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 30, 1995
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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 _____
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)
(617) 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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The aggregate market value of the registrant's Common Stock held by non-
affiliates of the registrant as of November 30, 1995 was $176,540,991 based on
the price of the last reported sale on the NASDAQ National Market System.
As of November 30, 1995 there were 4,178,485 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 27, 1996 (Items 10,11,12 and 13).
PART I
ITEM 1. BUSINESS.
Hologic, Inc. (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. The Company 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, the Company introduced its fourth
generation of DXA bone densitometers, its clinically oriented QDR [registered
trademark] 4500 ACCLAIM product line.
To address the growing clinical market for the early diagnosis and
monitoring of osteoporosis, the Company is developing products that it believes
will complement its DXA product line. In December 1994, the Company acquired
the ultrasound bone analyzer business of Walker Sonix, Inc. ("Walker Sonix").
The Company is developing an enhanced ultrasound bone analyzer, the Sahara
[trademark] which it intends to introduce in clinical test sites in the United
States and certain international markets during fiscal 1996. The Company
believes that ultrasound systems could represent a relatively low cost, compact,
easy-to-use, non-X-ray based, screening technique to assist in the initial
diagnosis of osteoporosis. In September 1994, the Company 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.
The strip test is being designed 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. The Company and Serex have also recently entered into an
agreement in principle with a leading pharmaceutical company to develop and
market an over-the-counter version of the strip test.
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"), 25 million
Americans, 80% of whom are women, and approximately 200 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
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morbidity (loss of quality of life) and mortality due to osteoporosis. The NOF
estimates that in the United States osteoporosis contributes to more than 1.3
million fractures annually, a majority of which were of the spine and hip, and
that related direct health care and indirect productivity costs in 1987 were
approximately $10 billion. 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.
Until recently, osteoporosis was thought to be an 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 70 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.
On September 29, 1995, the FDA approved Merck's drug Fosamax 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. Merck reports that in clinical studies of Fosamax conducted in over
16 countries post-menopausal patients with established osteoporosis who were
treated with Fosamax gained on average of 7-10% bone mass in the spine and 7-8%
bone mass in the hip over a three-year period compared to patients treated with
placebo, and that Fosamax reduced the number of new vertebral fractures
(fractures of the spine) by approximately 48% compared with placebo. Merck is
conducting ongoing clinical trials to determine the effectiveness of Fosamax in
preventing osteoporosis. Fosamax is also approved in at least 18 countries in
addition to the United States.
Other therapies cleared by the FDA to treat osteoporosis in 1995 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, in November 1995, an FDA advisory
committee recommended that the FDA approve 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 or anti-
estrogens being developed by Eli Lilly (Raloxifene) and Pfizer (Draloxifene).
3
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 media 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.
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
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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 techniques currently employed and under
development by the Company and others will be for initial screening for
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 density 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.
MARKET. The Company believes that the clinical market for osteoporosis
diagnostic and monitoring products is 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
5
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
comprehensive Merck program will further accelerate the growth of the bone
densitometer and related markets. Currently, Fosamax is only approved for use
by patients with established osteoporosis. However, Merck and other drug
companies are conducting ongoing clinical trials to establish the efficacy of
drug therapies to prevent osteoporosis in high risk patients. Such approval
would 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, 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 evaluations at the rate of $68 per scan effective April 1994.
Effective January 1995, HCFA furthered the clinical use of DXA evaluations by
increasing the recommended reimbursement rate to $124. In part as a result of
the reimbursement policy recommendations implemented by HCFA, bone density
examinations are paid for by many private third party insurers in the United
States.
With the recent increase in reimbursement levels in the United States, and
the FDA approval of Fosamax and other drug therapies, the Company believes that
the United States market for bone densitometers and other methods of bone
mineral assessment will expand 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 is a growing use of osteoporosis therapies
and an expanding market for osteoporosis diagnostic and monitoring equipment.
