UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: SEPTEMBER 26, 1998
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or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-18281
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HOLOGIC, INC.
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(Exact name of registrant as specified in its charter)
Delaware 04-2902449
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(State of incorporation) (I.R.S. Employer Identification No.)
590 LINCOLN STREET, WALTHAM, MASSACHUSETTS 02154
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(Address of principal executive offices) (Zip Code)
(781) 890-2300
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(Registrant's telephone number, including area code)
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
RIGHTS TO PURCHASE
COMMON STOCK
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 [_]
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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
10-K. [X]
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The aggregate market value of the registrant's Common Stock held by non-
affiliates of the registrant as of November 30, 1998 was $174,914,399 based on
the price of the last reported sale on the Nasdaq National Market System.
As of November 30, 1998 there were 13,390,576 shares of the registrant's Common
Stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Proxy Statement for Registrant's Annual Meeting of Stockholders to be held
on February 23, 1999 (Part III: Items 10,11,12 and 13).
INTRODUCTORY STATEMENT
When used in this Report, the words "expects," "anticipates,"
"estimates," "should," "will," "could," "would," "may," and similar expressions
are intended to identify forward-looking statements. Such statements, which
include statements relating to the timing and availability of products under
development, the ability of the Company to market such products, once developed,
successfully, the anticipated growth or expansion of the markets for the
Company's products, and other matters are subject to risks and uncertainties
that could cause actual results to differ materially from those anticipated.
These forward-looking statements speak only as of the date of this Report. The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statement contained herein to
reflect any change in the Company's expectation with regard thereto or any
change in events, conditions or circumstances on which any such statement
is based.
PART I
ITEM 1. BUSINESS
Hologic, Inc. ("Hologic" or the "Company") is a leading international
developer, manufacturer and marketer of X-ray bone densitometers which precisely
measure bone density for use in the diagnosis and monitoring of metabolic bone
diseases such as osteoporosis. Hologic pioneered the use of dual-energy X-ray
absorptiometry ("DXA") to measure bone density, introducing the first DXA bone
densitometer in 1987. Since this introduction, DXA systems have become the
standard for measuring bone density. In 1995, Hologic introduced its fourth
generation of DXA bone densitometers, its clinically oriented QDR(R) 4500
ACCLAIM(R) product line.
To address the growing clinical market for the early diagnosis and monitoring
of osteoporosis, Hologic has developed and is developing additional products
that it believes will complement its DXA product line. In December 1994, Hologic
acquired the ultrasound bone analyzer business of Walker Sonix, Inc. ("Walker
Sonix"). In July 1996, Hologic began international shipments of its
internally-developed, dry ultrasound system, the Sahara(R) Clinical Bone
Sonometer ("Sahara"). On March 13, 1998, the Food and Drug Administration
("FDA") approved the Company's pre-market application ("PMA") for Sahara.
Hologic believes that ultrasound systems represent a relatively low cost,
compact, easy-to-use, non-ionizing, measurement technique to assist in the
initial diagnosis of osteoporosis. The Company also believes that Sahara will
improve patient accessibility to bone density testing. In September 1994,
Hologic began a joint development effort with Serex, Inc. ("Serex") to develop
a diagnostic strip test to detect biochemical markers that indicate the rate of
a patient's bone loss. In January 1997, Hologic expanded its joint development
agreement to include Ostex International, Inc. Under this agreement, Ostex's
Osteomark assay is being combined with Serex's strip test technology to provide
a physician with a real-time means of measuring a patient's biochemical response
to osteoporosis therapies and compliance with those therapies, as a complement
to periodic bone density measurements.
On August 29, 1996, Hologic's wholly-owned subsidiary merged with FluoroScan
Imaging Systems, Inc. ("FluoroScan") in an all stock transaction accounted for
as a pooling-of-interests. FluoroScan manufactures and distributes the
FluoroScan Imaging System (the "FluoroScan System"), a low intensity, real-
time mini c-arm X-ray imaging device which provides high resolution images at
radiation levels and at a cost well below those of conventional X-ray and
fluoroscopic equipment. These mini c-arm systems are used primarily by
orthopedic surgeons to perform minimally invasive surgical procedures on a
patient's extremities (i.e., hand, wrist, knee, foot, ankle etc.).
As used herein the term "Company" includes Hologic and all of its
subsidiaries, including FluoroScan.
The Hologic logo is a service mark of the Company. QDR, QDR-1000, ACCLAIM and
Sahara are registered trademarks of the Company. QDR-1000W, QDR 1000plus, QDR-
2000, QDR 2000plus, QDR 4500, QDR 4500A, QDR
2
4500SL, QDR 4500W, QDR 4500C, FluoroScan, FluoroScan I, FluoroScan II,
FluoroScan III, Premier, Officemate, FluoroScan Imaging Systems and UBA 575+ are
trademarks of the Company. The trademarks Scanora and WalkerSonix are licensed
by the Company.
BONE ASSESSMENT PRODUCT BACKGROUND
OSTEOPOROSIS. Osteoporosis is a condition characterized by reduced bone
density that leads to an increased risk of fractures. Bone is a dynamic organ
that is maintained through a process referred to as remodeling in which old bone
is removed (resorption) and new bone is formed. In early adulthood, the levels
of bone resorption and bone formation are generally balanced, with the quantity
and distribution of bone throughout the body varying over time depending on
muscle mass, strength and use. When remodeling does not function properly, and
resorption exceeds formation, the result is a net loss of bone mass and density,
often causing diminished structural integrity of the skeleton (particularly of
the trabecular "spongy" bone) and an increased risk of fracture.
According to the National Osteoporosis Foundation (the "NOF"), 28 million
Americans, 80% of whom are women, and approximately 250 million people
worldwide, suffer from osteoporosis. Osteoporosis typically develops silently
over a period of years, eventually progressing to a point where a fracture can
easily occur, causing pain and disability. The post-menopausal female population
has the highest incidence of osteoporosis and the highest rate of morbidity
(loss of quality of life) and mortality due to osteoporosis. The NOF estimates
that in the United States osteoporosis contributes to more than 1.5 million
fractures annually, and the costs to the U.S. healthcare system to treat these
osteoporosis-related fractures exceed $14 billion annually. Furthermore, it is
estimated that women can lose up to 20% of their bone mass in the 5-7 years
following menopause. Hip fractures lead to the most serious consequences.
According to the NOF, as many as one in every five hip fracture patients dies
from complications within a year after fracture, one in every four requires
long-term care and an even higher percentage of hip fracture patients never
return to an active and independent lifestyle. According to the World Health
Organization, the "aging of America" could increase the incidence of hip
fracture by as much as 280% by the year 2040.
Until recently, osteoporosis was thought to be an inevitable and untreatable
consequence of aging. The Company believes that the recent development and
introduction of new drug therapies, the aging of the population, and an
increased focus on women's health issues and preventive medical practices has
created a growing awareness among patients and physicians that osteoporosis is
treatable.
THERAPIES. The Company believes that over 45 clinical studies are currently
in progress to assess the safety and effectiveness of new therapies to treat
osteoporosis. However, prior to 1995, there were only two approved drug
treatments for osteoporosis in the United States, hormone replacement therapy,
using estrogen and related hormones ("HRT"), and calcitonin, with the most
widely prescribed treatment being HRT. Patient concerns regarding complications
related to prolonged use of HRT have contributed to a low compliance rate. Until
recently, calcitonin was available only in an injectable form, a delivery method
that has contributed to low patient compliance. Although HRT and calcitonin have
generally been shown in clinical trials to slow or stop the loss of bone mass,
these therapies have not been proven to restore bone mass.
Bisphosphonates are compounds that inhibit bone deterioration and slow bone
loss. Bisphosphonates have been shown to increase bone density and decrease the
risk of fractures at the hip and spine. In September 1995, the FDA approved
Merck and Company's ("Merck") drug Fosamax/(R)/ for the treatment of established
osteoporosis in post-menopausal women. Fosamax is a bisphosphonate that acts by
coating the bone surface and inhibiting bone resorption. In clinical trials of
Fosamax conducted in over 16 countries, Merck reported that on average, the
post-menopausal patients with established osteoporosis who were treated with
Fosamax experienced an increase in bone density of the hip and spine over a
three-year period. The clinical data also indicated that Fosamax reduced the
number of new vertebral fractures in these patients by approximately 48% when
compared with patients in placebo. In April 1997, the FDA approved an expansion
of the permitted use for Fosamax to include the prevention of osteoporosis.
3
Selective Estrogen Receptor Modulators ("SERMS") are a new class of compounds
being studied for their selective ability to act like estrogen in some tissues
but not in others. Like estrogens, SERMS produce changes in blood lipids that
may protect against heart disease. Unlike estrogens, SERMS do not appear to
stimulate breast and uterine tissue which could cause breast and uterine
cancers. On December 10, 1997, Eli Lilly and Company ("Eli Lilly") received
marketing clearance from the FDA for its new osteoporosis drug, Evista/(R)/.
Evista is among the first in this new class of drugs. Eli Lilly reported that in
clinical studies of Evista conducted in 28 countries, the drug was shown to
prevent bone loss in the total body, lower spine and hip and to significantly
increase bone mineral density in those regions when compared with the calcium-
supplement placebo group.
Other therapies cleared by the FDA to treat osteoporosis are a one-tablet
hormone replacement therapy, which combines estrogen and progestin, developed by
Wyeth-Ayerst Laboratories, and an intra-nasal formulation of calcitonin
developed by Sandoz. In addition, the FDA approved slow-release sodium fluoride
for the treatment of post-menopausal osteoporosis. Additional therapies
undergoing clinical trials for the prevention or treatment of osteoporosis
include bisphosphonates being developed by Proctor & Gamble (Rasidronate),
Boehringer-Mannheim (Ibandronate) and Sanofi (Tiludronate), and estrogen
analogues being developed by Pfizer (Draloxifene).
In several European countries, Japan and other international markets, there
has been an earlier availability and greater acceptance of osteoporosis
therapies. Some of these therapies include estrogens, bisphosphonates,
calcitonins, vitamin D compounds and ipriflavone.
The timing of when and where new drugs will become commercially available, if
ever, is uncertain. However, the Company believes that there will be broadened
and new approvals of osteoporosis therapies for both treatment and prevention
which should positively impact the bone assessment market worldwide.
DIAGNOSIS AND MONITORING OF OSTEOPOROSIS. There are a number of different
technologies that are available that can be used to assess bone mineral status.
Since the introduction of the first DXA bone densitometer by the Company in
1987, dual-energy X-ray absorptiometry has become the primary means of measuring
bone density. Prior to that introduction, the most widely used bone density
measuring technique for the hip and spine was dual photon absorptiometry
("DPA"). DPA systems were not very precise and required relatively long scanning
times and the use of an expensive radioactive source that required periodic
replacement. In contrast, DXA systems have much higher precision, require
significantly shorter scanning times and do not require a radioactive source.
DXA systems require a low patient radiation exposure. The most advanced DXA
systems can be used to measure the bone density of the whole body, or any site,
including the most important fracture sites of the hip or spine. As a result of
their precision and versatility, DXA systems have become the predominant means
of evaluating low bone density before fractures occur and monitoring changes in
a patient's bone density in response to therapies.
Other bone assessment technologies include single photon absorptiometry
("SPA"), radiographic absorptiometry ("RA"), quantitative computed tomography
("QCT"), quantitative ultrasound and biochemical markers.
Single photon absorptiometry was introduced in the 1960s and represents an
effective method of measuring bone density at a peripheral site of the skeleton
(forearm or heel), although it cannot be used to measure the most important
fracture sites of the spine or hip. SPA systems also have the added
inconvenience of requiring the patient to place the site being scanned in water
or other tissue-equivalent medium to achieve precision. SPA, however, does
represent a relatively inexpensive and valuable tool in the diagnosis of
osteoporosis with reasonable precision and low radiation exposure.
Quantitative computed tomography was introduced in the mid 1970s and can
measure bone density by using a CT scanner to determine both the patient's bone
density and bone distribution in three dimensions. QCT, however, has remained
limited in clinical use because of its relatively high radiation dose and the
high cost of CT scanner equipment.
4
Radiographic absorptiometry, also introduced in the 1970s, measures bone
density from two X-ray images (radiographs) of the hand placed alongside a
calibration device using a conventional X-ray machine. The radiographs are sent
to a central processing laboratory where a computer measures the density of the
bone. The precision of this technique is comparable to SPA measurements. An
advantage of this system is that it does not require any additional capital
investment, as traditional X-ray equipment can be used to obtain the
radiographs. The technique, however, cannot be used to measure and monitor the
hip or spine. Also, because the radiograph must be sent to a laboratory for
testing, it does not provide a real-time assessment of bone density, and, if the
test is positive, a follow-up consultation is required. The Company believes
that RA will be useful in rural areas where there may not be a sufficient
concentration of patients to justify a capital investment in DXA bone density
measuring equipment.
Ultrasound has long been used in medical testing. However, the use of
ultrasound for the detection of osteoporosis was not commercially introduced
until recently, and then only in certain foreign countries. Ultrasound
measurement has concentrated mainly on the calcaneous (the heel), which is
comprised primarily of trabecular bone, as a measuring site. Initial clinical
trials of ultrasound systems have indicated a significant association of low
ultrasonic bone measurements of the calcaneous and the risk of fracture. The
latest developments in hardware and software, resulting in enhanced precision
and ease of use, are currently making ultrasound techniques an option for the
diagnosis of osteoporosis. Major advantages of ultrasound examination are the
complete absence of radiation and the small size and low cost of the equipment.
Ultrasound devices do not use X-rays in making their measurements and therefore
do not require X-ray licensing or registered operators. However, because
ultrasound bone measurements currently are not as precise as DXA and other
measurements, they are less reliable for continued monitoring of small changes
in bone density or for assessing the response to therapies. In addition, they
are generally limited to measurements at peripheral sites, not the more
important spine or hip fracture sites. Accordingly, the Company believes that
the most likely use for ultrasound devices such as Sahara, and others, will be
for initial identification of osteoporosis and not for continued monitoring of
changes in bone density or the response to therapies.
Biochemical markers are substances that are produced within the body that
correlate directly or indirectly to disease or bodily function. A number of
biochemical markers have been discovered that can be used to measure the rate of
bone resorption or formation. These measurements, while not measuring bone
density, can provide a means to assess quickly (within approximately three
months) the effectiveness of treatment and patient compliance with therapies for
osteoporosis. A baseline and subsequent bone density tests (as frequently as
annually) must be used in conjunction with biochemical marker measurements to
assess fully the bone status of the patient. Because biochemical markers cannot
be used independently to diagnose osteoporosis or risk of fracture, or to
monitor a patient's changes in bone density as a result of therapy or otherwise,
the Company believes that biochemical marker tests, including those being
developed by the Company, will complement and not replace densitometry.
BONE ASSESSMENT MARKET
The Company believes that the clinical and primary care markets for
osteoporosis diagnostic and monitoring products are expanding due to the recent
development and introduction of new drug therapies to treat osteoporosis, the
more widespread and increased reimbursement for bone density examinations, the
aging of the population, and an increased focus on women's health issues and
preventive medical practices. All of these factors have led to an increased
awareness by women and primary care providers, such as gynecologists and family
physicians, that osteoporosis is a treatable disease and that measurement of
bone density is an integral component of diagnosis and monitoring of this
disease.
Upon obtaining FDA approval for Fosamax in September 1995, Merck launched an
extensive educational campaign to increase patient and physician awareness that
osteoporosis is a treatable disease. In connection with this effort, Merck is
promoting the use of DXA and other techniques to diagnose and monitor
osteoporosis and the effects of drug therapies. The Company believes that this
ongoing comprehensive Merck program has significantly contributed to the growth
of the bone densitometer and related markets. Fosamax is approved for use by
patients for both the prevention and treatment of osteoporosis. In addition,
Eli Lilly's Evista was recently approved for the prevention of osteoporosis.
The
5
approval of therapies for both the prevention and treatment of osteoporosis
should increase the need for patient testing and monitoring at an earlier age,
before a patient is afflicted with osteoporosis.
In the United States, the Health Care Finance Administration ("HCFA"), which
establishes guidelines for the reimbursement of health care providers treating
Medicare and Medicaid patients, provided validation for DXA bone densitometry
examinations as a clinically useful procedure by recommending the reimbursement
for DXA bone examinations in April 1994. In October 1997, HCFA published new
guidelines for bone density measurements. Effective January 1, 1998, HCFA
recommended reimbursement for central (hip and spine) DXA examinations, the
important fracture sites, of approximately $131 per patient examination, an
increase from the previous recommended rate of $121. Reimbursement for DXA
densitometry done at peripheral sites was reduced to approximately $40 from $67
in early 1998. In June 1998, HCFA established an interim reimbursement code
specifically for ultrasound bone mineral density studies in accordance with the
Medicare Bone Mass Measurement Coverage Standardization Act. In October 1998,
the American Medical Association established a permanent Certified Procedural
Terminology ("CPT") code for ultrasound bone density examinations. CPT codes
facilitate automated Medicare billing and the adoption of coverage by private
carriers. CPT code 76977 covers ultrasound bone density measurement and
interpretation at peripheral sites. HCFA recently published guidelines for CPT
code 76977 to be reimbursed at a national average of $42, effective January 1,
1999. The differential in reimbursement between central and peripheral exams
recognizes the important benefit of DXA measurements of the critical fracture
sites, the hip and spine, in assisting in the detection and monitoring of bone
disease. In part, as a result of the reimbursement policy recommendations
implemented by HCFA, DXA bone density examinations are paid for by many private
third party insurers in the United States.
With the established reimbursement levels in the United States, and the FDA
approval of additional osteoporosis drug therapies, the Company believes that
the United States market for bone densitometers and other methods of bone
mineral assessment has expanded from the hospitals, large clinics, research
institutions and imaging and women's centers, to the larger potential market of
primary care providers, including gynecologists and family physicians.
In several European countries, Japan and other international markets, there
has been a greater availability or acceptance of osteoporosis therapies and an
earlier adoption of reimbursement for bone densitometry exams. Countries in
which reimbursement for the use of X-ray bone densitometers has been approved
include Belgium, Brazil, Canada, Germany, Greece, Japan, South Korea, Spain and
Switzerland. In addition, the Japanese government has been actively supporting
an educational program to promote public awareness of osteoporosis as a
treatable disease. In Latin American countries such as Argentina, Brazil and
Chile, and in Pacific Rim countries, such as Australia, The Peoples Republic of
China, South Korea and Taiwan, there has been a growing use of osteoporosis
therapies and an increased use of osteoporosis diagnostic and monitoring
equipment. Recent economic uncertainties in certain foreign countries,
including those in Asia and Latin America, may adversely affect the future
growth of these markets.
