------------------------------------------------------------------------------
Options outstanding
at end of
year 1,131,115 $0.16-32.75 1,482,720 $0.16-14.33 1,442,415 $0.16-14.33
================================================================================
Options exercisable
at end of
year 544,375 812,475 768,615
================================================================================
The option price under both option programs was based on 100% of
estimated fair market value of the Company's stock on the dates the options were
granted.
The Company has a longevity stock award program whereby 25 shares of
common stock are issued to employees with five years of service, and 100 shares
are issued for ten years of service. The Company issued 775, 975, and 900
shares under this program in the years ended June 30, 1996, 1995, and 1994,
respectively.
The Company has a program which provides for bonuses to all employees
contingent upon achieving certain financial goals. Total expense under the
program was $338,690, $189,457, and $207,130 for the years ended June 30, 1996,
1995 and 1994, respectively.
(4) Income Taxes
Income taxes consist of the following:
1996 1995 1994
---- ---- ----
Current:
Federal $4,714,000 $2,212,503 $1,452,264
State 0 236,000 293,000
---------- ---------- ----------
4,714,000 2,448,503 1,745,264
Deferred:
Federal (804,000) (269,000) 88,000
State 0 (29,000) 16,000
---------- ---------- ----------
(804,000) (298,000) 104,000
---------- ---------- ----------
$3,910,000 $2,150,503 $1,849,264
========== ========== ==========
A reconciliation of the provision for income taxes with the applicable
Federal income tax rate is presented below:
1996 1995 1994
Percent Percent Percent
of of of
1996 pretax 1995 pretax 1994 pretax
Amount income Amount income Amount income
------ ------ ------ ------ ------ ------
Provision computed
at normal rate $4,469,791 34% $3,009,600 34% $2,602,785 34%
Increases (reductions)
in taxes resulting from:
State income taxes 0 0 161,480 2 202,620 3
Tax benefit of exempt
foreign trade
income (731,265) (6) (807,905) (9) (574,422) (8)
Research and
development credits 0 0 (215,000) (3) (25,000) 0
Income tax recovery 0 0 0 0 (235,000) (3)
Other 171,474 2 2,328 0 (121,719) (2)
- -------------------------------------------------------------------------------
Provision for
income taxes $3,910,000 30% $2,150,503 24% $1,849,264 24%
===============================================================================
The tax effect of temporary differences that give rise to deferred tax
assets at June 30, 1996 and 1995 are as follows:
1996 1995
---- ----
Accrued warranty $1,011,000 $603,000
Inventory valuation 113,000 105,000
Allowance for doubtful accounts 828,000 440,000
Other 32,000 32,000
---------- ---------
$1,984,000 $1,180,000
========== ==========
(5) Marketable Securities
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses, and fair value for marketable securities at June 30, 1996 and
1995 were as follows:
Gross Gross
unrealized unrealized
Amortized holding holding
1996 cost gains losses Fair value
---- ---- ----- ------- ----------
Available-for-sale:
Current $2,318,279 $29,121 $ 0 $2,347,400
Due after
one year 1,028,088 0 0 1,028,088
---------- ------- ------- ----------
$3,346,367 $29,121 $ 0 $3,375,488
========== ======= ======= ==========
1995
----
Held-to-maturity:
Current $11,647,041 $14,672 ($6,576) $11,655,137
Due after
one year 4,322,629 31,184 (12,275) 4,341,538
----------- ------- --------- -----------
$15,969,670 $45,856 ($18,851) $15,996,675
=========== ======= ========= ===========
The scheduled maturities for investment securities at June 30, 1996 were
as follows:
Less than 6 months More than
6 months to 1 year 1 year Total
-------- --------- ------ -----
State and municipal bonds $876,325 $771,075 $1,028,088 $2,675,488
Other 700,000 0 0 700,000
---------- --------- ---------- ----------
$1,576,325 $771,075 $1,028,088 $3,375,488
========== ========= ========== ==========
The gross realized gains and losses on the sale of available-for-sale
investment securities for the year ended June 30, 1996 were not material.
The Company had historically reported its investment securities as
held-to-maturity. In December 1995, the Company changed its classification of
investments from held-to-maturity to available-for-sale. The impact of the
change in classification was not material to the consolidated financial
statements as book value approximated the fair value.