HOLOGIC'S STRATEGY
6
The Company's goal is (i) to become the leading fully-integrated supplier
of technologically advanced, innovative and clinically valuable diagnostic
systems and tests that address the growing market for osteoporosis prevention
and treatment, and (ii) to diversify into other medical device markets which it
believes will be complementary to its current business. Key elements of this
strategy are as follows:
MAINTAIN AND ENHANCE DXA TECHNOLOGICAL LEADERSHIP. The Company has been a
pioneer in the development of DXA bone densitometers. Since commercially
introducing the first DXA bone densitometer in 1987, the Company introduced a
bone densitometer capable of assessing the bone density of the entire body in
1989, introduced the first bone densitometer capable of taking supine lateral
measurements of the spine in 1991 and introduced its fourth generation
clinically-oriented QDR 4500 ACCLAIM series of bone densitometers in 1995. The
ACCLAIM series 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 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 intends to continue to enhance and expand upon its core technical
expertise to develop increasingly efficient and cost-effective DXA bone
densitometer solutions.
EXPAND RANGE OF COMPLEMENTARY BONE DIAGNOSTIC AND MONITORING PRODUCTS. The
Company believes that a significant market exists for relatively low-cost
products that assess bone density, employ technologies that do not use X-rays or
other ionizing radiation, and may be used in a doctor's office. In order to
address this market, the Company is pursuing the development and acquisition of
products that use ultrasound and biochemical markers to assess bone mineral
status. Recent milestones achieved by the Company in connection with this
pursuit include the following:
. In December 1994, the Company acquired the Walker Sonix ultrasound bone
analyzer business.
. In September 1995, the Company introduced a prototype of the Sahara, an
internally developed advanced ultrasound bone analyzer that does not
require the use of water, at the American Society of Bone Mineral
Research.
. In September 1994, the Company began a joint development effort with
Serex to develop a low-cost biochemical marker strip test.
. In December 1995, the Company and Serex further entered into an
agreement in principle with a major pharmaceutical company to develop an
over-the-counter version of the biochemical marker strip test.
The Company believes that if it is able to develop these products successfully
it will be in a position to offer a full range of diagnostic and monitoring
products for the growing osteoporosis market. The Company also plans to pursue
other product development and market opportunities in the area of bone
assessment that the Company identifies as promising.
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EXPAND UNITED STATES DISTRIBUTION. The Company believes that the continued
development of its distribution network in the United States will be an
important factor in its continued success. The Company has developed an
experienced 11 person direct sales force covering the United States and 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.
CONTINUED INTERNATIONAL EXPANSION. International sales have accounted for
approximately 75% of the Company's sales in fiscal 1995, with such sales being
made predominantly to countries in Western Europe and Japan. In fiscal 1995,
the Company increased its efforts to expand its market penetration into new
markets in Latin America, including Argentina, Brazil and Chile, and along the
Pacific Rim, including Australia, The Peoples Republic of China, South Korea and
Taiwan. The Company intends to continue to seek to expand sales in these and
other less-developed territories.
DIVERSIFICATION INTO COMPLEMENTARY MARKETS. The Company is seeking to
leverage its medical device development, manufacturing and distribution
expertise to expand, through acquisition or strategic alliances, into
complementary markets. Such markets could include other diagnostic or imaging
markets, or other women's healthcare markets.
There can be no assurance that the Company will be able to implement
successfully any of its strategies on a timely basis, if at all, or if
successfully implemented, that any of these strategies will enable the Company
to maintain or enhance its growth.
BONE ASSESSMENT PRODUCTS
The Company's 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 United States
list prices for the Company's DXA bone densitometers range from approximately
$55,000 to $165,000 per system.
The Company believes that a significant market may exist 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 acquired or is developing products that use
ultrasound or measure biochemical markers to assist in the assessment of bone
mineral status.
QDR X-RAY BONE DENSITOMETERS. Since the Company's first commercial
shipment of a DXA system in October 1987, the Company has sold more than 2,000
DXA systems. The Company believes that its systems' performance advantages
8
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 the Company's 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, who is positioned lying on her back. 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. Controlled by a
computer, the X-ray source and detector are moved in tandem across 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
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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.
Numerous scientific articles have established lateral bone densitometry,
using supine patient positioning, as a highly precise and more diagnostically
sensitive way to measure the spine than conventional posterior-anterior
examinations. Lateral densitometry also eliminates scan artifacts such as
aortic calcification or degenerative disease of the spinal processes that can
distort conventional posterior-anterior measurements.
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. As of December
11, 1995, regulatory approval to sell the system in Japan was pending. See
"Regulation."
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.
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
10
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. The Company has retained its QDR 1000plus system as a low-
price offering. The QDR 1000plus employs the Company's older pencil beam
technology. In the fourth quarter of fiscal 1995, the ACCLAIM series accounted
for approximately 70% of DXA sales.