BONE ASSESSMENT PRODUCTS
The Company's bone assessment products include a family of DXA bone
densitometers which are used for the precise measurement of bone density to
assist physicians in the diagnosis and monitoring of metabolic bone diseases
such as osteoporosis. Since commercially introducing the first DXA bone
densitometer in 1987, the Company introduced its first bone densitometer capable
of assessing the bone density of the entire body in 1989, introduced the first
bone densitometer capable of taking lateral measurements of the spine in 1991,
and, in 1995, introduced its new QDR 4500 ACCLAIM fourth generation series of
bone densitometers, which integrates the Company's most advanced X-ray
technology into a compact package that facilitates installation in a standard
examination room.
The Company believes that a significant market exists for relatively low-cost
products that assess bone mineral status, employ technologies that do not use
ionizing radiation and may be used in a doctor's office. In order to address
this market, the Company has introduced the Sahara Clinical Bone Sonometer, a
dry ultrasound device that measures bone density of the heel. The Company is
also working on the joint development of a biochemical marker strip test to
assist in the assessment of bone mineral status.
6
QDR X-Ray Bone Densitometers. Since its first commercial shipment of a DXA
system in October 1987, the Company has sold more than 6,000 DXA systems. The
Company believes that its systems' performance advantages and their early
adoption by leading clinical investigators have led to their market acceptance.
The Company's DXA systems have been purchased for multiple-site studies
sponsored by the pharmaceutical companies and by the United States government
for evaluation of the incidence and treatment of osteoporosis. In addition,
pharmaceutical companies have promoted the purchase of the systems for use by
physicians to assist in the diagnosis and treatment of osteoporosis.
Advantages of the Company's DXA systems include high precision (consistency
from test to test), low patient radiation exposure equivalent to 1/10th of a
conventional chest X-ray, a relatively fast scanning time, low operating cost,
no radioactive source and the ability to measure bone density of the most
important fracture sites, the spine and hip. Studies conducted by the Company
and independent investigators have demonstrated that the systems can detect a
change in spine bone density with a precision error of less than 1%.
All the Company's DXA systems employ its patented Automatic Internal Reference
System, which continuously calibrates each patient's bone density measurement to
a known standard. This system virtually eliminates errors that might result from
manual calibration and saves operators the time-consuming task of calibrating
several times a day. The system automatically compensates for drift in the X-ray
system, detectors or other electronic components which ensures long-term
measurement stability.
Each of the Company's DXA systems contains an X-ray source mounted beneath the
patient. The X-ray source generates alternating high and low energy pulses in a
thin beam that passes through the Company's patented Automatic Internal
Reference System and then through the patient to an X-ray detector mounted above
the patient. When the X-ray beam is detected, it contains information about the
X-ray absorbing characteristics of both the patient and the calibration
materials in the Automatic Internal Reference System at each of the two levels
of radiation. The system converts this information into a digital format which
is processed and analyzed by a computer and displayed on a high-resolution color
monitor, both of which are incorporated into the system.
The Company has invested substantial resources in developing operating and
applications software for its systems. The software includes calibration
software, automated scan and analysis programs for each scan site, a patient
data base manager that archives all raw data for later retrieval and analysis
and allows the operator to review the current image with an earlier image of the
same patient.
Initial DXA systems developed by the Company employed a single narrow pencil
beam detected by one receptor. In 1991, the Company introduced the first bone
densitometer employing a high density fan shaped X-ray beam that is detected by
an array of receptors. This configuration enables the system to obtain better
quality images with improved spatial resolution, significantly faster scanning
time and higher patient throughput compared to single-beam systems. Moreover,
for standard spine and hip scans, fan beam technology can reduce scan time by a
factor of more than 25 compared to older single-beam scanning systems.
The Company developed this fan beam technology to perform lateral (side-to-
side) scans of the lower spine, in addition to the posterior-anterior (back-to-
front) measurements performed by the Company's pencil beam systems. The earliest
and most dramatic loss of bone density in the spine occurs primarily in the
spine's soft (trabecular) bone, which is positioned directly behind the hard
(cortical) bone when taking back-to-front measurements. This results in bone
density measurements that average the density of the soft and hard bone and
tends to mask changes in the soft bone. A lateral scan permits the imaging and
measurement of the spine's soft bone with only limited interference from hard
bone. In addition, a lateral scan reduces the interference caused by abnormal
accumulation of bone and calcium deposits in and around the spine.
In November 1994, the Company introduced the QDR 4500A ACCLAIM at the annual
meeting of the Radiological Society of North America and in January 1995
obtained FDA clearance to sell the system in the United States.
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The Company's QDR 4500 ACCLAIM series of bone densitometers offers rapid
scanning and high resolution imaging using the latest available fan beam and
high density, solid-state multi-detector array technology. In addition, the
QDR 4500 ACCLAIM series is built in modular configurations that allow customers
to add new features and capabilities, while protecting their investment in the
equipment and patient data. The ACCLAIM series is comprised of four modular
systems: the high-end QDR 4500A, the QDR 4500SL, the QDR 4500W and the QDR 4500C
clinical bone densitometer.
An important feature of the QDR 4500A and QDR 4500SL is their ability to
perform lateral (side-to-side) scans of the lower spine, without turning the
patient on her side, in addition to the posterior-anterior (back-to-front)
measurements. The QDR 4500A and QDR 4500SL ACCLAIM are capable of producing high
quality images of the spine, lateral spine, hip and other skeletal sites. The
ACCLAIM's scan arm allows for multiple scan views without patient repositioning.
The images produced can be combined with capabilities that enable vertebral
dimensions to be determined with a radiation dose approximately ten to 100 times
lower than that of conventional chest X-rays. Using the QDR 4500A or the QDR
4500SL, high-quality lateral images of the entire spine can now be obtained in
as little as ten seconds.
The ACCLAIM systems are designed to require less floor space than any other
bone densitometer capable of taking hip and spine measurements. The special
tabletop design and motorized scanner C-arm allow the QDR 4500C and QDR 4500SL
to be installed in a standard 8ft x 8ft examination room (the QDR 4500W and QDR
4500A require an 8ft x 10ft room). Installation requirements for any of the
ACCLAIM bone densitometers are minimal and normally do not require special
electrical, structural or lead-shielding preparation. In addition to their small
size, the QDR 4500 series offers virtually silent operation. The ACCLAIM series
has replaced the Company's QDR 1500, QDR 2000 and QDR 2000plus products. In
fiscal 1998, the ACCLAIM series accounted for approximately 69% of DXA sales.
In November 1997, the Company introduced the QDR 4000 at the annual meeting of
the Radiological Society of North America. The QDR 4000 pencil beam bone
densitometer combines the reliability and economy of Hologic's DXA bone
densitometers with a unique package of value-added applications that provide
physicians with bone density measurements of the hip, spine and forearm. The
QDR 4000 replaced Hologic's 1000plus pencil beam system in May 1998, and is
targeted at the price sensitive segment of the market.
Ultrasound. In December 1994, the Company acquired the ultrasound bone
analyzer business of Walker Sonix. Walker Sonix had developed an ultrasound
product line to assess bone mineral status of the heel. The location of the heel
facilitates easy coupling of the ultrasound transducers at a site with a
relatively low amount of overlying soft tissue. The heel is also made up of
predominantly trabecular bone which tends to be more metabolically active. The
Walker Sonix ultrasound devices measure two parameters, Broadbased Ultrasound
Attenuation ("BUA") and Speed of Sound ("SOS") through a water medium to
characterize bone mineral status. The use of water as a medium, which is a
characteristic of other ultrasound bone analyzers, requires the patient to place
her foot in water. The use of water requires cumbersome plumbing and cleaning
mechanisms to be incorporated in the system.
The Company developed internally an enhanced dry ultrasound bone analyzer,
called "Sahara" that does not require the use of water. The Company believes
that this "dry" technology offers further operator convenience by the
elimination of the water handling required between each patient. On March 13,
1998, the FDA approved the Company's PMA for Sahara. Hologic believes that
ultrasound systems represent a relatively low cost, compact, easy-to-use, non-
ionizing, measurement technique to assist in the initial diagnosis of
osteoporosis. The Company also believes that Sahara will improve patient
accessibility to bone density testing, although the timing of which is
uncertain.
Recent studies have suggested that ultrasound provides good separation of
fracture populations from reference groups and suggests that this method is a
promising screening tool for evaluating a patient's fracture risk. However,
ultrasound does not allow for direct assessment of important hip and spine
fracture sites, has undocumented ability to follow the effects of therapy and
has less precision (reproducibility of results) compared to DXA measurements.
Accordingly, the Company believes that ultrasound systems will be used
predominantly as a low cost initial screening or diagnostic tool and not as a
patient monitoring tool.
8
Biochemical Markers. In September 1994, the Company entered into a joint
development agreement with Serex to develop a simple strip test for use by
physicians to monitor the levels of a patient's biochemical markers that
indicate the rate of bone resorption. Serex has developed a proprietary and
patented technology that enables complex immuno-chemistry assays to be performed
in a strip test format that the Company believes is well-suited for testing
directly in the physician's office to provide a real-time assessment of bone
resorption. In January 1997, the Company expanded this joint development
agreement to include Ostex International, Inc.'s Osteomark(R) assay. Osteomark
is a simple, inexpensive immunoassay used to assess the level of bone
resorption. Under the joint agreement, the Company, Serex and Ostex are engaged
in the development of a point-of-care Osteomark test, utilizing Serex's strip-
test technology. Although biochemical markers cannot measure bone density, the
Company believes that biochemical markers may be useful as a tool to determine
if therapy is effective. This is accomplished by comparing the baseline level of
the marker with the value obtained from a serial measurement performed only two
or three months following the start of therapy. This same technique may be
useful to evaluate patient compliance with a prescribed therapy. There can be no
assurance that the Company, Serex and Ostex will be able to develop effective
strip tests, either for physician or over-the-counter use, on a timely basis, if
at all, that once developed, any strip test will be approved or cleared for sale
in the United States or other jurisdictions, or that once cleared or approved
for sale any strip test will be commercially successful.
Traditionally, biochemical markers of bone were performed using high pressure
liquid chromatography ("HPLC") methods conducted in a research laboratory.
HPLC procedures are complex and labor intensive requiring a highly trained
technician, relatively slow, subject to high variability and expensive. For
these reasons, biochemical markers of bone using HPLC methods have not been used
for routine clinical testing. Recently, several immunodiagnostic tests that are
antibody-based have been developed as biochemical markers of bone remodeling.
Immunodiagnostic tests may be performed in a variety of technical formats. The
format that has been introduced by several companies is the microtitre plate
system, which is used for many different types of in-vitro diagnostic tests and
is normally performed in a reference laboratory.
The Company believes that other applications for biochemical markers of bone
as well as new markers are likely to be developed in the future, and under its
agreement with Serex, the Company retains the first right of negotiation to
develop and license such tests.
MINI C-ARM IMAGING PRODUCTS
BACKGROUND AND MARKET OVERVIEW
On August 29, 1996, Hologic's wholly-owned subsidiary merged with FluoroScan
in a pooling-of-interests transaction. FluoroScan manufactures and distributes
the FluoroScan Imaging System, a low intensity, real-time mini c-arm X-ray
imaging device which provides high resolution images at radiation levels and at
a cost well below those of conventional X-ray and fluoroscopic equipment. These
mini c-arm systems are used primarily by orthopedic surgeons to perform
minimally invasive surgical procedures on a patient's extremities (i.e., hand,
wrist, knee, foot, ankle, etc.).
The Company believes that certain trends in the healthcare industry could
broaden the use of mini c-arms from the hospitals and surgery centers to private
orthopedic and podiatric physician groups. Some of these trends include: the
emergence of technology that enables minimally invasive procedures and
therapies, the increase in the number of office-based procedures and
examinations as a result of efforts to contain healthcare costs, and the
development of new treatments and pharmaceuticals such as synthetic bone
materials that are facilitated by the use of a mini c-arm to perform these
procedures.
FLUOROSCAN PRODUCTS
FluoroScan pioneered the mini c-arm market with the introduction of FluoroScan
I in June 1984. The basis of the FluoroScan System technology used in the
OfficeMate and FluoroScan III products is a second generation micro channel
9
plate image intensifier commonly referred to as a "night vision" intensifier.
This technology permits the FluoroScan System to produce high resolution readily
viewable images by using a small amount of radiation, converting it to visible
light and amplifying it approximately 50,000 times. The same night vision
intensifier, as used by the military, allows clear views of a battlefield at
night by amplifying small amounts of ambient light. The FluoroScan System
technology offers several advantages over existing real-time conventional X-ray
imaging devices (also known as C-arms, image intensifiers or fluoroscopy
equipment). These advantages include; a substantial reduction of radiation to
the patient and of scatter radiation to the surgeon and other operating room
personnel, a cost of approximately one-third of the cost of a conventional
C-arm, and mobility.
Building upon the expertise developed using "night vision" technology coupled
with Hologic's dual-energy x-ray expertise, the Company introduced a new x-ray
image intensifier (cesium iodide) in its new Premier line. The cesium iodide
intensifier, coupled with the smallest focal spot x-ray tube on the market,
provides improved image quality in a six inch field-of-view mini c-arm.
Premier. The Premier mini c-arm system was introduced in August 1998. The
Premier's .085 mm focal spot x-ray tube (the smallest in the mini c-arm
industry) provides clear resolution and detailed images. The Premier's balanced
iso-centered mini C-arm rotates 360 degrees with easy maneuverability. Also
unique to the Premier is its readily accessible surgeon centered controls on the
c-arm which make both assisted and unassisted operation much easier. The
Premier's compact ergonomic design fits into tight spaces with ease. The
combination of advanced technical features and ease-of-use should make the
Premier attractive to hospital, surgery centers, orthopedic group practices and
private physician offices.
OfficeMate. The OfficeMate imaging system was introduced in fiscal 1997.
This system was designed specifically to meet the needs of the physician office.
This system has replaced the FluoroScan II system which was targeted at
physician office and veterinary markets. The OfficeMate features efficient,
user-friendly operation, high resolution real-time and freeze frame images,
full 360-degree arm rotation and the choice of three or four inch field-of-view.
Due to its compact size and portability, the Company believes the OfficeMate is
well suited for the in-office extremity imaging requirements of hand and
orthopedic surgeons. The OfficeMate system is 51 inches high, 29 inches wide
and 30 inches deep. The Company believes the primary market for this system is
the office based physician. However, with minor modifications, the OfficeMate
can also be configured to address the needs of the veterinary market.
FluoroScan III. The FluoroScan III imaging system was introduced in the
first quarter of 1996. The FluoroScan III typically has a four or five inch
field-of-view and is targeted primarily at orthopedic surgeons, operating rooms,
emergency rooms and ambulatory surgery centers. The new system replaced
FluoroScan I (the first generation model FluoroScan System) and has a number of
technical enhancements. FluoroScan III has dual video channels that allow a
surgeon to display different views of the anatomy for side-by-side comparison.
The unit also features four image buffer memories for instant recall of previous
images. The unit also provides for permanent storage of up to 4,000 full
resolution digital images. The unit stands approximately four feet high, weighs
about 240 pounds and can be plugged into any standard outlet. It rests on a
portable, wheeled base cabinet, and all vital functions are computer controlled.
Images can be viewed on the monitor or, through the addition of options, printed
on thermal paper or stored on video tape or computer diskette.
FLUOROSCAN CORPORATE COLLABORATION
Certain companies are developing material to assist in the healing of bone
fractures. For example, Norian Corporation ("Norian") is in clinical trials
in the U.S. and Europe for its Skeletal Repair System/(TM)/ ("SRS"). SRS is a
material that is injected into a fracture and has been shown to hold the bones
in position while providing the raw materials to help the body repair itself
more rapidly. Since SRS requires extensive imaging from the initial injection
through the healing process, the Company believes that FDA approval and market
acceptance of SRS could provide long-term benefits for the Company. On June 12,
1995, the Company entered into an agreement with Norian that provides for the
Company to provide imaging equipment for seminars introducing Norian's Skeletal
Repair System to orthopedic
10
surgeons. The Company can offer no assurance that SRS will receive FDA approval,
or if approved will gain wide market acceptance or enhance sales of the
Company's FluoroScan System.
OTHER PRODUCTS; SCANORA, CRANEX AND SMARTLIGHT
In order to take advantage of its European sales force and associated
distribution capability, the Company distributes Scanora and Cranex, specialized
systems for taking X-ray images of the maxillo-facial anatomy (teeth, jaw and
other facial structures) manufactured by Soredex, S.A. ("Soredex"), a division
of Orion Corporation of Helsinki, Finland. The Company is also distributing
SmartLight/(R)/ Plus ("SmartLight"), a state-of-the-art lightbox used by
radiologists for the reading and interpretation of X-ray film. SmartLight is
manufactured by SmartLight, LTD of Israel.
The Scanora system differs from Cranex in that it supports more than 1,000
different image modes, including pre-surgical planning of dental implants,
reconstructive surgery and temporal mandibular joint repair. This system
provides significantly improved images of the maxillo-facial anatomy compared to
other techniques available in the market, such as panoramic X-rays or computed
tomography. Dental implant procedures have experienced significant growth in
Europe over the past five years. The Company is the exclusive distributor of
Scanora and Cranex systems in Western Europe, the Middle East and Africa,
excluding South Africa and Namibia. In addition, the Company has non-exclusive
distribution rights in several Eastern European countries. The Company is
distributing Scanora and Cranex under a distribution agreement which is
renewable annually.
SmartLight utilizes optronic technologies to improve film reading. By fully
reducing glare and controlling light intensity and ambient light, the SmartLight
systems can provide the diagnostician with more clinically valuable information.
Proprietary adaptive technology reduces glare by automatically masking the
areas that are not clinically significant. The system also controls the light
intensity emanating from clinically important parts of the film, regardless of
film density. Ambient light is automatically adjusted to increase visual
acuity. The Company is distributing SmartLight in France, Spain and Portugal
under a distributuion agreement with an initial expiration date of October 1999.
CUSTOMERS
The Company's DXA customers include many pharmaceutical companies active in
the field of bone mineral metabolism, such as Eli Lilly, Merck, Pfizer, Proctor
& Gamble, Rhone-Poulenc/Rorer, Sanofi Research and SmithKline. The Company
believes that because of their technological features, its DXA systems have been
and continue to be the most widely used bone densitometers for clinical studies
involving the emerging drug therapies for osteoporosis. The Company has a group
of 13 employees who provide data collection and quality assurance services to
such customers. Initial clinical evaluation sites for the Company's DXA systems
included leading medical and research institutions, such as the Mayo Clinic, the
Massachusetts General Hospital and the University of California at San Francisco
in the United States; the University of Lyon and Guy's Hospital in Europe; and
Kobe University in Japan. These institutions, along with many other leading
medical institutions, continue to be users of the Company's DXA systems.