(6) Profit-sharing Plan
The Company has established a 401(k) profit-sharing plan covering
substantially all employees. Employer contributions to the plan are at the
discretion of the Board of Directors. The Company's policy is to fund
profit-sharing plan contributions as they accrue. Profit-sharing expense
amounted to $88,254, $69,186, and $61,562 for the years ended June 30, 1996,
1995, and 1994 respectively.
(7) Supplemental Sales and Customer Information
The Company's approximate revenues by geographic regions are as follows (in
thousands):
June 30, June 30, June 30,
1996 1995 1994
---- ---- ----
United States and Canada $30,835 $12,848 $7,553
Europe 11,140 9,114 6,090
Asia 14,760 14,284 8,891
Central and South America 10,124 8,326 7,493
------- ------- -------
$66,859 $44,572 $30,027
======= ======= =======
The Company sells its products to end-user customers or its distributors in
South America on financed terms. Generally, the financing is over a two- or
three-year time period and denominated in U.S. dollars. As of June 30, 1996,
1995, and 1994, the Company had approximately $12,541,000, $9,124,000, and
$6,295,000, respectively, of financed trade accounts receivable from South
American customers. The collateral for these receivables is generally the
equipment sold and mortgages on customers' real estate.
Sales to one distributor accounted for 13% of total sales for the year
ended June 30, 1996, 21% of total sales for the year ended June 30, 1995, and
17% of total sales for the year ended June 30, 1994.
(8) Fee Per Patient Program
The Company has entered into an agreement with a leasing company whereby
the Company sells its systems to the leasing company, which, in turn, leases the
systems to third parties on a fee-per-patient basis. Under the terms of the
agreement, the Company is contingently liable to the leasing company for
approximately $309,000 as of June 30, 1996.
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
LUNAR CORPORATION:
We have audited the accompanying consolidated balance sheets of Lunar
Corporation and subsidiaries as of June 30, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended June 30, 1996. 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 Lunar Corporation
and subsidiaries as of June 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Chicago, Illinois
July 26, 1996
QUARTERLY FINANCIAL INFORMATION (unaudited)
The following table sets forth unaudited selected quarterly financial
information for each of the two most recent fiscal years.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands except per-share data)
1996
----
Revenues $12,360 $16,934 $17,287 $20,278
Income from operations 1,398 2,753 3,474 4,210
Net income 1,327 2,244 2,588 3,077
Net income per share 0.15 0.25 0.29 0.34
1995
----
Revenues $9,113 $10,450 $12,231 $12,778
Income from operations 1,729 1,957 1,865 1,661
Net income 1,564 1,752 1,767 1,618
Net income per share 0.18 0.20 0.20 0.18
LUNAR is unable to predict the timing of purchase orders and the related
product shipments and is unable to predict demand for LUNAR's products in
specific foreign markets. Therefore, quarterly sales and earnings fluctuations
can be expected.
LUNAR has not paid any cash dividends on its shares of common stock
since its initial public offering on August 14, 1990, and does not expect to pay
any cash dividends in the foreseeable future. LUNAR intends to reinvest its
earnings on the continued development and operation of its business. Any payment
of dividends would depend upon LUNAR's pattern of growth, profitability,
financial condition, and such other factors as the Board of Directors may deem
relevant.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- ------------------------------------------------------------------------
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The Company incorporates by reference the information included in the
Company's definitive Proxy Statement for its 1996 Shareholders Meeting to be
held on November 21, 1996 ("Proxy Statement") under the caption "Purposes of the
Meeting - Election of Directors" which will be filed with the Securities and
Exchange Commission separately pursuant to Rule 14a-6 under the Securities
Exchange Act of 1934 and in accordance with General Instruction G(3) to Form
10-K, not later than 120 days after the end of the Company's fiscal year.
Information with respect to executive officers of the Company appears at the end
of Part I, page 10 of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The Company incorporates by reference the information included in the
Proxy Statement under the caption "Executive Compensation," other than the
information included in the Proxy Statement under the sub-captions "Board of
Directors Report on Executive Compensation" and "Performance Graph."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The Company incorporates by reference the information included in the
Proxy Statement under the caption "Securities Beneficially Owned by Principal
Shareholders, Directors, and Executive Officers."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The Company incorporates by reference the information included in the Proxy
Statement under the caption "Certain Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a) 1 and 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Reference is made to the separate index to the Company's consolidated
financial statements and schedule contained on page 35 hereof.