ULTRASOUND. In December 1994, the Company acquired the ultrasound bone
analyzer business of Walker Sonix. WalkerSonix 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
Attention (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 is developing internally an enhanced dry ultrasound bone
analyzer, called "Sahara" that will not require the use of water. The Company
believes that this "dry" technology will offer further operator convenience by
the elimination of the water handling required between each patient. The
elimination of the use of water has also enabled the Company to reduce the size
and weight of the device. In September 1995, the Company introduced a prototype
of the Sahara at the American Society of Bone Mineral Research and plans to
begin clinical trials of the Sahara in the United States and selected foreign
countries, and to commence international sales of the system in fiscal 1996.
Commercial introduction of the system in the United States is dependent upon FDA
approval. The Company believes that this approval process may take as long as
two to three years. There can be no assurance that the Company will be able to
obtain FDA approval for the Sahara on a timely basis, if at all.
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.
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. In December 1995, the Company and Serex
expanded the scope of this development effort by entering into an agreement in
principle with a major pharmaceutical company to develop an over-the-counter
11
version of this strip test. 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.
Traditionally, biochemical markers of bone were performed using high
pressure liquid chromatography ("HPLC") methods conducted in a research
laboratory. HPLC procedures are complex, 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.
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
or the home to provide a real-time assessment of bone resorption. In September
1994, the Company purchased a minority interest in Serex and entered into a
license and supply agreement with Serex to develop a urine-based bone resorption
test deliverable in a diagnostic strip test format. 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. There can be no assurance that Serex 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.
OTHER PRODUCTS; SCANORA
In order to take advantage of its European sales force and associated
distribution capability, in May 1993, the Company entered into exclusive
distribution agreement with Soredex, S.A. ("Soredex"), a division of Orion
Corporation of Helsinki, Finland, to distribute Scanora, a specialized system
for taking X-ray images of the maxillo-facial anatomy (teeth, jaw and other
facial structures).
The Scanora system 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.
12
Under the agreement, the Company is the exclusive distributor of Scanora
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 agreement with Soredex provides for the
Company to purchase a minimum number of systems in each contract year. In the
event that the Company does not achieve the minimum levels set forth under this
agreement, Soredex has the option to terminate the distribution agreement. The
Company has met its minimum purchase requirements in each year of the contract.
The agreement expires in May 1996, subject to the rights of each party to pursue
an extension under conditions to be agreed upon at such time. There can be no
assurance that the Company and Soredex will agree to an extension of the
distribution agreement on favorable terms, if at all.
CUSTOMERS
The Company's DXA customers include many pharmaceutical companies active in
the field of bone mineral metabolism, such as Ciba-Geigy, Eli Lilly, Merck,
Pfizer, Proctor & Gamble, Rhone-Poulenc/Rorer, Sandoz, 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 eight 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 is growing as
a result of the increased worldwide focus on women's health problems and the
availability of new osteoporosis therapies entering the market. More than 50%
of the Company's new sales of DXA systems have shifted to the clinical segment
of the market which includes radiologists, endocrinologists and rheumatologists.
The Company expects a further 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.
In fiscal 1995, the Company's sales to its Japanese distributor, Toyo
Medic, accounted for 20% of product sales. The loss of Toyo Medic as a customer
of the Company or an adverse change in the relationship between the Company and
Toyo Medic could have a material adverse affect on the Company's business.
MARKETING AND SALES
In the United States, the Company sells its DXA systems primarily through
its direct sales force. As of November 30, 1995, the Company had approximately
11 employees engaged in sales in the United States. In order to penetrate this
market more effectively, the Company has expanded its direct
13
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 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.
The Company sells its DXA and Scanora systems 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, 1995, the Company had
six employees engaged in sales in Europe.
The Company distributes its 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 DXA systems through independent distributors, all of whom offer technical
support. Employees of these distributors and sales representatives have
undergone product and technical training related to the Company's products. The
Company has increased its efforts to expand its market penetration into Latin
America, including Argentina, Brazil and Chile, and into Pacific Rim countries
other than Japan, 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.