The clinical demand for the Company's DXA bone densitometers has grown as a
result of the increased worldwide focus on women's health problems and the
availability of new osteoporosis therapies entering the market. There has been
a shift in the market for bone densitometers to primary care physicians,
including gynecologists and family physicians, in response to the development of
new drug therapies for osteoporosis and the growing awareness of osteoporosis as
a treatable disease.
11
MARKETING AND SALES
Domestic Market. In the United States, the Company sells its DXA systems
primarily through its direct sales force and its FluoroScan Systems through a
national network of independent sales representatives and sales representative
organizations. As of November 30, 1998, the Company had approximately 27
employees engaged in DXA sales in the United States. In order to penetrate the
DXA market more effectively, the Company has expanded its direct marketing
activities, including additions to its sales force, and has implemented various
leasing programs, including a program with a third party leasing company to make
its QDR 4000 (the replacement for the QDR 1000plus) and QDR 4500C ACCLAIM system
available to physicians on a fee-per-scan basis. To meet the growing demand for
its products, the Company plans to enhance further its distribution capabilities
in the United States through a combination of an expansion of its sales force
and strategic alliances with companies with established distribution channels in
the various market segments for the Company's products.
In the second quarter of fiscal 1997, the Company entered into a distribution
agreement with Physician Sales and Service, Inc. ("PSS") of Jacksonville,
Florida. PSS is a leading distributor of medical products with over 850 sales
representatives focused on private physician practices in the United States.
Under the terms of the agreement, PSS has an exclusive right to distribute
Hologic's QDR 4000 and QDR 4500C X-ray bone densitometers in certain markets
throughout the United States. PSS is also the exclusive U.S. distributor of the
Sahara ultrasound bone densitometer to the primary care market. The Company's
distributuion agreements with PSS have initial terms through March 2000 and May
2000, respectively, and each may be terminated earlier upon written notice under
certain criteria. In fiscal 1998, PSS accounted for approximately 35% of
Hologic's bone densitometry sales.
Strategic Alliance Program. The Company markets certain of its products in
the United States, in part, through its strategic alliance program with Sanwa
Business Credit Corporation ("Sanwa"). Under the program, the Company enters
into a fee-per-scan lease arrangement with its customers and then sells the
lease and the underlying equipment to Sanwa. Under the fee-per-scan arrangement
the customer is required to make an initial down payment. Thereafter, payments
to Sanwa are based upon the customer's monthly use of the equipment on a fee-
per-scan basis. No minimum fees are required. However, if the customer's use
of the equipment is insufficient to cover the cost of the equipment, Sanwa has
the option of repossessing the equipment. In addition, customers have the
option, after an initial six month trial period, to terminate the arrangement
and return the equipment. Customers that use the equipment frequently, also have
the option to fix their cost by purchasing the equipment or entering into a
fixed lease for the equipment.
If equipment sold by the Company to Sanwa under this program is repossessed or
returned to Sanwa, the Company has the obligation to use its best efforts to
remarket the product. The Company has also guaranteed to reimburse Sanwa for
certain losses that Sanwa may incur as a result of this arrangement. Generally,
the Company's total potential liability for reimbursement of Sanwa and
remarketing costs is limited to 10% of the total fee-per-scan contracts funded
under the program. See "Management's Discussion and Analysis of Financial
Position and Results of Operations."
In fiscal 1998 and 1997, the Company's revenues under its strategic alliance
program accounted for 33% and 17% of the Company's product revenues,
respectively. See "Risk Factors -- Customer Concentration; Sales Channel
Risks."
International Markets. The Company sells its products in international
markets through independent distributors, as well as a direct sales force in
France, the Benelux countries, Spain and Portugal. As of November 30, 1998, the
Company had 13 employees engaged in sales in Europe.
The Company distributes its DXA and ultrasound products in Japan through Toyo
Medic, which has been the Company's exclusive distributor in Japan since April
1988. The agreement requires Toyo Medic to purchase certain minimum quantities
and to provide technical and warranty support to its customers.
In certain other territories outside the United States, the Company sells its
systems through independent distributors, all of whom offer technical support.
The Company has increased its efforts to expand its market penetration for its
DXA systems into Latin America, including Argentina, Brazil and Chile, and into
Pacific Rim countries other than Japan,
12
including Australia, The Peoples Republic of China, South Korea and Taiwan, by
working with local sales representatives and distributors or entering into
strategic marketing alliances in those territories. The Company believes that
with time, Eastern Europe may present a significant opportunity for growth and
also is seeking to expand its presence in the area. Recent economic
uncertainties in certain foreign territories, including much of Asia, may
adversely impact the growth of these markets.
In fiscal 1998 and in fiscal 1997, foreign sales accounted for approximately
28% and 39% of the Company's product sales, respectively. The Company's foreign
sales are subject to risks generally associated with foreign sales, including
United States and foreign regulatory approval requirements, policy changes and
foreign economic changes. In fiscal 1998, sales to Asia and Latin America
decreased 57% and 39%, respectively. The Company believes this decline was
primarily attributable to economic uncertainties in these regions. The relative
strength of the United States dollar in relation to foreign currencies may also
adversely affect the Company's sales to foreign countries. The Company also
believes that its sales to Europe may be seasonal, with reduced orders in the
summer months reflecting summer vacation schedules. International sales will
also be affected by government approval of new drug therapies, changes in local
healthcare policies regarding reimbursement and the strength of promotional
efforts by its distributors. Moreover, the FluoroScan System technology is
governed by the International Traffic in Arms Regulations of the United States
Department of State. As a result, the export of FluoroScan Systems to certain
countries may be limited or prohibited. See Note 12 of Notes to Consolidated
Financial Statements.
COMPETITION
The bone assessment market is highly competitive and characterized by
continual change and improvement in technology, and multiple technologies that
have been or are under development. Some of the companies in this industry have
significantly greater manufacturing, marketing and financial resources than the
Company. See "Background."
The Company believes that competition in the field of DXA bone densitometry is
based upon price, precision, speed of measurement, patient radiation dose, cost
and ease of operation, product versatility, product reliability and quality of
service. The Company believes that it competes effectively with respect to these
criteria. The Company believes that its DXA systems will also compete with other
X-ray based modalities, including a radiographic absorptiometry product
developed by CompuMed Inc. which has been licensed to Merck. The Company's DXA
systems also compete with specially-equipped CT scanners and may compete with
used and refurbished DXA systems. See "Bone Assessment Products - Background"
for a discussion of the technical advantages and disadvantages of these other
systems.
The Company believes that competition in the field of ultrasound systems is
based on price, precision, speed of measurement, cost and ease of operation,
product versatility, product reliability and quality of service. The Company
believes that advantages of its Sahara ultrasound bone analyzer system include
the system's dry operation, simple single-button operation, and a compact and
self-contained design that does not require the use of a separate computer. On
March 13, 1998, the Company's Sahara system became the first ultrasound bone
sonometer to receive FDA approval in the United States. The Sahara system was
followed by Lunar Corporation's Achilles ultrasound device which was approved
for sale by the FDA in June 1998 and Myriad Ultrasound Systems, LTD's
SoundScan/(TM)/ bone sonometer which received FDA approval in September 1998.
The Company believes that ultrasound systems will compete with DXA systems in
the diagnostic market for initial screening of patients. However, the Company
believes that because ultrasound systems can only measure peripheral skeletal
sites and do not have the precision of DXA systems, DXA systems will continue to
be the predominant means of monitoring bone density for patients being treated
for or at high risk of osteoporosis.
Three companies, including Ostex, have obtained FDA clearance to market
biochemical marker tests that evaluate bone turnover in a microtitre format
which require samples to be sent to the lab for evaluation. One or more of
these companies may develop point-of-care, over-the-counter or other real-time
biochemical marker tests that would compete with the biochemical marker strip
tests being developed by the Company, Serex, and Ostex. The Company believes
that
13
competition in this market will be based upon price, product reliability,
diagnostic sensitivity, precision and ease-of-use. There can be no assurance
that the Company, Serex and Ostex will be able to compete effectively in this
market.
The Company believes that competition for its mini c-arm systems is based
largely on price, quality, service and production capabilities. The market for
mini c-arm systems has become increasingly more competitive due to the
introduction of new mini c-arm devices, particularly in the United States. The
Company believes that key advantages of its FluoroScan Systems include low
levels of radiation, low costs, mobility, quality and durability.
MANUFACTURING
The Company's manufacturing operations for its DXA and ultrasound systems
consist primarily of assembly, test, burn-in and quality control. The Company
purchases a major portion of the parts and peripheral components for its
products, and manufactures certain subsystems, such as the high-voltage X-ray
power supply, from raw materials. Parts and materials are readily available from
several supply sources.
The Company is required to purchase all of its requirements for Scanora from
Soredex. Failure of Soredex to manufacture those systems on time and in
accordance with specifications would have an adverse impact on the Company's
sales of those systems.
The Company manufactures all the FluoroScan System models and related products
at its manufacturing facility in Northbrook, Illinois. Current manufacturing
capacity permits the production of approximately 30 units per month. Generally,
units for use in the health care field are manufactured without a prior order,
while units for use in industrial applications are custom made to the customer's
specifications.
The Company performs final assembly and test of the FluoroScan System. All of
the materials and most of the purchased components used in manufacturing the
Company's products are readily available from numerous sources. Several key
components require high technology including the X-ray tube, image intensifier,
video camera and fiberoptic taper and are manufactured by only one or a small
number of suppliers. Failure of any component supplier to provide acceptable
quality and timely components at an acceptable price, or an interruption of
supplies from a supplier as a result of fire, nature calamity, strike or other
significant events could materially and adversely affect the Company's business.
Although the Company uses materials in its manufacturing process that may be
subject to federal, state and/or local environmental laws, the costs and effects
of compliance with these laws have not had a material effect on the Company's
financial condition or results of operations during any of the past three years.
BACKLOG
Backlog for the Company's systems as of November 30, 1998 and November 30,
1997 totaled approximately $10.6 million and $8.7 million, respectively.
Backlog consists of purchase orders for which a delivery schedule within the
next twelve months has been specified by the customer. Orders included in
backlog may be canceled or rescheduled by customers without significant penalty.
Backlog as of any particular date should not be relied upon as indicative of the
Company's net revenues for any future period.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are focused on enhancing its
existing products and developing new products for the bone assessment and mini
C-arm market. The Company's research and development personnel also are involved
in establishing protocols, monitoring, interpreting and submitting test data to
the FDA and other regulatory agencies to obtain the requisite clearances and
approvals for its products. At November 30, 1998, the Company had 61
14
persons engaged in research and development, of whom 17 persons were engaged in
software development. The research and development group was responsible for the
development of the Company's Sahara bone analyzer, the QDR 4000 and the
development of Premier. During fiscal 1998, 1997 and 1996, the Company's
research and product development expenses were approximately $9.8 million, $8.5
million and $7.3 million, respectively.
PATENTS AND PROPRIETARY RIGHTS
The Company relies upon trade secrets and patents to protect its technology.
Due to the rapid technological change that characterizes the medical
instrumentation industry, the Company believes that the improvement of existing
products, reliance upon trade secrets and unpatented proprietary know-how and
the development of new products are generally as important as patent protection
in establishing and maintaining a competitive advantage. Nevertheless, the
Company has obtained patents and will continue to make efforts to obtain
patents, when available, in connection with its product development program. The
Company has obtained 26 patents, licensed 5 patents and has pending 12 patent
applications in the United States relating to its DXA technology, and has
obtained 5 patents, licensed 5 patents and has pending 3 patent applications in
the United States relating to its ultrasound technology. The Company has
obtained or applied for corresponding patents and patent applications for
certain of these patents and patent applications in certain foreign countries.
There can be no assurance that any of the Company's patent applications will be
granted or that any patent or patent application will provide significant
protection for the Company's products and technology. Moreover, there can be no
assurance that foreign intellectual property laws will protect the Company's
intellectual property rights. In the absence of significant patent protection,
the Company may be vulnerable to competitors who attempt to copy the Company's
products, processes or technology.
In September 1994, Serex granted the Company an exclusive license to use
Serex's technology to manufacture, market, sell and distribute the biochemical
marker strip test being developed under a joint development agreement between
Serex and the Company. Serex further granted the Company the right of first
negotiation with respect to the development and distribution of new products
conceived of by Serex for application in bone metabolism. In order to maintain
its exclusive rights once the product is developed, the Company is required to
purchase a certain minimum number of tests or pay Serex amounts that would have
been paid had the Company purchased the minimum number of tests. If the Company
does not meet these minimum requirements, its rights become nonexclusive.
In June 1989, the Company granted an exclusive worldwide license of certain of
its DXA technology to Vivid Technologies, Inc., an affiliate of S. David
Ellenbogen and Jay A. Stein, the Chief Executive Officer and Senior Vice
President of the Company, for the sole purpose of developing a baggage
inspection and security system. In September 1996, the Company also granted
Vivid Technologies, Inc. a nonexclusive license to be used for the development
of X-ray based products for process control applications in the food and
beverage industry.
The Company had been involved in extensive patent litigation with Lunar, with
each party claiming that the other was infringing certain patents held by the
other. This litigation was settled by agreement dated November 22, 1995. The
agreement provides for certain royalties to be paid by each party to the other
for future sales of products using certain defined technologies. The Company
does not believe that amounts to be paid by either party under this arrangement
will be material. The agreement also provides that neither party will engage the
other party in patent litigation for a period of ten years following the date of
the agreement, regardless of the infringement claimed and regardless of whether
the technology in question currently exists or is developed or acquired by the
other party in the future. Neither party is required to disclose to the other
any of its technology during this ten year period or otherwise. However, there
can be no assurance that Lunar will not use the Company's technology in a manner
that would materially and adversely affect the Company's business and results of
operations.
The Company has a license agreement for technology used in its mini c-arms
with the United States government as represented by NASA that is exclusive
within the United States. This agreement gives the Company exclusive rights to
manufacture and distribute NASA's high voltage isolation transformer and high
voltage power supply. This technology allows the Company's mini c-arm products
to produce low levels of radiation. This license and underlying patent
15
previously had an expiration date of 2002 but was extended as a result of GATT
and now expires in 2003. Pursuant to this license, the Company may be required
to grant sublicenses to the extent that NASA believes such sublicenses are
necessary for the health and safety needs of the United States and such needs
cannot be fulfilled by the Company.
There has been substantial litigation regarding patent and other intellectual
property rights in the medical device and related industries. The Company has
in the past, and may in the future be, notified that it may be infringing
intellectual property rights possessed by other third parties. If any such
claims are asserted against the Company's intellectual property rights it may
seek to enter into a royalty or licensing arrangement. The Company cannot
assure, however, that a license will be available on reasonable terms or at all.
The Company could decide, in the alternative, to resort to litigation to
challenge such claims or to design around the patented technology. Such actions
could be costly and would divert the efforts and attention of the Company's
management and technical personnel. As a result, any infringement claims by
third parties or other claims for indemnification by customers resulting from
infringement claims, whether or not proven to be true, may materially and
adversely affect the Company's business, financial condition and results of
operations.
THIRD PARTY REIMBURSEMENT
In the United States, the Health Care Finance Administration, which
establishes guidelines for the reimbursement of health care providers treating
Medicare and Medicaid patients, provided validation for DXA bone densitometry
examinations as a clinically useful procedure by recommending the reimbursement
for DXA bone examinations in April 1994. In October 1997, HCFA published new
guidelines for bone density measurements. Effective January 1, 1998, HCFA
recommended reimbursement for central (hip and spine) DXA examinations, the
important fracture sites, of approximately $131 per patient examination, an
increase from the previously recommended rate of $121. Reimbursement for DXA
densitometry done at peripheral sites was reduced to approximately $40 from $67
in early 1998. In June 1998, HCFA established an interim reimbursement code
specifically for ultrasound bone mineral density studies in accordance with the
Medicare Bone Mass Measurement Coverage Standardization Act. In October 1998,
the American Medical Association established a permanent CPT code for ultrasound
bone density examinations. CPT codes facilitate automated Medicare billing and
the adoption of coverage by private carriers. CPT code 76977 covers ultrasound
bone density measurement and interpretation at peripheral sites. HCFA recently
published guidelines for CPT code 76977 to be reimbursed at a national average
of $42, effective January 1, 1999. The differential in reimbursement between
central and peripheral exams recognizes the important benefit of DXA
measurements of the critical fracture sites, the hip and spine, in assisting in
the detection and monitoring of bone disease. In part, as a result of the
reimbursement policy recommendations implemented by HCFA, DXA bone density
examinations are paid for by many private third party insurers in the United
States.
In several European countries, Japan and other international markets, there
has generally been an earlier adoption of reimbursement for bone densitometry
exams. Countries in which reimbursement for the use of X-ray bone densitometers
has been approved include Belgium, Brazil, Canada, Germany, Greece, Japan, South
Korea, Spain and Switzerland. In addition, in Japan, where there is a general
aversion to ionizing devices, the government has initiated a program to
subsidize purchases of ultrasound bone densitometers. As a result, there is much
greater use of ultrasound bone densitometers in Japan than in any other country.
REGULATION
The medical devices manufactured and marketed by the Company are subject to
regulation by the FDA and, in many instances, by foreign governments. Under the
Federal Food, Drug and Cosmetic Act (the "FDA Act"), manufacturers of medical
devices must comply with certain regulations governing the testing,
manufacturing, packaging and marketing of medical devices. The Company's
products are 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.
16
The FDA generally must approve the commercial sale of new medical devices.
Commercial sales of the Company's medical 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 a premarket approval. The 510(k) notification
filing must contain information that establishes that the device is
substantially equivalent to an existing device that has been continuously
marketed since May 28, 1976. The Company received FDA market clearance under
510(k) for its DXA bone densitometers and expects to be eligible to seek 510(k)
clearance for its biochemical marker strip test for use by physicians, once
developed.
The premarket approval procedure involves a more complex and lengthy testing
and review process by the FDA than the 510(k) premarket notification procedure
and often requires at least several years to obtain. The Company must first
obtain an investigational device exemption ("IDE") for the product to conduct
extensive clinical testing of the device to obtain the necessary clinical data
for submission to the FDA. The FDA will thereafter only grant premarket approval
if, after evaluating this clinical data, it finds that the safety and efficacy
of the product has been sufficiently demonstrated. This approval may restrict
the number of devices distributed or require additional patient follow-up for an
indefinite period of time. On March 13, 1998, the FDA approved the Company's
PMA for Sahara.
The Company's systems are also subject to approval by certain foreign
regulatory and safety agencies. The FluoroScan System technology is governed by
the International Traffic in Arms Regulations of the United States Department of
State. As a result, the export of FluoroScan Systems to certain countries may
be limited or prohibited.
No assurance can be given that the FDA or foreign regulatory agencies will
give the requisite approvals or clearances for any of the Company's medical
devices under development on a timely basis, if at all. Moreover, after
clearance is given, these agencies can later withdraw the clearance or require
the Company to change the device or its manufacturing process or labeling, to
supply additional proof of its safety and effectiveness, or to recall, repair,
replace or refund the cost of the medical device, if it is shown to be hazardous
or defective. The process of obtaining clearance to market products is costly
and time-consuming and can delay the marketing and sale of the Company's
products.