3. EXHIBITS
Reference is made to the separate exhibit index contained on page 39
hereof.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the fourth quarter
ended June 30, 1996.
LUNAR CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND
FINANCIAL STATEMENT SCHEDULE
The following documents are filed Page(s) in
as part of this report: Form 10-K
(1) Financial Statements:
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . . 31
Consolidated Balance Sheets at
June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . .18-19
Consolidated Statements of Income
for the years ended June 30, 1996,
1995, and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Consolidated Statements of
Shareholders' Equity for the
years ended June 30, 1996,
1995, and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Consolidated Statements of Cash Flows
for the years ended June 30, 1996,
1995, and 1994 . . . . . . . . . . . . . . . . . . . . . . . . .21-22
Notes to Consolidated Financial Statements . . . . . . . . . . . . .23-30
Pages in
(2) Financial Statement Schedule: Form 10-K
---------
Report of Independent Auditors on
Financial Statement Schedule . . . . . . . . . . . . . . . . . . . 36
Schedule II - Valuation and Qualifying
Accounts for each of the years ended
June 30, 1996, 1995, and 1994. . . . . . . . . . . . . . . . . . . 37
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Lunar Corporation:
Under date of July 26, 1996, we reported on the consolidated balance sheets of
Lunar Corporation and subsidiaries as of June 30, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended June 30, 1996, which are included
herein. In connection with our audits of the aforementioned consolidated
financial statements, we also have audited the related financial statement
schedule as listed in the accompanying index. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based on our audits.
In our opinion, this financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Chicago, Illinois
July 26, 1996
Schedule II
LUNAR CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
- -----------------------------------------------------------------------------
Additions
---------------------
Balance Charged Other
at to Charged Charges Balance
Beginning Costs and to Other Add at End
Description of Year Expenses Account (Deduct) of Year
- -----------------------------------------------------------------------------
For the year ended June 30, 1996:
Allowance for
doubtful accounts $1,150,000 1,085,000 0 0 $2,235,000
For the year ended June 30, 1995:
Allowance for
doubtful accounts $900,000 $250,000 0 0 $1,150,000
For the year ended June 30, 1994:
Allowance for
doubtful accounts $700,000 $200,000 0 0 $900,000
- -----------------------------------------------------------------------------
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 on
its behalf by the undersigned, thereunto duly authorized.
LUNAR CORPORATION
Date: September 25, 1996 By: Richard B. Mazess
-----------------------------
Richard B. Mazess, Ph.D.
President
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 and on the dates indicated.
Name
Richard B. Mazess President and September 25, 1996
- ------------------------ Director (Principal
Richard B. Mazess, Ph.D. Executive Officer)
Robert A. Beckman Vice President of September 25, 1996
- ------------------------ Finance (Principal
Robert A. Beckman Financial and
Accounting Officer)
Samuel E. Bradt Director September 25, 1996
- ------------------------
Samuel E. Bradt
John W. Brown Director September 25, 1996
- ------------------------
John W. Brown
Reed Coleman Director September 25, 1996
- ------------------------
Reed Coleman
John J. McDonough Director September 25, 1996
- ------------------------
John J. McDonough
Malcolm R. Powell Director September 25, 1996
- ------------------------
Malcolm R. Powell, M.D.
LUNAR CORPORATION
INDEX TO EXHIBITS
Exhibit
Number Document Description
- ------- --------------------
3.1 Articles of Amendment and Restated Articles of
Incorporation of Registrant
3.2 By-Laws of Registrant
10.1* Lunar Corporation Amended and Restated Stock Option Plan(1)
(Exhibit 10.4) and Forms of Stock Option Agreements
10.2* Forms of Stock Option Agreements(1) (Exhibit 10.4)
10.3 Distribution Agreement Between Bone Care and Lunar Corporation
10.4 Tax Disaffiliation Agreement Between Bone Care and Lunar
Corporation
10.5 Transition Agreement Between Bone Care and Lunar Corporation
11. Computation of Per Share Earnings
21. List of Subsidiaries of Registrant
23. Consent of Independent Auditors
27. Financial Data Schedule
(1)Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended June 30, 1992 (File No. 0-18643). Parenthetical
references to exhibit numbers are to the exhibit numbers on the Form 10-K
*Indicates a management contract or compensatory plan or arrangement required to
be filed as an exhibit to this Form 10-K.