In fiscal 1995, foreign sales accounted for approximately 75% of the
Company's product sales. The Company believes that the relatively high level of
foreign sales reflects, in part, a more advanced regulatory status for drug
therapies for osteoporosis in certain foreign countries than in the United
States. Additionally, the large percentage of foreign sales in Japan in fiscal
1994 reflect a government initiative in Japan to provide wide-spread screening
for women's health problems such as osteoporosis and the Company's efforts to
develop new foreign markets. The Company's foreign sales are subject to risks
generally associated with foreign sales, including United States and foreign
regulatory approval requirements and policy changes. 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 health care
policies regarding reimbursement and the strength of promotional efforts by its
distributors. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 11 of Notes to Consolidated Financial
Statements.
COMPETITION
14
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."
Four companies, Lunar, Norland Medical Systems, Aloka and Hitachi, have
developed DXA systems to measure bone density which compete with the Company's
systems. The Company believes that competition in the field of DXA bone
densitometry is based upon their 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 an
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
"Background" for a discussion of the technical advantages and disadvantages of
these other systems.
Several companies, including Igea SPA, McCue Ultrasonics, Lunar, Myriad
Ultrasound, Osteometer and Osteo-Sciences have developed ultrasound systems to
assess bone mineral status. Some of these companies have had substantially more
experience than the Company in developing and marketing their 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 under development
will 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. No ultrasound bone analyzer has been approved for commercial sale in
the United States. The timing of FDA clearance or approval for ultrasound bone
analyzers in the United States, developed by the Company and others, could have
a significant impact on their respective market shares. 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 have obtained FDA clearance to market biochemical marker
tests that evaluate bone turnover in a microtitre format. Ostex International
and Metra Biosystems have been cleared to market biochemical markers that assess
bone resorption. Hybritech and Metra Biosystems have been cleared to market
biochemical markers that assess bone formation. One or more of these companies
may develop point-of-care, over-the-counter or other biochemical marker tests
that would compete with the biochemical marker strip tests being developed by
the Company and Serex. 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 and Serex will be able to compete
effectively in this market.
MANUFACTURING
15
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.
BACKLOG
Backlog for the Company's systems as of November 30, 1995 and 1994 totaled
approximately $4.6 million and $4.9 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 market.
The Company's research and development personnel also are involved in
establishing protocols, monitoring and 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, 1995, the Company had 32 persons
engaged in research and development, of whom 23 persons were engaged in the
enhancement of the DXA product line and nine persons were engaged in the
development and enhancement of the Company's ultrasound systems. Of these
persons, ten persons were engaged in software development. The research and
development group was responsible for the introduction of the Company's fourth
generation QDR ACCLAIM series of DXA bone densitometers during 1995 and the
ongoing development of the Company's Sahara bone analyzer. During fiscal 1995,
1994 and 1993, the Company's research and product development expenses were
approximately $4.3 million, $3.4 million and $3.2 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 ten patents, licensed three patents and has
pending 17 patent applications in the United States relating to its DXA
technology, and has obtained three patents, licensed four patents
16
and has pending two 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 bio-chemical
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, 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.
Until recently, 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.
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 evaluations at an initial rate of $68 per scan effective April
1994, which was increased to $124, effective January 1995.
17
The actual reimbursement amounts provided for DXA examinations is determined by
the individual state Medicare carriers. As of December 1995, several of the more
populous states, including California, Connecticut, New York, New Jersey and
Pennsylvania, had no or only partial reimbursement of DXA examinations. In part
as a result of HCFA's recommendations, 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 than in any other
country. However, DXA bone densitometers continue to account for a substantial
portion of the Japanese market.
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.
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. The Company believes that
the approval to market its ultrasound products and its over-the-counter
18
biochemical market strip test, once developed, in the United States may be
subject to this more stringent FDA review process.
The Company's systems are also subject to approval by certain foreign
regulatory and safety agencies. The Company is awaiting regulatory approval of
the Company's QDR 4500 ACCLAIM systems in Japan and certain other foreign
countries, and has obtained the requisite regulatory approvals for the systems
in certain other countries.
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, 1995, the Company had 191 full-time employees, including
53 in manufacturing operations, 32 in research and development, 71 in marketing,
sales and support services, 27 in finance and administration and eight 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
The Company leases a 83,500 square foot building located in Waltham,
Massachusetts. The initial term of the lease expires in June 1996, with the
Company having an option to extend the lease for an additional four years. The
Company has subleased approximately 26,500 square feet of this space to Vivid,
an affiliate of Mr. Ellenbogen and Dr. Stein. During fiscal 1995, Vivid paid
the Company approximately $320,000 for this space. The Company and Vivid have
agreed that Vivid will vacate this space by the end of the second quarter of
fiscal 1996, which the Company will then occupy. The Company also leases an
additional 3,100 square feet of nearby office space under a tenancy at will.