As a manufacturer of medical devices, the Company is subject to certain other
FDA regulations and the Company's manufacturing processes and facilities are
subject to continuing review by the FDA. Most states and certain other foreign
countries monitor and require licensing of X-ray devices. Federal, state and
foreign regulations regarding the manufacture and sale of medical devices are
subject to future change. The Company cannot predict what impact, if any, such
changes might have on its business.
EMPLOYEES
As of November 30, 1998, the Company had 396 full-time employees, including
102 in manufacturing operations, 61 in research and development, 161 in
marketing, sales and support services, 59 in finance and administration and 13
in medical data management. None of the Company's employees are represented by a
union. The Company considers its employee relations to be good.
ITEM 2. PROPERTIES
On July 30, 1998, the Company purchased a 200,000 square foot building located
in Bedford, Massachusetts for approximately $20 million in cash. The Company is
currently renovating the building at an additional cost of approximately $5
million and plans to relocate its corporate headquarters and manufacturing
facility for its bone assessment products to this new site in late January 1999.
Currently, the Company leases a 83,500 square foot building located in Waltham,
Massachusetts, under a lease which expires in January 1999, for its corporate
headquarters and manufacturing facility and rents on a month to month basis
additional space for storage of finished product and inventory totaling
approximately 15,000 square feet. The Company also utilizes approximately
25,500 square feet of space in Northbrook, Illinois pursuant to a lease that
expires in February 2001 for operations of its wholly-owned subsidiary,
FluoroScan. The Company believes that its facilities will be adequate for its
needs for the foreseeable future. The Company also maintains sales and service
offices in France, Belgium and Spain. The Company believes that it has
17
adequate space for its anticipated needs and that suitable additional space will
be available at commercially reasonable prices as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information. The Company's Common Stock is traded on the Nasdaq
National Market under the symbol "HOLX." The following table sets forth, for
the periods indicated, the high and low sales prices per share of Common Stock,
as reported by the Nasdaq National Market.
FISCAL YEAR ENDED SEPTEMBER 27, 1997 High Low
First Quarter $29 $18
Second Quarter $31 3/4 $23 1/8
Third Quarter $28 3/8 $17 7/8
Fourth Quarter $29 3/4 $18 1/2
- -----------------------------------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 26, 1998 High Low
First Quarter $29 1/8 $20 3/8
Second Quarter $29 5/8 $18 3/4
Third Quarter $29 3/4 $17 3/8
Fourth Quarter $18 15/16 $ 9 7/8
- ------------------------------------------------------------------------------
Number of Holders. As of December 18, 1998, there were approximately
430 holders of record of the Company's Common Stock.
Dividend Policy. The Company has never declared or paid cash
dividends on its capital stock and does not plan to pay any cash dividends in
the foreseeable future. The Company's current policy is to retain all of its
earnings to finance future growth.
19
ITEM 6. SELECTED FINANCIAL DATA.
The historical selected financial data of the Company has been retroactively
restated to reflect the acquisition of FluoroScan in a pooling-of-interests
transaction. See Note 3 of the accompanying Notes to the Consolidated Financial
Statements.
FISCAL YEARS ENDED
September 24, September 30, September 28, September 27, September 26,
1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS DATA (In thousands, except per share data)
Revenues:
Product sales $46,227 $54,276 $ 88,201 $102,781 $111,498
Other revenue 1,427 2,270 3,390 3,908 4,066
------- ------- -------- -------- --------
47,654 56,546 91,591 106,689 115,564
------- ------- -------- -------- --------
Costs and Expenses:
Cost of product sales 24,522 27,549 41,253 47,492 55,891
Research and development 3,668 4,499 7,283 8,527 9,778
Selling and marketing 7,781 11,052 16,504 19,448 28,589
General and administrative 5,795 6,879 9,081 8,827 10,452
Litigation expenses (2) --- 2,533 798 --- ---
Acquisition expenses --- --- 1,949 --- ---
------- ------- -------- -------- --------
41,766 52,512 76,868 84,294 104,710
------- ------- -------- -------- --------
Income from operations 5,888 4,034 14,723 22,395 10,854
Interest income 437 883 2,583 5,346 5,458
Other income (expense) 70 (56) (249) (172) (124)
------- ------- -------- -------- --------
Income before income taxes 6,395 4,861 17,057 27,569 16,188
Provision for income taxes 1,627 1,513 5,700 9,840 5,800
------- ------- -------- -------- --------
Net income $ 4,768 $ 3,348 $ 11,357 $ 17,729 $ 10,388
======= ======= ======== ======== ========
Net income per common and
common equivalent share:
Basic $ .49 $ .33 $ .97 $ 1.37 $ .78
======= ======= ======== ======== ========
Diluted $ .51 $ .34 $ .91 $ 1.30 $ .75
======= ======= ======== ======== ========
Weighted average number of common and
common equivalent shares outstanding:
Basic 9,649 10,230 11,698 12,986 13,259
======= ======= ======== ======== ========
Diluted 9,355 9,831 12,524 13,672 13,766
======= ======= ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet Data
Working capital $23,967 $27,189 $ 97,199 $112,868 $ 99,633
Total liabilities 9,426 12,551 15,835 17,900 32,215
Total assets 36,670 44,083 123,107 144,667 172,597
Stockholders' equity 27,244 31,532 107,272 126,767 140,382
- -----------------------------------------------------------------------------------------------------------------------
(1) All share and per share data has been restated to reflect the 2-for-1 stock
split that occurred on March 25, 1996.
(2) The fiscal 1995 litigation expenses of $2.5 million before income taxes
($1.8 million after tax, or $.18 per share) relate primarily to certain patent
litigation. A definitive agreement was reached by the Company and the other
party to this litigation in November 1995, settling all outstanding disputes.
See "Patents and Proprietary Rights".
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
the "Selected Consolidated Financial Data" and the Consolidated Financial
Statements included elsewhere in this Report and the information described under
the caption "Risk Factors" below.
OVERVIEW
Since inception, the Company has experienced generally increasing annual sales
as interest in bone diseases, such as osteoporosis, has grown, as new drug
therapies have become available in the United States and other countries to
treat these diseases and as the use of DXA systems to measure bone density has
become more widespread. In fiscal 1998, sales of the Company's X-ray bone
densitometers reached record levels, especially in the United States as the
clinical use of bone densitometers continued to expand.
The Company introduced the first dual energy X-ray absorptiometry (DXA) bone
densitometer in 1987 and continued with a string of new product advancements
including the introduction of the fourth-generation clinically-oriented ACCLAIM
series of bone densitometers in fiscal 1995. In July 1996, the Company began
international shipments of Sahara, a completely dry ultrasound bone sonometer
system that does not require water as a coupling medium like the other
competitive devices. In March 1998, Sahara was approved for sale in the United
States by the Food and Drug Administration. The Company believes that future
growth will be in part conditional upon the success of sales of Sahara,
especially in the United States to the primary care market.
In fiscal 1996, the Company acquired FluoroScan Imaging Systems, Inc., an
industry leader in the field of mini c-arm imaging systems. Sales of mini c-
arms has accounted for less than 10% of the Company's total revenues since the
acquisition.
The availability of reimbursement to healthcare providers for bone density
measurements of patients continues as an important factor in the attractiveness
of the Company's bone densitometers. Effective January 1, 1998, the Health Care
Finance Administration, the agency which administers Medicare, increased the
recommended reimbursement rates for central DXA tests to a national average of
$131, from $121, and in October 1998, the American Medical Association
established a permanent Certified Procedural Terminology ("CPT") code for
ultrasound bone density measurement. The newly created CPT code 76977 will
become effective January 1, 1999 with a recommended national average
reimbursement rate of $42. In addition, the recommended reimbursement rate for
central DXA tests will remain at approximately $131 on average.
In connection with a fee-per-scan program offered for the Company's DXA bone
densitometers, the Company has entered into a remarketing agreement whereby the
Company has agreed to perform certain remarketing activities on a best efforts
basis and to cover any losses incurred by the leasing company up to 10% of the
total fee-per-scan contracts funded. The leasing company purchases all such DXA
densitometers covered under these contracts from the Company. The Company has
reserved for potential losses under these contracts by deferring revenue of an
amount equal to 10% of the contracts funded.
21
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
revenues represented by items as shown in the Company's consolidated statements
of operations.
FISCAL YEARS ENDED
---------------------------------------------------
September 28, September 27, September 26,
1996 1997 1998
------------- ------------- --------------
- ----------------------------------------------------------------------------------
Revenues:
Product Sales 96.3% 96.3% 96.5%
Other revenue 3.7 3.7 3.5
- ----------------------------------------------------------------------------------
100.0 100.0 100.0
- ----------------------------------------------------------------------------------
Cost and expenses:
Cost of product sales 45.0 44.5 48.4
Research and development 8.0 8.0 8.5
Selling and marketing 18.0 18.2 24.7
General and administrative 9.9 8.3 9.0
Litigation expenses .9 -- --
Acquisition expenses 2.1 -- --
- ----------------------------------------------------------------------------------
83.9 79.0 90.6
- ----------------------------------------------------------------------------------
Income from operations 16.1 21.0 9.4
Interest income 2.8 5.0 4.7
Other income (expense) (0.3) (0.2) (0.1)
- ----------------------------------------------------------------------------------
Income before income taxes 18.6 25.8 14.0
Provision for income taxes 6.2 9.2 5.0
- ----------------------------------------------------------------------------------
Net income 12.4% 16.6% 9.0%
FISCAL YEAR ENDED SEPTEMBER 26, 1998 VERSUS FISCAL YEAR ENDED SEPTEMBER 27, 1997
REVENUES. Total revenues increased 8% to $115.6 million in fiscal 1998
compared to $106.7 million in fiscal 1997. The increase in revenues was due to
an increase in the total number of Sahara (the Company's ultrasound bone
sonometer) product sales, especially in the United States, and an increase in
the total number of DXA product sales which were partially offset by decreased
sales of mini c-arm imaging systems. The increase in the number of DXA bone
densitometers sold was primarily attributable to a significant increase in sales
to the primary care market in the United States partially offset by a decrease
in sales to the domestic hospital and radiology markets and a decrease in the
number of DXA's sold internationally, especially in Asia. Additionally, in the
United States, the increase in the number of DXA bone densitometers sold was
partially offset by lower average selling prices primarily attributed to this
shift in sales to the primary care market. The primary care market accounted
for 35% of total revenues in fiscal 1998 compared to 5% in fiscal 1997.
Total revenues for the fourth quarter of fiscal 1998 decreased 28% from
$34.4 million in the immediately preceding quarter and remained relatively
unchanged compared to the fourth quarter of fiscal 1997. The sequential quarter
decrease was primarily attributable to a shift in the focus of the Company's
U.S. distributor for the primary care market to the Sahara bone sonometer from
the DXA line of bone densitometers. In the current quarter, compared to the
immediately preceding quarter, sales of DXA bone densitometers into the primary
care market decreased significantly and were only partially offset by increased
Sahara sales. The Company believes that sales of the Sahara were adversely
impacted by a lack of a permanent reimbursement code for ultrasound bone density
measurement. The Company further believes that the approval by HCFA of a
permanent reimbursement code for
22
these measurements, scheduled to take effect in January 1999, should positively
impact Sahara sales. However, the Company cannot assure that Sahara sales will
increase. The Company's sales may also be somewhat seasonal, with generally
lower sales in its fourth quarter, reflecting summer vacation schedules.
Other revenues consist primarily of revenue relating to medical data
management services provided to pharmaceutical companies to assist in the
collection and monitoring of clinical trial data, royalty revenues from the
Company's licensing of its technology to a related party and additional revenues
generated from the Company's Strategic Alliance Program on a fee-per-scan basis.
In fiscal 1998, other revenues increased 4% to $4.1 million from $3.9 million in
fiscal 1997 primarily due to additional fee-per-scan revenues.
In fiscal 1998, approximately 72% of product sales were generated in the
United States, 18% in Europe, 6% in other international markets and 4% in Asia.
In fiscal 1997, approximately 61% of product sales were generated in the United
States, 20% in Europe, 10% in Asia and 9% in other international markets.
The Company expects that foreign sales in the current fiscal year will
continue to account for a substantial portion of product sales. Continued
economic and currency related uncertainty in a number of foreign countries,
especially in Asia and Latin America, could reduce the Company's future sales to
these markets.
COSTS AND EXPENSES. The cost of product sales increased as a percentage of
product sales to 50% in fiscal 1998 from 46% in fiscal 1997. This increase was
primarily due to (i) a dramatic shift in the product sales mix to the primary
care market in the United States, (ii) lower sales to its hospital and radiology
markets which tended to purchase the higher gross margin ACCLAIM systems and
(iii) lower sales prices for mini c-arm systems. In the first half of the
fiscal year, the Company predominantly sold the lower gross margin QDR 1000plus
in the primary care market. In the second half of the fiscal year, sales
shifted in this market to the Company's QDR 4500C but at an average selling
price less than in the prior year. Partially offsetting these factors were
increased sales of the higher gross margin Sahara ultrasound sonometers,
especially in the United States.
Research and development expenses increased 15% to $9.8 million (8% of total
revenues) in fiscal 1998 from $8.5 million (8% of total revenues) in fiscal
1997. This increase was primarily due to the addition of engineering personnel
and outside consultants working on the development of new products and product
enhancements.
Selling and marketing expenses increased 47% to $28.6 million (26% of product
sales) in fiscal 1998 from $19.4 million (19% of product sales) in fiscal 1997.
The increase in selling and marketing expenses in 1998 is primarily due to an
increase in sales commissions based on the higher sales volume in the primary
care market in the United States.
General and administrative expenses increased 18% to $10.5 million (9% of
total revenues) in fiscal 1998 from $8.8 million (8% of total revenues) in
fiscal 1997. This increase was primarily due to an increase in accounts
receivable reserve related to the Company's foreign accounts receivable,
especially in Brazil, and an increase in employee benefit related expenses.
INTEREST INCOME. Interest income increased to $5.5 million in fiscal 1998
from $5.3 million in fiscal 1997. In fiscal 1998, the Company held a higher
investment base than in the prior year. The Company has invested these proceeds
in investment grade corporate and government securities.
OTHER EXPENSE. In fiscal 1998 and 1997 the Company incurred other expenses of
approximately $124,000 and $172,000 respectively. These expenses were primarily
attributable to the interest costs on a bank line of credit used by the
Company's European subsidiaries to borrow funds in their local currencies to pay
for all intercompany sales, thereby reducing the foreign currency exposure on
those transactions. To the extent that foreign currency exchange rates
fluctuate in the future, the Company may be exposed to continued financial risk.
Although the
23
Company has established a borrowing line denominated in the two foreign
currencies (the French franc and the Belgian franc) in which the subsidiaries
currently conduct business to minimize this risk, there can be no assurance that
the Company will be successful or can fully hedge its outstanding exposure.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 35.8% in
fiscal 1998 and 35.7% in fiscal 1997. The Company's effective tax rate is lower
than the statutory tax rates due primarily to the favorable Federal and state
tax treatment afforded the Company's foreign sales corporation and the favorable
state tax treatment of certain of the Company's interest income. See Note 5 of
Notes to the Consolidated Financial Statements.
FISCAL YEAR ENDED SEPTEMBER 27, 1997 VERSUS FISCAL YEAR ENDED SEPTEMBER 28, 1996
REVENUES. Total revenues increased 16% to $106.7 million in fiscal 1997
compared to $91.6 million in fiscal 1996. The increase in revenues was primarily
due to an increase in the total number of DXA product shipments in the United
States, Europe and Latin America. The increase in DXA product revenues in these
markets were partially offset by fewer sales in Asia and, to a lesser extent, by
decreased sales of mini c-arm imaging systems. There has also been a shift in
product sales mix to the Company's new line of bone densitometers, the ACCLAIM
series, which the Company began shipping in January 1995. The new ACCLAIM
products have higher average selling prices than the comparable DXA bone
densitometers which they replace.
In fiscal 1997, other revenues increased 15% to $3.9 million from $3.4
million in fiscal 1996 primarily due to additional fee-per-scan revenues and
from an increase in royalty revenues.
In fiscal 1997, approximately 61% of product sales were generated in the
United States, 20% in Europe, 10% in Asia and 9% in other international markets.
In fiscal 1996, approximately 60% of product sales were generated in the United
States, 17% in Asia, 17% in Europe and 6% in other international markets.
COSTS AND EXPENSES. The cost of product sales decreased as a percentage of
product sales to 46% in fiscal 1997 from 47% in fiscal 1996. These costs
decreased as a percentage of product sales primarily due to (i) increased
shipments of the latest family of DXA bone densitometers, the ACCLAIM series,
which earns a better gross margin than the Company's older DXA systems, (ii) a
volume increase in the number of DXA systems sold resulting in certain
manufacturing efficiencies and (iii) an increase in sales by the Company's
direct sales force (primarily in the United States) which resulted in higher
average selling prices. Partially offsetting these decreases were increased
costs and lower sales relating to mini c-arm systems.
Research and development expenses increased 17% to $8.5 million (8% of total
revenues) in fiscal 1997 from $7.3 million (8% of total revenues) in fiscal
1996. This increase was primarily due to the addition of engineering personnel
working on the development of new products, product enhancements and the funding
of Serex to develop a biochemical marker strip test.
Selling and marketing expenses increased 18% to $19.4 million (19% of product
sales) in fiscal 1997 from $16.5 million (19% of product sales) in fiscal 1996
primarily due to an increase in sales personnel and related expenses, marketing
and promotional costs incurred in connection with the ACCLAIM series and
increased sales commissions based on the higher sales volume. In addition, the
Company incurred additional costs in connection with its strategic alliances for
the introduction and planned introduction of new products and the distribution
of products through new sales channels.
General and administrative expenses decreased slightly to $8.8 million (8% of
total revenues) in fiscal 1997 from $9.1 million (10% of total revenues) in
fiscal 1996. The 3% decrease in fiscal 1997 when compared to fiscal 1996 was
primarily due to certain efficiencies achieved in connection with the
integration of FluoroScan.
24
Litigation expenses incurred in fiscal 1996 were in connection with the
Company's disputes with Lunar Corporation (Lunar) and B.V. Optische Industrie de
Oude Delf ("Oldelft"). Legal expenses in connection with the patent litigation
with Lunar began in October 1994 and represent a substantial portion of the
total litigation expenses. In November 1995, a definitive agreement that
provides for the cross-licensing of certain patent rights and a non-assertion
agreement for all patents involving DXA and ultrasound technologies for a period
of ten years was reached by the Company and Lunar. The complaint brought by
Oldelft against the Company was settled in May 1996.
Acquisition expenses incurred in fiscal 1996 were direct transaction costs
related to the Company's merger with FluoroScan Imaging Systems, Inc. These
costs were expensed in the period incurred in accordance with the pooling-of-
interests accounting for business combinations.
INTEREST INCOME. Interest income increased to $5.3 million in fiscal 1997
from $2.6 million in fiscal 1996. In fiscal 1997, the Company earned a slightly
higher rate of return on a higher investment base than in the prior year. In
January 1996, the Company received proceeds of approximately $49.2 million from
a public sale of Common Stock which increased the investment base. The Company
also received approximately $8.0 million from the exercise of FluoroScan
warrants in July 1996. The Company has invested these proceeds in investment
grade corporate and government securities. In fiscal 1997, the Company also
increased the number of long-term receivables to Latin American customers
resulting in additional interest income.
OTHER EXPENSE. In fiscal 1997 and 1996 the Company incurred other expenses of
approximately $172,000 and $249,000, respectively. These expenses were
primarily attributable to the interest costs on a bank line of credit used by
the Company's European subsidiaries.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 35.7% in
fiscal 1997 and 33.4% in fiscal 1996. The Company's effective tax rate was
lower than the statutory tax rates due primarily to the tax benefits associated
with the Company's foreign sales corporation and the utilization of net
operating losses in foreign jurisdictions and tax credits. The increase in the
effective tax rate is primarily due to the significant increase in U.S. income.
See Note 5 of Notes to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
At September 26, 1998, working capital was $99.6 million and cash, cash
equivalents and short-term investments totaled $75.9 million. The cash, cash
equivalents and short-term investments balance decreased approximately $8.4
million during fiscal 1998 primarily due to the purchase of a 200,000 square
foot building for approximately $20.1 million and an increase in inventories,
which were partially offset by other operating activities which included net
income of $10.4 million and an increase in deferred revenue. The increase in
inventory is primarily related to increased production of Sahara. The Company
finances certain sales to Latin America over a two-to three year-time frame. At
September 26, 1998, the Company had long-term accounts receivable outstanding of
approximately $2.9 million relating to these sales, which were included in other
assets. As of September 26, 1998, the Company had not experienced any
significant change in these receivables, however, the economic and currency
related uncertainties in these countries may increase the likelihood of non-
payment. As a result, the Company increased its bad debt reserve in the fourth
quarter. In fiscal 1998, the Company purchased approximately $2.5 million of
property and equipment in addition to the building, primarily computers and
other equipment associated with the hiring of additional personnel.
As noted above, the Company purchased a 200,000 square foot building in fiscal
1998 for approximately $20.1 million in cash and the Company plans to spend
approximately $5 million in renovations prior to occupying the facility early in
1999. The Company does not have any other significant capital commitments and
believes that existing sources of liquidity and funds expected to be generated
from operations will provide adequate cash to fund the Company's anticipated
working capital and other cash needs for the foreseeable future.
25
Year 2000 READINESS DISCLOSURE
The year 2000 (Y2K) issue is the potential for system and processing failure
of date-related data and the result of computer-controlled systems using two
digits rather than four to define the applicable year. For example, computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. Systems that do not properly recognize
date-sensitive information when the year changes to 2000 could generate system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar ordinary business activities. The Company has defined Y2K
compliance as the ability for the Company, its products and suppliers to
continue normal business activities in the year 2000 and beyond.
The Company is evaluating the Y2K issue with respect to its financial and
management information systems, its products and its suppliers. At this point in
its assessment, the Company is not currently aware of any Y2K problems that are
reasonably likely to have a material effect on the Company's business, results
of operations or financial condition, without taking into account the Company's
efforts to avoid such problems.
The Company is completing its review of its management and information systems
for Y2K compliance and has identified other application software and hardware
which must be upgraded to become Y2K compliant. The Company believes that its
accounting and information systems are currently compliant as a result of
installing an upgrade version of the software made available through the annual
maintenance contract. However, the Company uses other application hardware and
software which may not be Y2K complaint. Most upgrades for these programs are
also available as part of an annual maintenance program. The Company believes
that it already has and installed most of the necessary upgrades for these
programs or that the upgrades for the programs are otherwise available without
material expenditure by the Company. The Company anticipates that it will be
able to complete, test and implement all upgrades of this software that may be
material to its business on a timely basis. There is a risk that,
notwithstanding its internal review, if the Company has not properly identified
all year 2000 compliance issues with respect to its management and information
systems, the Company may not be able to implement all necessary changes to these
systems on a timely basis and within budget. Such a failure could result in a
material disruption to the Company's business, including the inability to track
and fill orders on a timely basis, which could have a material adverse effect on
its business, results of operations and financial condition.
The Company has evaluated its DXA products currently in production and
believes that they will be Y2K compliant by the end of January 1999, as the
compliant version of software is in beta test. The Company plans to make this
software available, at the Company's expense, to its customers by the end of
March 1999. These costs are not expected to be material. The Company has also
identified certain older models of its DXA products that will need computer
hardware upgrades to become Y2K compliant. The Company plans to offer users of
these products a computer upgrade at the customers' expense. The Company
believes that its Sahara ultrasound bone sonometer is currently Y2K compliant.
The Company is also exposed to the risk that it could experience material
shipment delays from its major component suppliers or material sales delays from
its major customers due to year 2000 issues relating either to their management
information or production systems. The Company has inquired of these suppliers
in an attempt to ascertain their year 2000 readiness. At this time, the Company
is unable to estimate the nature or extent of any potential adverse impact
resulting from the failure of third parties, such as its suppliers and
customers, to achieve year 2000 compliance. Moreover, such third parties, even
if year 2000 compliant, could experience difficulties resulting from year 2000
issues that may affect their suppliers, service providers and customers. As a
result, although the Company does not currently anticipate that it will
experience any material shipment delays from their major product suppliers or
any material sales delays from its major customers due to year 2000 issues,
these third parties could experience year 2000 problems that could have a
material adverse effect on the Company's business, results of operations and
financial condition.
26
Apart from its activities described above, the Company does not have and
does not plan to develop a contingency plan to address Y2K issues. Should any
unanticipated significant Y2K issues arise, the Company's failure to implement
such a contingency plan could have a material adverse affect on its business,
financial condition and results of operations.
To the extent that the Company does not identify any material non-compliant
year 2000 issues affecting the Company or third parties, such as the Company's
suppliers, service providers and customers, the most reasonably likely worst
case year 2000 scenario is a systemic failure beyond the control of the Company,
such as a prolonged telecommunications or electrical failure, or a general
disruption in United States or global business activities that could result in a
significant economic downturn. The Company believes that the primary business
risks, in the event of such failure or other disruption, would include but not
be limited to, loss of customers or orders, increased operating costs, inability
to obtain inventory on a timely basis, disruptions in product shipments, or
other business interruptions of a material nature, as well as claims of
mismanagement, misrepresentation, or breach of contract, any of which could have
a material adverse effect on the Company's business, results of operations and
financial condition.
RISK FACTORS
This report contains forward looking statements that involve risks and
uncertainties, such as statements of the Company's objectives, expectations and
intentions. The cautionary statements made in this Report should be read as
applicable to all forward-looking statements wherever they appear in this
Report. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include those discussed below, as well as those discussed elsewhere in this
Report.
DEPENDENCE OF PRODUCT SALES ON AVAILABILITY AND ACCEPTANCE OF NEW DRUG
THERAPIES. The Company believes that it is important for the continued growth
of its sales of bone densitometers and other related products, that the efficacy
of new drug therapies to treat osteoporosis and other bone disorders be
demonstrated, that broadened regulatory approval of those therapies be granted
in the United States and elsewhere, and once approved, that these new drug
therapies gain acceptance. Similarly, the Company believes that it is important
for the growth of sales of its mini c-arm products that the efficacy of
therapies that could broaden the use of minimally invasive orthopedic surgery
such as synthetic bone materials be demonstrated, that broadened regulatory
approval of those therapies be granted in the United States and elsewhere, and
once approved, that these new therapies gain acceptance. The Company cannot
assure that any therapies under development or in clinical trials will prove to
be effective, obtain FDA approval, or that any FDA approved therapy will gain
wide acceptance. The failure of one or more of these therapies to gain wide
acceptance, or the failure of new therapies to be approved and gain acceptance,
could have a material adverse effect on the Company's business.
UNCERTAINTY OF HEALTH CARE REFORM. Health care reform and medical cost
containment have received significant attention in the United States and many
foreign countries. Certain reform proposals and cost containment measures
could limit the use of the Company's products, reduce reimbursement available
for such use, or adversely affect the use of new therapies for which the
Company's products may be targeted. As a result, such reforms or cost
containment measures could materially and adversely affect the Company's sales.
Uncertainty in the medical community regarding the nature and effect of proposed
health care reforms and cost containment measures may also have a material
adverse effect on the Company's business.
THIRD PARTY REIMBURSEMENT FOR BONE DENSITY EXAMINATIONS. Reimbursement for
the use of bone densitometers has been approved by health care insurance systems
in the United States and many foreign countries. In the United States, bone
density examinations are paid for by many private third party insurers. In
27
addition, the Health Care Finance Administration which establishes guidelines
for the reimbursement of health care providers treating Medicare and Medicaid
patients, has approved reimbursement for DXA examinations and, commencing in
January 1999, for ultrasound examinations. The actual reimbursement amounts
provided for these examinations is determined by the individual state Medicare
carriers. There are often delays between the approval of reimbursement by HCFA
and by a state Medicare carrier. Moreover, states may choose not to follow the
HCFA reimbursement guidelines. The Company believes that it is important for
the continued growth of sales of its Sahara bone sonometer in the United States
and internationally that reimbursement for bone density examinations be more
broadly adopted. A reduction in reimbursement levels for the Company's products
could have a material adverse effect on the Company's business.
DEVELOPING MARKETS; NEED TO BROADEN MARKET ACCEPTANCE. The continued
success of the Company's products that address the clinical market for the early
diagnosis and monitoring of osteoporosis, will depend upon the acceptance and
adoption of newly introduced and emerging drug therapies to treat osteoporosis
by the broad market of primary care providers, such as gynecologists and family
physicians, and the Company's ability to broaden sales of its products to these
physician groups. In the United States, PSS serves as the Company's exclusive
sales representative to this market. Historically, the Company has marketed its
mini c-arm products to hospitals and surgery centers for use by orthopedic
surgeons in the operating room. The success of these products will be dependent
upon its ability to broaden its sales to orthopedic and podiatric physician
groups. The Company cannot give assurance that it will be successful in
obtaining broader market acceptance for its products. Failure to do so could
have a material adverse effect on the Company's business.
PRODUCT DEVELOPMENT; UNCERTAINTY OF MARKET ACCEPTANCE. The Company's
success will depend upon its ability to enhance its existing products, to
develop new products to meet regulatory and customer requirements and to achieve
market acceptance. The Company has a continuing program of research and
development designed to enhance and improve its products. In addition, the
Company is developing, together with Serex, Inc., a diagnostic strip test to
detect biochemical markers that indicate the rate of a patient's bone loss. The
development of these products will be subject to all of the risks associated
with new product development, including unanticipated delays, expenses,
technical problems or other difficulties that could result in the abandonment or
substantial change in the commercialization of these new products. The Company
cannot give assurance that the Company will be successful in introducing
products or product enhancements on a timely basis, if at all, or that the
Company will be able to market these products and product enhancements once
developed. Failure to do so could have a material adverse effect on the
Company's business.
OBSOLESCENCE AND RAPID TECHNOLOGICAL CHANGE. The markets for the Company's
products are highly competitive and subject to rapid technological change and
evolving industry requirements and standards. Several companies have developed
or are developing bone densitometry systems or other products that measure or
assess bone density or bone mineral status, which compete, or will compete, with
the Company's products. These other systems include single photon
absorptiometry, radiographic absorptiometry, quantitative computed tomography,
ultrasound and biochemical markers. In addition, many companies, research
institutions and universities may be working in a number of engineering and
radiology disciplines similar to those being used and developed by the Company
with respect to is mini c-arm products. As a result, the Company's mini c-arm
products may become subject to competition from products using technologies
other than those developed by the Company, which may render the Company's mini
c-arm products obsolete or less attractive to customers if the Company cannot
participate in such new technologies. The Company cannot give assurance that
continuing improvements in current or new technologies will not make them
technically equivalent or superior to the Company's technologies, in addition to
providing cost or other advantages.
COMPETITION. The Company competes directly with a number of companies with
significant financial resources, including Lunar, Norland Medical Systems, Aloha
and Hitachi, each of which has developed DXA systems to measure bone density.
In ultrasound, the Company competes with Lunar and Myriad and expects additional
competitors based upon the greater availability of ultrasound technology. In
addition, Lunar, Norland
28
and Schick have peripheral DXA systems which may compete with the Company's DXA
and ultrasound products, primarily on price. The Company's FluoroScan subsidiary
competes directly with a limited number of companies including Lunar, OEC
Medical and XiTec. The Company also competes indirectly with manufacturers of
conventional C-Arm image intensifiers including Philips, Siemens, General
Electric, OEC Medical, Fischer Imaging and Picker International. Many of these
competitors have substantially greater financial and marketing resources than
the Company. The Company cannot give assurance that it will be able to compete
successfully.
CUSTOMER CONCENTRATION; SALES CHANNEL RISKS. In the United States, the
Company sells its products to the primary care market through PSS. In fiscal
1997 and 1998 sales in which PSS acted either as a sales representative or
distributor for the Company accounted for 5% and 35% of the Company's product
revenues, respectively. In fiscal 1998, the majority of these sales to the
primary care market were made pursuant to the Company's strategic alliance
program with Sanwa. In 1997 and 1998 the Company's sales under this program
accounted for 17% and 33% of the Company's product revenues, respectively. The
pricing and other features of this program is periodically reviewed by the
Company and Sanwa. As a result of recent changes made to the strategic alliance
program, the Company believes that the program may be less attractive for PSS
and that sales to the primary care market under this program may therefore
decrease. In addition, the Company cannot assure that the program will be
continued for an extended period on favorable terms, if at all. A material
reduction in revenues under the strategic alliance program, a termination or
other cutback of this program, a reduction of sales through PSS or the loss of
PSS as the Company's sales representative could have a material adverse affect
on the Company's business.
RISKS RELATING TO REMARKETING OBLIGATIONS. Under its strategic alliance
program with Sanwa, the Company is obligated to use best efforts to remarket
equipment repossessed by or returned to Sanwa. The Company has engaged PSS to
assist it in remarketing the equipment originally placed by PSS. The efforts of
the Company and PSS to remarket this equipment could have a material adverse
affect on future sales.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS. The Company's results of
operations have been and may continue to be subject to significant quarterly
variation. The results for a particular quarter may vary due to a number of
factors including the overall state of health care and cost containment efforts,
the development status and demand for drug therapies to treat osteoporosis,
economic conditions in the Company's markets, the timing of orders, the timing
of expenditures in anticipation of future sales, the mix of products sold by the
Company, the introduction of new products and product enhancements by the
Company or its competitors, and pricing and other competitive conditions. The
Company also believes that its sales may be somewhat seasonal, with reduced
orders in the summer months reflecting summer vacation schedules. Customers may
also cancel or reschedule shipments and production difficulties could delay
shipments. Any of these factors also could materially adversely effect the
Company's annual results of operations.
NO ASSURANCE THAT NEW PRODUCTS WILL RECEIVE FDA OR FOREIGN REGULATORY
CLEARANCES. Medical devices cannot be marketed in the United States without
clearance or approval by the FDA. Medical devices sold in the United States
must also be manufactured in compliance with FDA Good Manufacturing Practices,
which regulate the design, manufacture, packing, storage and installation of
medical devices. Moreover, medical devices are required to comply with FDA
regulations relating to investigational research and labeling. States may also
regulate the manufacture, sale and use of medical devices, particularly those
that employ X-ray technology. The Company's products are also subject to
approval and regulation by certain foreign regulatory and safety agencies. The
process of obtaining clearances and approvals can be costly and time-consuming.
Moreover, any approvals or clearances, once obtained, can be withdrawn or
modified. The Company's delay or inability to obtain any necessary United
States or foreign clearances or approvals for the Company's products could have
a material adverse effect on the Company's business.
RELIANCE ON SEREX FOR THE DEVELOPMENT OF BIOCHEMICAL MARKER STRIP TEST.
The Company has entered into a research and development agreement with Serex to
develop biochemical marker strip tests to monitor bone
29
resorption. Serex is a relatively small company with limited resources and
limited operating history. Serex has experienced delays and budget overruns in
the development of this strip test. Serex could continue to encounter delays and
budget overruns in developing this strip test. The Company cannot give assurance
that Serex will be successful in developing the strip test, or that once
developed, that the strip test will be commercially successful.
RELIANCE ON FOREIGN SALES; RESTRICTION ON FLUOROSCAN'S FOREIGN SALES. In
years ended September 27, 1997, and September 26, 1998 foreign sales accounted
for approximately 39% and 28%, respectively, of the Company's product sales.
The Company maintains sales and service offices in Belgium, France and Spain.
The expenses and sales of these offices are denominated in local currencies.
The Company anticipates that foreign sales and foreign denominated sales will
continue to account for a significant portion of the Company's total sales,
which will result in a significant portion of the Company's revenues being
subject to risks associated with foreign sales, including risks of exchange rate
fluctuations, limitations on foreign sales of high technology products and other
United States and foreign regulatory requirements and policy changes, political
and economic instability, difficulties in accounts receivable collection,
difficulties in managing distributors or representatives and seasonality
of sales.
The Company's mini c-arm technology is governed by the International
Traffic in Arms Regulations of the United States Department of State. As a
result, the export of those products to certain countries may be limited or
prohibited.
On January 1, 1999, 11 of the 15 member countries of the European Union are
scheduled to establish fixed conversion rates between their existing sovereign
currencies and the euro. As of January 1, 2002, the transition to the euro will
be complete. The Company has significant operations within the European Union
and is currently preparing for the euro conversion. The issues that the Company
is addressing include preparing its information systems for the euro, analyzing
the benefit of decreased exchange rate risk in cross border transactions
involving participating countries and assessing the potential impact of
increased price transparency. In addition, the euro may impact general economic
conditions such as interest and foreign exchange rates within the participating
countries or in other areas where the Company operates. Volatility in the euro
exchange rates or other adverse impacts on the general economic conditions in
Europe or elsewhere resulting from the European Union's conversion to the euro
could have a material adverse effect on the Company's business.
The Company's functional currency for accounting purposes is the Belgian franc
in Belgium and the French franc in France. The Company anticipates that its
European subsidiaries will adopt the euro as their functional currency following
the European Union's conversion to the euro. The Company has hedged its foreign
currency exposure by borrowing funds in local European currencies to pay the
expenses of its foreign offices. The Company cannot assure that these hedging
activities will be successful. As a result, the impact of and economic
conditions relating to the euro (including fluctuations in foreign exchange
rates, particularly with respect to the U.S. dollar) could have a material
adverse affect on the Company's business, financial condition and results of
operations.