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 adequate space for
its anticipated needs and that suitable additional space will be available at
commercially reasonable prices as needed.
19
ITEM 3. LEGAL PROCEEDINGS.
On November 22, 1995, the Company and Lunar entered into a settlement
agreement relating to litigation involving allegations of each party against the
other of patent infringement. See "Item 1 --Patents and Proprietary Rights."
Until recently, the Company had been involved in litigation brought in
January 1995 by B.V. Optische Industrie de Oude Delft and two subsidiaries
("Oldelft") claiming damages relating to a prior patent dispute. On December
14, 1995, the United States District Court for the Southern District of New York
granted the Company's Motion to Dismiss and dismissed all claims against the
Company. While the court granted Oldelft leave to replead its complaint, no
action has been filed with the court to date.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote to the Company's security holders
during the fourth quarter of the fiscal year ended September 30, 1995.
20
PART II
ITEM 5. MARKET INFORMATION, HOLDERS AND DIVIDENDS.
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 24, 1994 High Low
------- -------
First Quarter......................... $ 5 $ 3 1/2
Second Quarter........................ $ 7 3/8 $ 3 3/8
Third Quarter......................... $14 $ 6 3/8
Fourth Quarter........................ $18 $ 9 3/4
FISCAL YEAR ENDED SEPTEMBER 30, 1995
First Quarter......................... $18 1/8 $12 1/4
Second Quarter........................ $18 3/4 $13 1/4
Third Quarter......................... $17 3/8 $ 9
Fourth Quarter........................ $25 1/8 $15 3/8
Number of Holders. As of December 11, 1995, there were approximately 223
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.
21
ITEM 6. SELECTED FINANCIAL DATA.
FISCAL YEARS ENDED
------------------
CONSOLIDATED STATEMENT OF September 30, September 25, September 24, September 30,
OPERATIONS DATA ----------------
1991 1992 1993 1994 1995
------- ------- ------------- ------------- -------------
(In thousands, except per share data)
Revenues:
Product sales $15,258 $26,197 $24,140 $37,056 $41,130
Other revenue 1,799 73 708 1,428 2,270
------- ------- ------- ------- -------
17,057 26,270 24,848 38,484 43,400
Costs and Expenses:
Cost of product sales 8,464 13,469 13,729 20,865 22,091
Research and development 3,559 3,608 3,182 3,442 4,301
Selling and marketing 2,373 4,692 5,472 5,893 7,835
General and administrative 1,249 3,132 3,501 4,189 4,461
Restructuring costs (1) -- -- 900 -- --
Litigation expenses (2) 1,190 -- -- -- 2,534
------- ------- ------- ------- -------
16,835 24,901 26,784 34,389 41,222
------- ------- ------- ------- -------
Income (loss) from operations 222 1,369 (1,936) 4,095 2,178
-------
Interest income 793 502 300 316 610
Other income (expense) -- 231 (439) (81) (268)
------- ------- ------- ------- -------
Income (loss) before income taxes 1,015 2,102 (2,075) 4,330 2,520
Provision (benefit) for income taxes 314 623 (300) 1,335 650
------- ------- ------- ------- -------
Net income (loss) $ 701 $ 1,479 $(1,775) $ 2,995 $ 1,870
======= ======= ======= ======= =======
Net income (loss) per common and common
equivalent share:
Primary $0.17 $0.37 ($0.45) $0.71 $0.43
Fully diluted 0.69 0.41
Weighted average number of common and
common equivalent shares outstanding:
Primary 4,049 4,050 3,930 4,195 4,376
======= ======= ======= ======= =======
Fully diluted 4,342 4,575
======= =======
FISCAL YEARS ENDED
------------------
CONSOLIDATED BALANCE SHEET September 30, September 25, September 24, September 30,
DATA: ----------------
1991 1992 1993 1994 1995
------- ------- ------------- ------------- -------------
(In thousands)
Working capital $15,503 $16,427 $14,540 $17,688 $19,370
Total Liabilities 3,135 4,578 5,854 8,625 11,190
Total assets 19,809 22,695 22,166 28,497 33,862
Stockholders' equity 16,674 18,117 16,312 19,872 22,672
22
(1) The fiscal 1993 restructuring charge of $900,000, or $0.23 per share,
relates to the reorganization of the Company's European operations.