UNCERTAINTY OF PATENT AND PROPRIETARY RIGHTS PROTECTION. The Company
relies upon trade secrets and patents to protect its technology. As of
September 30, 1998, the Company had obtained 31 patents, licensed 10 patents and
had pending 15 patent applications in the United States. These patents have
expiration dates ranging from 1999 to 2016. One of the Company's licensed U.S.
ultrasound patents will expire in 1999, and two licensed patents with ultrasound
and X-ray claims will expire in 2001. The Company does not believe that the
expiration of these patents will have any material effect on its business. The
Company has obtained or applied for corresponding patents and patent
applications for certain of these patents and patent applications for certain
foreign countries. The Company cannot assure that any of the Company's patent
applications will be granted or that any patent or patent application will
provide significant protection for the Company's products and technology.
Moreover, the Company cannot assure that foreign intellectual property laws will
protect the Company's intellectual property rights to the same extent as United
States intellectual property laws. In the
30
absence of significant patent protection, the Company may be vulnerable to
competitors who attempt to copy the Company's products, processes or technology.
The Company had been involved in extensive patent litigation with Lunar,
with each party claiming that the other is infringing certain patents held by
the other. This litigation was settled by agreement dated November 22, 1995.
The agreement provides for certain royalties to be paid by each party to the
other for future sales of products using certain defined technologies. The
Company does not believe that amounts to be paid by either party under this
arrangement will be material. The agreement also provides that neither party
will engage the other party in patent litigation relating to these technologies
for a period of ten years following the date of the agreement, regardless of the
infringement claimed and regardless of whether the technology in question
currently exists or is developed or acquired by the other party in the future.
As a result, Lunar could use the Company's technology during this ten-year
period in a manner that would materially and adversely affect the Company's
business.
The Company has a license from NASA to use and develop certain technology
that is used in its mini c-arm products and that are the subject of two patents
held by NASA. FluoroScan's license is exclusive in the United States. However,
under FluoroScan's license agreement with NASA, NASA retains the right to use
its technologies in connection with devices that it produces, including devices
that may be produced and marketed by NASA in direct competition with the
Company. NASA also has the right to circumvent the exclusivity of the license
agreement if, in NASA's opinion, such circumvention is required to serve the
public good and the national interest of the United States, and the Company
cannot serve such functions. Moreover, the Company's license agreement with
NASA is exclusive only in the United States and its territories. Accordingly,
NASA retains the right to license its technologies to others outside of the
United States, where such technologies are patented or can be patented. The
technology covered by the NASA patents is not patented in many foreign countries
and may therefore not be protectable or may be cumbersome and expensive to
enforce in such countries. Therefore, a competitor in one of these countries
could reverse engineer FluoroScan's products and manufacture and sell products
in direct competition with FluoroScan outside the United States. The patents
covered by this license expire in 2003. These patents previously had expiration
dates in February 1996 and 2002, but were extended as a result of the passage of
the General Agreement on Tariff and Trade ("GATT"). Upon expiration of a
patent, all of the technology covered by these patents will be accessible to
potential competitors, which could have a material adverse effect on
FluoroScan's business.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device and related industries. The
Company has in the past, and may in the future be, notified that it may be
infringing intellectual property rights possessed by other third parties. If any
such claims are asserted against the Company's intellectual property rights it
may seek to enter into a royalty or licensing arrangement. The Company cannot
assure, however, that a license will be available on reasonable terms or at all.
The Company could decide, in the alternative, to resort to litigation to
challenge such claims or to design around the patented technology. Such actions
could be costly and would divert the efforts and attention of the Company's
management and technical personnel. As a result, any infringement claims by
third parties or other claims for indemnification by customers resulting from
infringement claims, whether or not proven to be true, may materially and
adversely affect the Company's business, financial condition and results of
operations.
ACQUISITION RISKS. The Company expects that in addition to internal
development it will continue to seek to expand its products and technology in
part through acquisitions or strategic alliances in complimentary markets,
including other diagnostic or imaging markets, or other women's health care
markets. There can be no assurance the Company will be successful in
identifying, acquiring and developing products and technology. If any potential
acquisition opportunities are identified, there can be no assurance that the
Company will consummate such acquisitions or successfully integrate the
technology or businesses acquired into the Company. Acquisitions involve a
number of special risks, including the diversion of management's attention, the
assimilation of the operations and personnel of the acquired companies, the
incorporation of acquired products into existing product
31
lines, adverse short-term effects on reported operating results, the
amortization of acquired intangible assets, the loss of key employees of the
acquired company or business and the difficulty of presenting a unified
corporate image. No assurance can be given that any acquisition by the Company
will or will not occur, that if an acquisition does occur it will not materially
and adversely affect the Company or that any such acquisition will be successful
in enhancing the Company's business. If the operations of the acquired company
do not meet expectations, the Company may be required to restructure the
acquired business or write off the value of some or all of the assets of the
acquired business.
ATTRACTION AND RETENTION OF KEY PERSONNEL. The future success of the
Company will depend in large part on the continued services of its executive
officers, including the executive officers of FluoroScan, as well as the
Company's ability to attract and retain other highly qualified and well-trained
managerial and technical personnel. There may be only a limited number of
persons with the requisite skills to serve in these positions and it may become
increasingly difficult for the Company to hire such personnel. Competition for
such personnel is intense, and there can be no assurance that the Company will
be able to attract and retain personnel necessary for the development of its
business. S. David Ellenbogen and Jay A. Stein, the Chief Executive Officer and
Senior Vice President, respectively, of the Company, also serve in similar
positions at Vivid Technologies, Inc. ("Vivid"). Under a management agreement
between the Company and Vivid, the Company has agreed to provide management
services to Vivid, including the part-time assistance of Mr. Ellenbogen and Dr.
Stein. Mr. Ellenbogen and Dr. Stein typically devote up to approximately 16 and
eight hours per week, respectively, to Vivid. See "Certain Transactions."
PRODUCT LIABILITY. The Company's and FluoroScan's businesses involve the
risk of product liability claims inherent to the medical device business. The
Company currently maintains product liability insurance subject to certain
deductibles and exclusions. The Company can not assure that its insurance will
be sufficient to protect them from product liability claims, or that product
liability insurance will be available to the Company at a reasonable cost, if at
all, in the future. An underinsured or uninsured claim could have a material
adverse effect on the Company's financial condition.
ANTI-TAKEOVER PROVISIONS; MANAGEMENT CONTROL. The Company's Certificate of
Incorporation and By-laws include certain provisions that may have the effect of
discouraging or preventing a change in control of the Company. In addition, the
Company made a rights distribution in December 1992 that could also have the
effect of discouraging or preventing a change in control of the Company. These
provisions could limit the price that stockholders of the Company might receive
in the future for shares of the Company Common Stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
33
HOLOGIC, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 27, 1997 AND SEPTEMBER 26, 1998
TOGETHER WITH AUDITORS' REPORT
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hologic, Inc.:
We have audited the accompanying consolidated balance sheets of Hologic, Inc.
(a Delaware corporation) and subsidiaries as of September 27, 1997 and
September 26, 1998, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended September 26, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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 financial statements referred to above present fairly, in
all material respects, the financial position of Hologic, Inc. and subsidiaries
as of September 27, 1997 and September 26, 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
September 26, 1998, in conformity with generally accepted accounting
principles.
Boston, Massachusetts
November 6, 1998
F-2
HOLOGIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 27, SEPTEMBER 26,
1997 1998
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................ $ 28,092 $ 48,423
Short-term investments........................... 56,173 27,479
Accounts receivable, less reserves of $1,460 and
$2,100, respectively............................ 29,231 29,287
Inventories...................................... 13,205 20,438
Prepaid expenses and other current assets........ 4,068 6,221
-------- --------
Total current assets........................... 130,769 131,848
-------- --------
PROPERTY AND EQUIPMENT, AT COST:
Equipment........................................ 6,397 8,633
Furniture and fixtures........................... 1,656 1,910
Leasehold improvements........................... 1,687 1,729
Construction in progress......................... -- 20,066
-------- --------
9,740 32,338
Less--Accumulated depreciation and amortization.. 5,036 6,440
-------- --------
4,704 25,898
-------- --------
OTHER ASSETS, NET.................................. 9,194 14,851
-------- --------
Total assets................................... $144,667 $172,597
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit................................... $ 83 $ 3,799
Accounts payable................................. 5,232 5,497
Accrued expenses................................. 9,297 12,453
Deferred revenue................................. 3,288 10,466
-------- --------
Total current liabilities...................... 17,900 32,215
-------- --------
COMMITMENTS (NOTE 9)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value Authorized--
30,000,000 shares
Issued--13,111,442 and 13,377,821 shares,
respectively.................................... 131 134
Capital in excess of par value................... 91,668 95,100
Retained earnings................................ 35,799 46,187
Cumulative translation adjustment................ (831) (575)
Treasury stock, at cost--45,000 shares in 1998... -- (464)
-------- --------
Total stockholders' equity..................... 126,767 140,382
-------- --------
Total liabilities and stockholders' equity..... $144,667 $172,597
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
HOLOGIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEARS ENDED
-----------------------------------------
SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 26,
1996 1997 1998
------------- ------------- -------------
REVENUES:
Product sales..................... $ 88,201 $ 102,781 $ 111,498
Other revenue..................... 3,390 3,908 4,066
---------- ---------- ----------
91,591 106,689 115,564
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of product sales............. 41,253 47,492 55,891
Research and development.......... 7,283 8,527 9,778
Selling and marketing............. 16,504 19,448 28,589
General and administrative........ 9,081 8,827 10,452
Litigation expenses............... 798 -- --
Acquisition expenses.............. 1,949 -- --
---------- ---------- ----------
76,868 84,294 104,710
---------- ---------- ----------
Income from operations.......... 14,723 22,395 10,854
INTEREST INCOME..................... 2,583 5,346 5,458
OTHER EXPENSE....................... (249) (172) (124)
---------- ---------- ----------
Income before provision for
income taxes................... 17,057 27,569 16,188
PROVISION FOR INCOME TAXES.......... 5,700 9,840 5,800
---------- ---------- ----------
Net income...................... $ 11,357 $ 17,729 $ 10,388
========== ========== ==========
NET INCOME PER SHARE:
Basic............................. $.97 $1.37 $.78
========== ========== ==========
Diluted........................... $.91 $1.30 $.75
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic............................. 11,698,371 12,985,948 13,258,787
========== ========== ==========
Diluted........................... 12,523,983 13,671,894 13,765,809
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
HOLOGIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
COMMON STOCK TREASURY STOCK
-------------------- CAPITAL IN CUMULATIVE ---------------- TOTAL
NUMBER OF $.01 EXCESS OF PAR RETAINED TRANSLATION NUMBER OF STOCKHOLDERS'
SHARES PAR VALUE VALUE EARNINGS ADJUSTMENT SHARES AMOUNT EQUITY
---------- --------- ------------- -------- ----------- --------- ------ -------------
BALANCE, SEPTEMBER 30,
1995................... 9,323,077 $ 93 $24,467 $ 7,116 $(145) -- $ -- $ 31,531
Exercise of common
stock warrants........ 357,037 4 8,041 -- -- -- -- 8,045
Issuance of common
stock, net of issuance
costs of $391......... 2,492,000 25 49,169 -- -- -- -- 49,194
Compensation expense
related to issuance of
stock options......... -- -- 110 -- -- -- -- 110
Adjustment for
FluoroScan Imaging
Systems, Inc. pooling
of interests from
year-end change (Note
3).................... -- -- -- (403) -- -- -- (403)
Exercise of stock
options............... 684,310 7 2,375 -- -- -- -- 2,382
Issuance of common
stock under employee
stock purchase plan... 14,850 -- 162 -- -- -- -- 162
Tax benefit from stock
options exercised..... -- -- 4,930 -- -- -- -- 4,930
Net income............. -- -- -- 11,357 -- -- -- 11,357
Translation
adjustments........... -- -- -- -- (34) -- -- (34)
---------- ---- ------- ------- ----- ------ ----- --------
BALANCE, SEPTEMBER 28,
1996................... 12,871,274 129 89,254 18,070 (179) -- -- 107,274
Exercise of stock
options............... 212,214 2 1,346 -- -- -- -- 1,348
Stock issued for
employee
compensation.......... 7,000 -- 137 -- -- -- -- 137
Issuance of common
stock under employee
stock purchase plan... 10,766 -- 226 -- -- -- -- 226
Issuance of common
stock under 401(k)
plan.................. 10,188 -- 215 -- -- -- -- 215
Compensation for grants
of stock options to
nonemployees.......... -- -- 20 -- -- -- -- 20
Tax benefit from stock
options exercised..... -- -- 470 -- -- -- -- 470
Net income............. -- -- -- 17,729 -- -- -- 17,729
Translation
adjustments........... -- -- -- -- (652) -- -- (652)
---------- ---- ------- ------- ----- ------ ----- --------
BALANCE, SEPTEMBER 27,
1997................... 13,111,442 131 91,668 35,799 (831) -- -- 126,767
Exercise of stock
options............... 228,651 2 1,307 -- -- -- -- 1,309
Stock issued for
employee
compensation.......... 8,839 -- 227 -- -- -- -- 227
Issuance of common
stock under employee
stock purchase plan... 16,929 -- 278 -- -- -- -- 278
Issuance of common
stock under 401(k)
plan.................. 11,960 1 291 -- -- -- 292
Purchase of treasury
stock................. -- -- -- -- -- 45,000 (464) (464)
Compensation for grants
of stock options to
nonemployees.......... -- -- 133 -- -- -- -- 133
Tax benefit from stock
options exercised..... -- -- 1,196 -- -- -- -- 1,196
Net income............. -- -- -- 10,388 -- -- -- 10,388
Translation
adjustments........... -- -- -- -- 256 -- -- 256
---------- ---- ------- ------- ----- ------ ----- --------
BALANCE, SEPTEMBER 26,
1998................... 13,377,821 $134 $95,100 $46,187 $(575) 45,000 $(464) $140,382
========== ==== ======= ======= ===== ====== ===== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
HOLOGIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED
-----------------------------------------
SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 26,
1996 1997 1998
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $11,357 $17,729 $10,388
Adjustments to reconcile net income
to net cash provided by operating
activities--
Depreciation and amortization.... 891 1,252 1,851
Deferred income taxes............ (1,079) 182 (2,500)
Adjustment for FluoroScan Imaging
Systems, Inc. pooling of
interests from year-end change
(Note 3)........................ (403) -- --
Compensation expense related to
issuance of common stock and
stock options................... 110 271 302
Changes in assets and
liabilities--
Accounts receivable............ (8,853) (9,694) 526
Inventories.................... (2,667) (2,082) (7,234)
Prepaid expenses and other
current assets................ (1,189) 218 405
Accounts payable............... (404) 1,375 265
Accrued expenses............... 2,936 1,782 3,447
Deferred revenue............... 384 1,529 7,179
------- ------- -------
Net cash provided by
operating activities........ 1,083 12,562 14,629
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of held-to-maturity
investments....................... (3,831) (10,624) (69,282)
Sales of held-to-maturity
investments....................... -- 3,120 95,020
Purchases of available-for-sale
investments....................... (75,562) (71,832) --
Sales of available-for-sale
investments....................... 31,147 69,375 --
Purchase of property and equipment,
net............................... (2,383) (2,082) (22,597)
Decrease (increase) in other
assets............................ 71 (105) (3,714)
------- ------- -------
Net cash used in investing
activities.................. (50,558) (12,148) (573)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (settlements) under line
of credit......................... 605 (2,452) 3,716
Net proceeds from exercise of
common stock warrants............. 8,044 -- --
Net proceeds from sale of common
stock............................. 51,737 1,574 1,587
Purchase of treasury stock......... -- -- (464)
Tax benefit from stock options
exercised......................... 4,930 470 1,196
------- ------- -------
Net cash provided by (used
in) financing activities.... 65,316 (408) 6,035
------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH................................ 26 (668) 240
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................... 15,867 (662) 20,331
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR............................. 12,887 28,754 28,092
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF
YEAR................................ $28,754 $28,092 $48,423
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for
income taxes...................... $ 2,959 $ 7,380 $ 5,993
======= ======= =======
Cash paid during the year for
interest.......................... $ 111 $ 128 $ 324
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING ACTIVITIES:
Issuance of common stock under
401(k) plan....................... $ -- $ 215 $ 292
======= ======= =======
Stock issued for employee
compensation...................... $ 110 $ 137 $ 227
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
HOLOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) OPERATIONS
Hologic, Inc. and subsidiaries (the Company) is engaged in the development,
manufacture and distribution of proprietary X-ray and other medical systems.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application of
certain accounting policies as described in this note and elsewhere in the
accompanying consolidated financial statements.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and all of its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
(b) Fiscal Year
The Company's fiscal year ends on the last Saturday in September. Fiscal
1996, 1997 and 1998 ended on September 28, 1996, September 27, 1997 and
September 26, 1998, respectively.
(c) Management Estimates and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statement, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company is subject to a number of risks similar to those of other
companies of similar size in its industry, including rapid technological
changes, competition, customer concentration, government regulations and
dependence on key individuals.
(d) Cash and Cash Equivalents and Investments
The Company considers all highly liquid investments with maturities of three
months or less at the time of acquisition to be cash equivalents. Included in
cash equivalents at September 27, 1997 and September 26, 1998 are approximately
$8,310 and $5,808, respectively, of securities purchased under agreements to
resell. The securities purchased under agreements to resell are collateralized
by U.S. government securities. Short-term investments have maturities of
greater than three months and consist of commercial paper, corporate bonds and
securities issued by the U.S. Government and its agencies. Investments with
maturities of greater than one year have been classified as long-term. The
Company had long-term investments of approximately $4,527 and $7,483, with an
average maturity period of 23 months and 26 months, as of September 27, 1997
and September 26, 1998, respectively, which are included in other assets in the
accompanying consolidated balance sheets.
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. In accordance with SFAS No. 115,
investments that the Company has the positive intent and ability to hold to
maturity are reported at amortized cost, which approximates fair market value,
and are classified as held-to-maturity. The investments
F-7
HOLOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
that the Company has deemed held-to-maturity include cash equivalents and
securities issued by U.S. government agencies, which total approximately
$85,368 and $81,026 at September 27, 1997 and September 26, 1998, respectively.
(e) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information about Financial Instruments with Off-
Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. Financial instruments that subject the Company to credit risk
consists primarily of cash, short-term investments, trade accounts receivable
and long-term receivables. The Company's credit risk is managed by investing
its cash in high-quality money market instruments, securities of the U.S.
government and its agencies, and high-quality corporate issuers. The Company
has not experienced any material losses related to receivables from individual
customers, geographic regions or groups of customers in the X-ray and medical
devices industry. Due to these factors, no additional credit risk beyond
amounts provided for, is believed by management to be inherent in the Company's
accounts receivable.
The Company utilizes distributors in certain countries with various credit
terms, depending on the individual circumstances. One distributor had amounts
due to the Company of approximately $1,668 and $1,169 as of September 27, 1997
and September 26, 1998, respectively. This distributor accounted for 10%, 5%
and 2% of product sales for fiscal 1996, 1997 and 1998, respectively.
The Company finances certain sales to Latin American customers over 2 to 3
years. At September 27, 1997 and September 26, 1998, the Company had long-term
accounts receivable outstanding of approximately $3,486 and $2,904,
respectively, relating to these sales, which are included in other assets. As
of September 26, 1998, the Company has not experienced any significant change
in these receivables; however, the economic and currency related uncertainties
in these countries may increase the likelihood of nonpayment. As a result, the
Company increased its bad debt reserve in the fourth quarter.
The Company sells its systems to a leasing company, which in turn leases the
systems to third parties. The leasing company accounted for 4%, 13% and 33% of
product sales for fiscal 1996, 1997 and 1998, respectively (see Note 11).
(f) Disclosure of Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, short-term investments, accounts receivable, line of credit and
accounts payable. The carrying amounts of the Company's cash and cash
equivalents, short-term investments, accounts receivable, line of credit and
accounts payable approximate fair value due to the short-term nature of these
instruments.
(g) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
SEPTEMBER 27, SEPTEMBER 26,
1997 1998
------------- -------------
Raw materials and work-in-process............. $ 9,968 $13,859
Finished goods................................ 3,237 6,579
------- -------
$13,205 $20,438
======= =======
Work-in-process and finished goods inventories consist of materials, labor
and manufacturing overhead.
F-8
HOLOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(h) Building Purchase
The Company acquired real property consisting of land and an office building
located in Bedford, Massachusetts in a cash transaction which was consummated
on July 30, 1998. The $20,066 purchase price of the property was paid in cash.
This 200,000-square-foot building will serve as the Company's new world
headquarters and provide expanded manufacturing capacity. The Company
anticipates occupying the new facility in the second quarter of fiscal 1999.
(i) Depreciation and Amortization
The Company provides for depreciation and amortization by charges to
operations, using the straight-line and declining-balance methods, which
allocate the cost of property and equipment over the following estimated useful
lives:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -------------
Equipment................................................ 5 years
Furniture and fixtures................................... 5-7 years
Leasehold improvements................................... Life of lease
(j) Long-Lived Assets
The Company assesses the realizability of its long-lived assets, including
intangible assets, in accordance with SFAS No. 121, Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of. To date, the
Company has not identified any impairments requiring adjustment.
(k) Foreign Currency Translation
The Company translates the financial statements of its foreign subsidiaries
in accordance with SFAS No. 52, Foreign Currency Translation. In translating
the accounts of the foreign subsidiaries into U.S. dollars, assets and
liabilities are translated at the rate of exchange in effect at year-end, while
stockholders' equity is translated at historical rates. Revenue and expense
accounts are translated using the weighted average exchange rate in effect
during the year. Gains and losses from foreign currency translation are
credited or charged to cumulative translation adjustment, included in
stockholders' equity, in the accompanying consolidated balance sheets.
Transaction gains and losses in fiscal 1996, 1997 and 1998 were not
significant.
(l) Revenue Recognition
The Company recognizes product revenue upon shipment. A provision is made at
that time for estimated warranty costs to be incurred. Other revenues are
recorded at the time the product is shipped or the service is rendered. In
connection with a fee-per-scan offer for certain products, the Company has
entered into a remarketing agreement whereby the Company has agreed to perform
certain remarketing activities on a best efforts basis to cover any losses
incurred by the leasing Company up to 10% of the total fee-per-scan contracts
funded. The leasing Company purchases all such products covered under these
contracts from the Company. The Company has reserved for potential losses under
these contracts by deferring revenue of an amount equal to 10% of the contracts
funded.
Maintenance revenues are recognized over the term of the contract.
F-9
HOLOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(m) Research and Development and Software Development Costs
Research and development costs have been charged to operations as incurred.
SFAS No. 86, Accounting for the Costs of Computer Software To Be Sold, Leased
or Otherwise Marketed, requires the capitalization of certain computer software
development costs incurred after technological feasibility is established. The
Company believes that once technological feasibility of a software product has
been established, the additional development costs incurred to bring the
product to a commercially acceptable level are not significant.
(n) Net Income Per Share
In March 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, Earnings per Share. This statement established standards for computing
and presenting earnings per share and applies to entities with publicly traded
common stock or potential common stock. Prior years' earnings per share have
been restated to reflect the adoption of SFAS No. 128.
Basic net income per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted net
income per share is computed by dividing net income by the diluted weighted
average number of common and common-equivalent shares outstanding during the
period. The weighted average number of common-equivalent shares has been
determined in accordance with the treasury stock method. Common stock
equivalents include common stock options to purchase common stock.
The reconciliation of basic and diluted shares outstanding is as follows:
1996 1997 1998
---------- ---------- ----------
Weighted average common shares
outstanding.............................. 11,698,371 12,985,948 13,258,787
Effect of dilutive securities stock
options.................................. 825,612 685,946 507,022
---------- ---------- ----------
Weighted average common shares
outstanding, assuming dilution........... 12,523,983 13,671,894 13,765,809
========== ========== ==========
Dilutive weighted average shares outstanding do not include 15,729, 163,111
and 830,701 common-equivalent shares for the end of fiscal years 1996, 1997 and
1998, respectively, as their effect would have been antidilutive.
(o) Derivative Financial Instruments
At September 27, 1997 and September 26, 1998, the Company had no instruments
requiring disclosure under SFAS No. 119, Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments.
(p) Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 requires disclosure of all components of comprehensive income on
an annual and interim basis. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. The Company will adopt this
statement for their fiscal 1999 financial statements.
In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. SFAS No. 131 requires certain financial and
supplementary information to be disclosed on an
F-10
HOLOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
annual and interim basis for each reportable segment of an enterprise, as
defined. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. Unless impracticable, companies would be required to disclosure
similar prior period information upon adoption. The Company will adopt this
statement in their fiscal 1999 year-end financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments investments embedded in other contracts (collectively referred to
as derivatives) and for hedging activities. SFAS No. 133 is effective for
fiscal years beginning after June 15, 1999. The Company does not expect the
adoption of this statement to have a material impact on its consolidated
financial position or results of operations.
(3) ACQUISITION OF FLUOROSCAN IMAGING SYSTEMS, INC.
On August 29, 1996, the Company acquired all the common stock of FluoroScan
Imaging Systems, Inc. (FluoroScan) in exchange for 1,454,901 shares of the
Company's common stock. Under the terms of the agreement, FluoroScan
shareholders received .31069 of a share of the Company's common stock in
exchange for each share of FluoroScan common stock. Additionally, all
outstanding options and warrants to acquire FluoroScan common stock were
converted to options and warrants to acquire 297,517 shares of the Company's
common stock. FluoroScan is a manufacturer and distributor of low-intensity,
real-time X-ray imaging devices. The merger qualifies as a tax-free
reorganization and was accounted for as a pooling of interests. Accordingly,
the Company's financial statements have been restated to include the results of
FluoroScan for all periods prior to the acquisition.
(4) LINE OF CREDIT
The Company maintains a line of credit with a bank for the equivalent of
$3,000, which bears interest at the Paris Interbank Offered Rate (3.375% at
September 26, 1998) plus 1.50%. The bank allows for temporary advancements
greater than $3,000, which the Company has utilized, as $3,799 was outstanding
as of September 26, 1998. The borrowings under this line are primarily used by
the Company's European subsidiaries to settle intercompany sales and are
denominated in the respective local currencies of its European subsidiaries.
The line of credit may be canceled by the bank with a 30-day notice. The
average outstanding balance during fiscal 1998 was approximately $1,132 and the
weighted average interest rate for fiscal 1998 was 4.83%. Interest expense on
this line of credit of approximately $154, $66 and $60 has been included in
other expenses in the accompanying consolidated statements of income for 1996,
1997 and 1998, respectively.
(5) INCOME TAXES
The Company provides for income taxes under the liability method in
accordance with SFAS No. 109, Accounting for Income Taxes.
F-11
HOLOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The provision for income taxes in the accompanying consolidated statements of
income consists of the following:
YEARS ENDED
-----------------------------------------
SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 26,
1996 1997 1998
------------- ------------- -------------
Federal--
Current.......................... $5,942 $8,852 $7,327
Deferred......................... (569) 142 (2,207)
------ ------ ------
5,373 8,994 5,120
State--
Current.......................... 315 795 973
Deferred......................... -- 40 (293)
------ ------ ------
315 835 680
Foreign--
Current.......................... 12 11 --
------ ------ ------
$5,700 $9,840 $5,800
====== ====== ======
A reconciliation of the federal statutory rate to the Company's effective tax
rate is as follows:
YEARS ENDED
-----------------------------------------
SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 26,
1996 1997 1998
------------- ------------- -------------
Income tax provision at federal
statutory rate.................. 34.0% 35.0% 35.0%
Increase (decrease) in tax
resulting from--
Net effect of losses (income)
of foreign subsidiaries not
provided...................... 0.1 (0.6) 0.1
State tax provision, net of
federal benefit............... 1.1 2.3 2.7
Research and development tax
credit........................ (2.0) (0.9) (0.9)
Effect of not providing U.S.
taxes on exempt FSC income.... (1.0) (1.4) (1.2)
Nondeductible pooling of
interest expenses............. 2.9 -- --
Other.......................... (1.7) 1.3 0.1
----- ---- ----
33.4% 35.7% 35.8%
===== ==== ====
The components of domestic and foreign income (loss) before the provision for
income taxes are as follows:
YEARS ENDED
-----------------------------------------
SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 26,
1996 1997 1998
------------- ------------- -------------
Domestic.......................... $17,482 $27,063 $16,266
Foreign........................... (425) 506 (78)
------- ------- -------
$17,057 $27,569 $16,188
======= ======= =======
During fiscal 1996, 1997 and 1998, the Company realized tax benefits of
approximately $4,930, $470 and $1,196, respectively, relating to the exercise
of certain stock options. These benefits are reflected as a component of
capital in excess of par value.
F-12
HOLOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The components of the net deferred tax asset recognized as other current
assets in the accompanying consolidated balance sheets are as follows:
SEPTEMBER 27, SEPTEMBER 26,
1997 1998
------------- -------------
Deferred tax assets.............................. $2,136 $4,665
Valuation allowance.............................. (539) (568)
------ ------
$1,597 $4,097
====== ======
The approximate income tax effect of each type of temporary difference and
carryforward before allocation of the valuation allowance is approximately as
follows:
SEPTEMBER 27, SEPTEMBER 26,
1997 1998
------------- -------------
Net foreign operating loss carryforwards......... $ 330 $ 360
Nondeductible accruals........................... 283 332
Nondeductible reserves........................... 1,493 1,568
Other temporary differences...................... 30 (182)
Deferred Revenue................................. -- 2,587
------ ------
$2,136 $4,665
====== ======
The Company has recorded a valuation allowance against a portion of its
deferred tax assets. The valuation allowance relates primarily to certain
deferred tax assets in foreign jurisdictions, for which realization is
uncertain.
(6) COMMON STOCK
(a) Stock Option Plans
The Company's 1986 Combination Stock Option Plan (the 1986 Plan) is
administered by the Board of Directors. Under the terms of the 1986 Plan, the
Company granted employees either incentive stock options or nonqualified stock
options to purchase shares of the Company's common stock at a price not less
than fair market value at the date of grant. In addition, the Company may grant
nonqualified options to other participants. During fiscal 1996, the 1986 Plan
was terminated. Options granted under the 1986 Plan vest over a five-year
period and are exercisable at varying dates.
The Company's 1994 Stock Option Plan (the 1994 Plan) and the 1995 Stock
Option Plan (the 1995 Plan), both of which were originally adopted by
FluoroScan, are administered by the Board of Directors and the Company has
issued options to purchase 289,252 shares of the Company's common stock, as of
September 26, 1998. Under the terms of the 1994 Plan and the 1995 Plan, the
Company may grant employees either incentive stock options, nonqualified stock
options, stock appreciation rights, restricted stock and deferred stock awards
at a price not less than the fair market value on the date of grant. The
Company does not intend to grant any additional options under these plans.
In June 1995, the Board of Directors adopted the 1995 Combination Stock
Option Plan (the 1995 Combination Plan), pursuant to which the Company is
authorized to issue 1,100,000 options to purchase shares of common stock. Under
the terms of the 1995 Combination Plan, the Company may grant employees either
F-13
HOLOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
incentive stock options or nonqualified stock options to purchase shares of the
Company's common stock at a price not less than the fair market value at the
date of grant. In addition, the Company may grant nonqualified options to other
participants. As of September 26, 1998, the Company had 147,978 shares
available for future grant under this plan.
The Company's 1990 Nonemployee Director Stock Option Plan (the Directors'
Plan) allows for eligible directors to receive options to purchase 10,000
shares of common stock upon election as a director. The options vest ratably
over a five-year period. In addition, eligible directors are entitled to annual
option grants to purchase 8,000 shares of common stock, which vest after six
months. Option grants under the Directors' Plan are at not less than fair
market value on the date of grant. The Company has reserved 200,000 shares of
common stock for issuance under the Directors' Plan. As of September 26, 1998,
the Company had 32,000 shares available for future grant.
The Company's 1994 Directors' Stock Option Plan (the 1994 Directors' Plan),
originally adopted by FluoroScan, allows for eligible directors to receive
options to purchase an aggregate of 9,321 shares of common stock. Option grants
under the 1994 Directors' Plan are at not less than the fair market value on
the date of grant. As of September 26, 1998 all options available under the
1994 Directors' Plan had either expired or been exercised.
In May 1997, the Board of Directors adopted the 1997 Employee Equity
Incentive Plan (the 1997 Plan), pursuant to which the Company is authorized to
issue 500,000 shares of common stock. Under the terms of the 1997 Plan, the
Company may grant employees either nonqualified stock options, stock
appreciation rights, performance shares, restricted stock, or stock units. As
of September 26, 1998 the Company had 157,661 shares available for future grant
under this plan.
The following table summarizes all stock option activity under all of the
plans for the three years ended September 26, 1998.
NUMBER EXERCISE PRICE WEIGHTED AVERAGE,
OF SHARES PER SHARE EXERCISE PRICE
--------- --------------- -----------------
Outstanding, September 30,
1995........................ 1,995,859 $ .05-- $32.59 $ 6.45
Granted.................... 312,072 11.50-- 49.00 23.61
Terminated................. (36,374) 1.94-- 30.58 3.54
Exercised.................. (667,372) .05-- 20.72 6.99
--------- --------------- ------
Outstanding, September 28,
1996........................ 1,604,185 .50-- 49.00 11.24
Granted.................... 324,750 19.25-- 29.13 21.60
Terminated................. (224,524) 1.94-- 37.75 21.46
Exercised.................. (212,214) 1.88-- 30.98 10.36
--------- --------------- ------
Outstanding, September 27,
1997........................ 1,492,197 .50-- 49.00 12.08
Granted.................... 399,300 10.25-- 29.50 24.24
Terminated................. (93,428) 2.63-- 45.25 21.97
Exercised.................. (228,651) .50-- 25.38 5.72
--------- --------------- ------
Outstanding, September 26,
1998........................ 1,569,418 $ 1.81-- $49.00 $15.52
========= =============== ======
Exercisable, September 26,
1998........................ 818,468 $ 1.81-- $49.00 $10.46
========= =============== ======
Exercisable, September 27,
1997........................ 582,076 $ .50-- $49.00 $ 8.78
========= =============== ======
F-14
HOLOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The range of exercise prices for options outstanding and options exercisable
at September 26, 1998 are as follows:
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
-------------------------------------------------------------------------------------
WEIGHTED
AVERAGE
REMAINING
CONTRACTUAL WEIGHTED WEIGHTED
RANGE OF EXERCISE OPTIONS LIFE AVERAGE OPTIONS AVERAGE
PRICE OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
----------------- ----------- ----------- -------------- ----------- --------------
$ 1.81--$ 6.90 316,090 5.30 $ 3.40 279,070 $ 3.30
$ 7.00--$ 8.25 365,060 6.72 8.19 317,444 8.19
$ 8.31--$20.68 420,006 8.57 18.64 91,386 17.15
$20.72--$28.13 431,670 8.65 25.97 116,212 25.57
$28.17--$49.00 36,592 7.97 34.28 14,356 34.73
--------- ---- ------ ------- ------
$ 1.81--$49.00 1,569,418 7.49 $15.52 818,468 $10.46
========= ==== ====== ======= ======
The weighted average grant date fair value under the Black-Scholes option
pricing model of options granted during the years ended September 28, 1996,
September 27, 1997 and September 26, 1998 under the various plans is $14.82,
$14.62 and $14.81 per share, respectively. As of September 28, 1996, September
27, 1997 and September 26, 1998, the weighted average remaining contractual
life of outstanding options under these plans is 8.24, 7.69 and 7.49 years,
respectively.
The Company accounts for its stock-based compensation plans under Accounting
Principle Board Opinion No. 25, Accounting for Stock Issued to Employees. In
October 1995 the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which established a fair-value-based method of accounting for
stock-based compensation plans. The Company has adopted the disclosure-only
alternative under SFAS No. 123 that requires disclosure of the pro forma
effects on net income and earnings per share as if SFAS No. 123 had been
adopted, as well as certain other information.
The Company has computed the pro forma disclosures required under SFAS No.
123 for all stock options, stock issuances under the employee stock purchase
plan and warrants granted to employees of the Company in fiscal years ending
September 27, 1997 and September 26, 1998, using the Black-Scholes option
pricing model prescribed by SFAS No. 123. The assumptions used to calculate the
SFAS No. 123 pro forma disclosure and the weighted average information for the
fiscal years ending September 28, 1996, September 27, 1997 and September 26,
1998 are as follows:
1996 1997 1998
------- ------- -------
Risk-free interest rate.............................. 6.00% 6.00% 5.96%
Expected dividend yield.............................. -- -- --
Expected lives 6 years 6 years 6 years
Expected volatility.................................. 70% 70% 70%
F-15
HOLOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The pro forma effect of applying SFAS No. 123 for all options granted, stock
issuances under the employee stock purchase plan and warrants granted to
employees of the Company in fiscal years ending September 28, 1996, September
27, 1997 and September 26, 1998 would be as follows:
1996 1997 1998
------- ------- -------
Net income as reported.............................. $11,357 $17,729 $10,388
Pro forma net income................................ $10,210 $16,731 $ 8,761
Diluted net income per share, as reported........... $ .91 $ 1.30 $ .75
Pro forma diluted net income per share.............. $ .82 $ 1.22 $ .64
(b) Employee Stock Purchase Plan
In December 1994, the Company adopted the 1995 Employee Stock Purchase Plan
(the ESP Plan) in compliance with Section 423 of the Internal Revenue Code.