(2) The fiscal 1995 litigation expenses of $2.5 million, or $0.41 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 "Business -- Patents and Proprietary
Rights."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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. The Company's revenues increased 75% to $43.4 million
in 1995 from $24.8 million in 1993. During 1995, the Company's net income was
adversely impacted by litigation costs of $2.5 million, or $0.41 per share,
incurred in connection with the Company's dispute with Lunar, which was settled
in November 1995, and, to a lesser extent, its dispute with Oldelft which was
dismissed in December 1995. In fiscal 1993, the Company's sales dropped
slightly from fiscal 1992 as a result of certain recessionary economic trends in
Europe and a significant reduction of United States sales due to uncertainty
over the direction of proposed healthcare reform. In fiscal 1994 and 1995, the
economic climate in Europe steadily improved and the uncertainty over United
States government reform of the healthcare system abated. In addition, the
Company was successful in its efforts to develop new international markets in
Latin America and the Pacific Rim.
The Company commenced operations in April 1986 and was primarily engaged
in product development through the end of fiscal 1987. The Company shipped the
first QDR 1000 for clinical testing in June 1987 and began commercial shipments
of the system in October 1987 upon receipt of FDA marketing clearance. The
Company introduced a bone densitometer capable of assessing the bone density of
the entire body in 1989, introduced the first bone densitometer capable of
taking supine lateral measurements of the spine in 1991, and introduced its
fourth generation clinically-oriented QDR 4500 ACCLAIM series of bone
densitometers at the annual meeting of the Radiological Society of North America
in November 1994. The Company's shipments of its high-end QDR 4500A ACCLAIM
began in January 1995 and of its entire ACCLAIM product line began in the third
quarter of fiscal 1995. In the fourth quarter of fiscal 1995, ACCLAIM sales
represented approximately 70% of the Company's total DXA sales. The Company
achieved a slightly higher gross margin on this product line because of higher
selling prices and lower overall manufacturing costs than the older DXA line.
23
The Company believes that the two major drivers of the growth in demand for its
bone densitometers are (i) the availability of new and effective drug therapies
to treat and prevent bone diseases, including osteoporosis, and (ii) the
availability of reimbursement to healthcare providers for bone density
measurements of patients. On September 29, 1995, the FDA cleared for marketing
Merck's new bisphosphonate, Fosamax, for treatment of established osteoporosis
in post-menopausal women. The Health Care Finance Administration, the agency
which administers Medicare, increased the recommended reimbursement rate for DXA
tests to a national average of $124, effective January 1, 1995, from $68, the
original recommended reimbursement rate which went into effect in April 1994.
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.
24
FISCAL YEARS ENDED
-----------------------------------------------
SEPTEMBER 25, SEPTEMBER 24, SEPTEMBER 30,
1993 1994 1995
--------------- -------------- --------------
Revenues:
Product sales 97.1% 96.3% 94.8%
Other revenue 2.9 3.7 5.2
----- ----- -----
100.0 100.0 100.0
----- ----- -----
Costs and expenses:
Cost of product sales 55.3 54.2 50.9
Research and development 12.8 8.9 9.9
Selling and marketing 22.0 15.3 18.1
General and administrative 14.1 10.9 10.3
Restructuring costs 3.6 -- --
Litigation expenses -- -- 5.8
----- ----- -----
107.8 89.3 95.0
----- ----- -----
Income (loss) from operations (7.8) 10.7 5.0
Interest income 1.2 0.7 1.4
Other expense (1.7) (0.2) (0.6)
----- ----- -----
Income (loss) before income taxes (8.3) 11.2 5.8
Provision (benefit) for income taxes (1.2) 3.4 1.5
----- ----- -----
Net income (loss) (7.1%) 7.8% 4.3%
===== ===== =====
- -------------------------
FISCAL YEARS ENDED SEPTEMBER 30, 1995, SEPTEMBER 24, 1994 AND SEPTEMBER 25, 1993
REVENUES. Total revenues were $43.4 million in fiscal 1995, $38.5 million
in fiscal 1994 and $24.8 million in fiscal 1993. The increase in total revenues
of 13% in fiscal 1995 compared to fiscal 1994 was primarily due to the increase
in the total number of DXA product shipments in both the Company's domestic and
international markets, particularly to Europe where product sales increased 30%
over the prior year. During fiscal 1995, there was also 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. For the current year, sales of the ACCLAIM product accounted for over
42% of product sales. The increase in total revenues in fiscal 1994 compared to
1993 was primarily due to the increase in the total number of DXA product
shipments in both the Company's domestic and international markets, particularly
Japan where the Company's distributor accounted for 28% of product sales in
fiscal 1994. During fiscal 1994, there was also a shift in product sales mix
from fiscal 1993, with an increased percentage of sales being derived from the
higher-priced QDR 2000plus and QDR 2000 systems, and an increase in sales of two
X-ray products which the Company began to sell as a distributor, primarily in
Europe.