Employees who have completed three consecutive months or 1,000 hours, whether
or not consecutive, of employment with the Company are eligible to participate
in the ESP Plan. The ESP Plan allows participants to purchase common stock of
the Company at 85% of the fair market value, as defined. The Company may issue
up to 200,000 shares under the ESP Plan. During fiscal 1997 and 1998, the
Company issued 10,766 and 16,929 shares, respectively, under the ESP Plan. At
September 26, 1998, the Company has 147,895 shares available for purchase under
the ESP Plan.
(c) Rights Agreement
In December 1992, the Company adopted a shareholder rights plan. The plan is
intended to protect shareholders from unfair or coercive takeover practices. In
accordance with the plan, the Board of Directors declared a dividend
distribution of one common stock purchase right for each share of common stock
outstanding until the rights become detachable. Each right entitles the
registered holder to purchase from the Company one share of common stock for
$90, adjusted for certain events. In the event that the Company is acquired in
a merger or other business combination transaction or more than 50% of its
assets or earning power is sold, each holder shall thereafter have the right to
receive, upon exercise of each right, that number of shares of common stock of
the acquiring company that, at the time of such transaction, would have a
market value of two times the $90 per share exercise price. The rights will not
be detachable or exercisable until certain events occur. The Board of Directors
may elect to terminate the rights under certain circumstances.
(d) Warrants
In conjunction with its initial public offering, FluoroScan issued 357,294
warrants to purchase common stock at an exercise price of $22.53 per share. In
July 1996, 357,037 warrants to purchase FluoroScan common stock were exercised,
resulting in proceeds of approximately $8,000. Of the warrants issued to
underwriters, which were not subject to redemption, 257 remained outstanding at
September 26, 1998. The underwriters' warrants expire in July 1999.
(e) Underwriter's Option
In conjunction with its initial public offering, FluoroScan sold to the
underwriter an option to purchase up to 31,069 shares of common stock at an
exercise price of $33.80. As of September 26, 1998, there were 14,131 options
outstanding. The options expire in July 1999.
(f) Treasury Stock
In 1998, the Board of Directors authorized the purchase of up to one million
shares of the Company's common stock. As of September 26, 1998, the Company has
purchased 45,000 shares under this authorization.
F-16
HOLOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(7) PROFIT-SHARING 401(K) PLAN
The Company has a qualified profit-sharing plan covering substantially all of
its employees. Contributions to the plan are at the discretion of the Company's
Board of Directors. The Company has recorded approximately $309, $235 and $360
as a provision for the profit-sharing contribution for fiscal 1996, 1997 and
1998, respectively.
(8) RELATED-PARTY TRANSACTIONS
(a) Management Services Agreement
The Company has an agreement with Vivid Technologies, Inc. (Vivid), an
affiliated company, whereby the Company provides management, administrative and
support services. In addition, the Company leased a portion of its facilities
to Vivid through February 1996 for approximately $15 per month. Vivid paid the
Company for all direct costs incurred, as well as a portion of the Company's
overhead costs, as defined, representing the pro rata portion of costs
attributable to Vivid. The Company charged Vivid approximately $325, $130 and
$140 under the agreement during fiscal 1996, 1997 and 1998, respectively, which
have been offset against operating expenses of the Company. Of these amounts,
approximately $15 and $16 were unpaid as of September 27, 1997 and September
26, 1998, respectively.
(b) License and Technology Agreement
The Company has an agreement with Vivid whereby Vivid obtained a perpetual,
exclusive worldwide license to utilize certain of the Company's technology and
patents for the sole purpose of developing baggage and inspection security
systems (the Exclusive License). In September 1996, this license was amended to
grant Vivid a nonexclusive license to utilize these patents and technology for
certain new product development for other applications (the Nonexclusive
License). Royalty payments to the Company under the Exclusive License are 5% of
product revenue on Vivid's first $50 million in sales; thereafter, payments are
3% of Vivid's sales up to $200 million. Royalty payments under the Nonexclusive
License are 3% on sales up to $200 million. No royalty payments will be made on
aggregate revenues in excess of $200 million for either the Exclusive License
or the Nonexclusive License. The agreement terminates by mutual agreement of
the two parties or under certain other circumstances, as defined. The Company
recognized approximately $775, $950 and $1,070 of royalty revenue under the
Exclusive License for fiscal 1996, 1997 and 1998, respectively. Approximately
$710 and $519 were outstanding at September 27, 1997 and September 26, 1998,
respectively. The Company has not recognized any royalty revenue under the
Nonexclusive License.
(9) COMMITMENTS
(a) Operating Leases
The Company and its subsidiaries lease certain equipment and conduct their
operations in leased facilities under operating lease agreements that expire
through fiscal 2002. In addition, the facility lease requires the Company to
pay a percentage of real estate taxes and certain operating costs of the
property. Future minimum lease payments under the operating leases are
approximately as follows:
FISCAL YEARS ENDING AMOUNT
------------------- ------
September 25, 1999......................... $1,272
September 24, 2000......................... 1,221
September 30, 2001......................... 1,015
September 29, 2002......................... 301
September 25, 2003......................... --
------
$3,809
======
F-17
HOLOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Rental expense, net of subrentals from Vivid, was approximately $796, $1,107
and $1,937 for fiscal 1996, 1997 and 1998, respectively.
(b) Patent Acquisition
In fiscal 1992, the Company acquired certain patents pertaining to technology
incorporated into certain of the Company's products. The Company paid
approximately $245 for these patents and related expenses upon entering into
the agreement. In May 1993, this agreement was amended such that the Company
paid approximately $344 for additional patent rights and related expenses, of
which $50 was paid through the issuance of 21,334 shares of common stock. In
January 1998, the Company made the final payment of $1,086 with respect to the
acquisition of these patent rights. The cost of these patents is being
amortized over their expected life of 10 years.
(10) COLLABORATION AGREEMENT
In June 1995, the Company acquired a 5% minority interest in a collaborating
company. To acquire this minority interest, the Company issued 56,042 shares of
common stock and paid $76 in cash in return for all of the outstanding
convertible preferred stock of the collaborating company. The Company also
entered into a development agreement with the collaborating company related to
a certain product. As part of the development agreement, the Company will
reimburse the collaborating company for expenses incurred in the development of
this product. The Company incurred $458, $552 and $344 of expense, net of
related royalty revenue, in connection with this agreement in 1996, 1997 and
1998, respectively. In order to maintain its exclusive rights in the
collaborating company's technology, the Company must meet required sales
volumes, as defined, in the five years commencing 90 days after approval of the
product by the Food and Drug Administration. The Company is also required to
pay royalties to the collaborating company based on net sales of the product,
as defined. No royalties were due under the agreement as of September 26, 1998.
(11) FEE PER SCAN PROGRAM
The Company has entered into a strategic fee per scan program with a leasing
company whereby the Company sells its systems to the leasing company, which, in
turn, leases the systems to third parties. Under the terms of the agreement,
the Company is contingently liable for a certain amount per system, up to a
maximum of 10% of the aggregate value of systems sold under the program. The
Company has recorded the amount for which it is contingently liable as deferred
revenue.
(12) SUBSEQUENT EVENTS
In November 1998, the Company received notice from their landlord in Waltham,
MA that they would not be liable for the remaining lease payments once they
move to their new headquarters and vacated the Waltham, MA location (see Note
2(h)).
F-18
HOLOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(13) GEOGRAPHIC INFORMATION
Revenues, net income (loss) and identifiable assets for the Company's U.S.
and European operations are summarized as follows:
1996
----------------------------------------------------
EUROPEAN
UNITED STATES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
Revenues from
unaffiliated
customers.............. $ 79,688 $11,903 $ -- $ 91,591
Transfers between
geographic areas....... 6,039 1,187 (7,226) --
-------- ------- -------- --------
Total revenues........ $ 85,727 $13,090 $ (7,226) $ 91,591
======== ======= ======== ========
Net income (loss)....... $ 11,702 $ (436) $ 91 $ 11,357
======== ======= ======== ========
Identifiable assets..... $120,749 $ 6,550 $ (4,191) $123,107
======== ======= ======== ========
1997
----------------------------------------------------
Revenues from
unaffiliated
customers.............. $ 91,635 $15,054 $ -- $106,689
Transfers between
geographic areas....... 8,736 1,100 (9,836) --
-------- ------- -------- --------
Total revenues........ $100,371 $16,154 $ (9,836) $106,689
======== ======= ======== ========
Net income.............. $ 17,346 $ 495 $ (111) $ 17,729
======== ======= ======== ========
Identifiable assets..... $144,834 $ 4,304 $ (4,471) $144,667
======== ======= ======== ========
1998
----------------------------------------------------
Revenues from
unaffiliated
customers.............. $108,554 $18,225 $(11,215) 115,564
Transfers between
geographic areas....... (10,083) (1,132) 11,215 --
-------- ------- -------- --------
Total revenues........ $ 98,471 $17,093 $ -- $115,564
======== ======= ======== ========
Net income (loss)....... $ 10,866 $ (152) $ (325) $ 10,388
======== ======= ======== ========
Identifiable assets..... $166,164 $ 8,506 $ (2,073) $172,597
======== ======= ======== ========
Export sales from the United States to unaffiliated customers primarily in
Europe, Asia and Latin America during fiscal 1996, 1997 and 1998 totaled
approximately $21,468, $24,751 and $14,496 respectively.
Transfers between the Company and its European subsidiaries are generally
recorded at amounts similar to the prices paid by unaffiliated foreign dealers.
All intercompany profit is eliminated in consolidation.
Export product sales as a percentage of total product sales are as follows:
YEARS ENDED
-----------------------------------------
SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 26,
1996 1997 1998
------------- ------------- -------------
Europe............................ 17% 20% 18%
Asia.............................. 17 10 4
All others........................ 6 9 6
--- --- ---
40% 39% 28%
=== === ===
F-19
HOLOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(14) ACCRUED EXPENSES
Accrued expenses consist of the following:
SEPTEMBER 27, SEPTEMBER 26,
1997 1998
------------- -------------
Accrued payroll and employee benefits............ $1,997 $ 2,233
Accrued commissions.............................. 3,821 3,769
Accrued legal.................................... 430 317
Accrued income taxes............................. 1,504 3,748
Other accrued expenses........................... 1,545 2,386
------ -------
$9,297 $12,453
====== =======
(15) LITIGATION
In the ordinary course of business, the Company is party to various types of
litigation. The Company believes it has meritorious defenses to all claims,
and, in its opinion, all litigation currently pending or threatened will not
have a material effect on the Company's financial position or results of
operations.
(16) QUARTERLY INCOME STATEMENT INFORMATION (UNAUDITED)
The following table presents a summary of quarterly results of operations for
1997 and 1998:
1997
-------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Total revenue.............................. $27,110 $28,000 $26,948 $24,632
Net income................................. 4,408 4,651 4,746 3,924
Diluted net income per common and common
equivalent share.......................... .32 .34 .35 .29
1998
-------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Total revenue.............................. $26,121 $30,197 $34,426 $24,822
Net income................................. 2,063 2,720 4,289 1,316
Diluted net income per common and common
equivalent share.......................... .15 .20 .31 .09
F-20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by reference to the
sections entitled "Election of Directors" and "Executive Officers" in the
Registrant's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to the
sections entitled "Executive Compensation" in the Registrant's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to the
section entitled "Share Ownership of Directors, Officers and Certain Beneficial
Owners" in the Registrant's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to the
section entitled "Certain Transactions" in the Registrant's Proxy Statement.
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements
Report of Independent Public Accountants
Consolidated Balance Sheets as of September 27, 1997
and September 26, 1998
Consolidated Statements of Operations for the years
ended September 28, 1996, September 27, 1997 and September 26, 1998
Consolidated Statements of Stockholders' Equity for the years ended
September 28, 1996, September 27, 1997 and September 26, 1998
Consolidated Statements of Cash Flows for the years ended September
28, 1996, September 27, 1997 and September 26, 1998
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
The following financial statement schedules are filed as part of this
report and should be read in conjunction with the consolidated
financial statements:
SCHEDULE
--------
Report of Independent Public Accountants on Schedule
II Valuation and Qualifying Accounts
All other schedules have been omitted because they are not required or
because the required information is given in the Consolidated Financial
Statements or Notes thereto.
(3) Listing of Exhibits
Exhibit
Number Reference
- ------- ---------
2.01 Merger Agreement between the Company and
its Massachusetts predecessor............................. A
2.02 Agreement and Plan of Merger between the Company,
Fenway Acquisition Corp., and FluoroScan Imaging
Systems, Inc.............................................. I-2.01
3.01 Certificate of Incorporation of the Company............... A
3.02 By-laws of the Company.................................... A
4.01 Specimen certificate for shares of the
Company's Common Stock.................................... A
4.02 Description of capital stock (contained in the Certificate
of Incorporation of the Company filed, as Exhibit 3.01)... A
35
4.03 Rights Agreement dated December 22, 1992.................. C
4.04 Amendment No. 1 to Rights Agreement....................... G
10.07 1986 Combination Stock Option Plan, as amended............ F*
10.08 Amended and Restated 1990 Non-Employee
Director Stock Option Plan................................ H
10.09 Employee Stock Purchase Plan of the Company............... F
10.10 1995 Combination Stock Option Plan........................ H*
10.12 Form of Indemnification Agreement for directors and
certain officers of the Company........................... A*
10.17 Management Agreement between the Company and
Vivid Technologies, Inc................................... A*
10.18 License Agreement between the Company and
Vivid Technologies, Inc.,................................. A
10.19 Distribution Agreement between the Company, Toyo Medic
Company Limited and Yokogawa Medical Systems, Ltd......... B*
10.20 Facility lease between the Company and
Lincoln Street Trust...................................... B
10.21 Orion Corporation Soredex
Distribution Agreement for Scanora........................ D**
10.22 Employment Agreement with an officer
of the Company............................................ E
10.23 Form of Selling Stockholders Agreement.................... G
10.25 Amendment No.1 to the License Agreement between
the Company and Vivid Technologies, Inc................... K
10.26 Facility Lease between the Company and
Mangen Management Company................................. K
10.32 First Amendment to the facility lease between the Company
and Lincoln Street Trust.................................. I
10.33 Building Purchase and Sale Agreement...................... L
Filed
10.34 Master Product Financing Agreement........................ herewith**
Filed
10.35 Distribution Agreement between Company and PSS for DXA ... herewith**
10.36 Distribution Agreement between Company and PSS for Filed
Sahara................................................... herewith**
Filed
21.01 Subsidiaries of the Company............................... herewith
Filed
23.01 Consent of Arthur Andersen LLP............................ herewith
_______________________
* Management compensation plan or arrangement
** Confidentiality requested as to certain provisions
A. The above exhibits were previously filed as an exhibit of the same number to
the Company's Registration Statement on Form S-1 (Registration No. 33-33128)
filed on January 24, 1990 and are incorporated herein by reference.
B. The above exhibits were previously filed as an exhibit of the same number to
the Company's 1990 Annual Report on Form 10-K and are incorporated herein
by reference.
C. The above exhibit was previously filed as an exhibit of the same number to
the Company's 1992 Annual Report on Form 10-K and is incorporated herein by
reference.
36
D. The above exhibit was previously filed as an exhibit of the same number to
the Company's 1993 Third Quarter Report on Form 10-Q and is incorporated
herein by reference.
E. The above exhibit was previously filed as an exhibit of the same number to
the Company's 1993 Annual Report on Form 10-K and is incorporated herein by
reference.
F. The above exhibits were previously filed as an exhibit of the same number to
the Company's 1994 Annual Report on Form 10-K and is incorporated herein by
reference.
G. The above exhibit was previously filed as an exhibit of the above referenced
number of the Company's Registration Statement on Form S-3 (Registration No.
33-65019) filed on December 14, 1995 and is incorporated herein by reference.
H. The above exhibits were previously filed as an exhibit of the same number to
the Company's 1995 Annual Report on Form 10-K and is incorporated herein by
reference.
I. The above exhibit was previously filed as an exhibit of the above referenced
number of the Company's Proxy Statement and Prospectus on Form S-4 filed
(Registration No. 333-08977) on August 6, 1996 and is incorporated herein by
reference.
J. The above exhibit was previously filed as an exhibit of the same number of
the Company's Registration Statement on Form S-8 (Registration No. 333-11853)
filed on September 12, 1996 and is incorporated herein by reference.
K. The above exhibits were previously filed as an exhibit of the same number to
the Company's 1996 Annual Report on Form 10-K and is incorporated herein by
reference.
L. The above exhibit was previously filed as an exhibit of the same number to
the Company's 1998 Third Quarter Report on Form 10-Q and is incorporated
herein by reference.
(d) Financial Statement Schedules:
The financial statement schedules required are included as part of
Item (2) above.
37
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.
HOLOGIC, INC.
By: /s/ S. David Ellenbogen
------------------------------
S. DAVID ELLENBOGEN
Chief Executive Officer
Dated: December 23, 1998
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.
SIGNATURE TITLE DATE
- ----------------------------- --------------------------- -----------------
Director
/s/ S. David Ellenbogen and Chief Executive Officer December 23, 1998
- -----------------------------
S. DAVID ELLENBOGEN
Director, President
/s/ Steve L. Nakashige and Chief Operating Officer December 23, 1998
- -----------------------------
STEVE L. NAKASHIGE
Vice President, Finance and
Principal Financial and
/s/ Glenn P. Muir Accounting Officer December 23, 1998
- -----------------------------
GLENN P. MUIR
Director and
/s/ Jay A. Stein Senior Vice President December 23, 1998
- -----------------------------
JAY A. STEIN
/s/ Irwin Jacobs Director December 23, 1998
- -----------------------------
IRWIN JACOBS
/s/ William A. Peck Director December 23, 1998
- -----------------------------
WILLIAM A. PECK
/s/ Gerald Segel Director December 23, 1998
- -----------------------------
GERALD SEGEL
/s/ Elaine Ullian Director December 23, 1998
- -----------------------------
ELAINE ULLIAN
38
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Hologic, Inc.
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Hologic, Inc. and subsidiaries included in
this Form 10-K and have issued our report thereon dated November 6, 1998. Our
audits were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in Item 14 is the
responsibility of the Company's management and is presented for the purposes of
complying with the Securities Exchange Commission's rules and is not part of the
basic financial statements. The schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Boston, Massachusetts
November 6, 1998
39
SCHEDULE II
HOLOGIC, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Balance at Charged to Balance
Beginning Costs and at End of
of Period Expenses Period
---------- ---------- ---------
Allowance for Uncollectible Amounts
Year Ended:
September 28, 1996 $ 850 $510 $1,360
September 27, 1997 $1,360 $100 $1,460
September 26, 1998 $1,460 $640 $2,100
40