Other revenues consist of royalty revenues from the Company's licensing of
its technology to a related party and revenue relating to medical data
management services provided to pharmaceutical companies to assist in the
collection and monitoring of clinical trial data. In fiscal 1995, other revenue
increased 59% to $2.3 million from $1.4 million in fiscal 1994,
25
primarily due to an increase in revenue for medical data management services. In
fiscal 1994, other revenue increased 101% from $710,000 in fiscal 1993 primarily
due to an increase in royalty revenues and, to a lesser extent, an increase in
revenue relating to medical data management services. See "Business --
Customers" and "Business -- Patents and Proprietary Rights."
In fiscal 1995, approximately 37% of product sales were generated in
Europe, 29% in Asia, 25% in the United States and 9% in other international
markets. In fiscal 1994, approximately 38% of product sales were generated in
Asia, 31% in Europe, 26% in the United States and 5% in other international
markets. In fiscal 1993, approximately 51% of product sales were generated in
Europe, 26% in the United States, 17% in Asia and 6% 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.
COSTS AND EXPENSES. The cost of product sales decreased as a percentage of
product sales to 54% in fiscal 1995 from 56% in fiscal 1994 and from 57% in
fiscal 1993. In fiscal 1995, these costs decreased as a percentage of product
sales primarily due to the Company initiating shipments of its new family of DXA
bone densitometers, the ACCLAIM series, and a volume increase in the number of
DXA systems sold resulting in certain manufacturing efficiencies. The Company
began selling the ACCLAIM product in the second quarter of fiscal 1995 and has
recognized higher gross margins than on the older DXA product line from higher
average selling prices and lower labor and overhead-related manufacturing costs.
In fiscal 1994, the cost of product sales decreased as a percentage of product
sales primarily due to the volume increase in the number of DXA systems sold and
the associated manufacturing efficiencies. These gross margin improvements were
offset somewhat by increased sales of X-ray systems, which are distributed but
not manufactured by the Company in Europe, resulting in an overall gross margin
percentage that is less than what is earned on the DXA product line.
Research and development expenses increased 25% to $4.3 million (10% of
total revenues) in fiscal 1995 from $3.4 million (9% of total revenues) in
fiscal 1994 primarily due to the addition of engineering personnel and outside
consultants working on the development of new products and the funding of Serex
to develop a biochemical marker strip test. In fiscal 1994, research and
development expenses increased from $3.2 million (13% of total revenues) in
fiscal 1993 primarily due to the addition of engineering personnel working on
the development of new products and due to higher prototype material costs
associated with the Company's new fourth-generation QDR 4500 ACCLAIM bone
densitometers.
Selling and marketing expenses increased 33% to $7.8 million (19% of
product sales) in fiscal 1995 from $5.9 million (16% of product sales) in fiscal
1994. The increase in fiscal 1995 expenses was primarily due to an increase in
sales personnel and related expenses, marketing and promotional costs incurred
in connection with the introduction of the QDR 4500 ACCLAIM product and
increased sales commissions based on the higher sales volume. In fiscal 1994,
selling and marketing expenses increased 8% from $5.5 million (23% of product
sales) in fiscal 1993. The increase in fiscal 1994 from 1993 was primarily due
to increased sales commissions based on the higher sales volume, especially in
North America and Latin America where the Company sells directly to end-user
customers. In addition, the Company incurred additional
26
costs in connection with its initiation of a formal new business development
effort, which has resulted in the Company's recent product acquisitions and
strategic alliances. The decrease in expenses as a percentage of product sales
in fiscal 1994 was due to the significant increase in sales volume to
distributors which generally do not receive commissions.
General and administrative expenses increased to $4.5 million (10% of total
revenues) in fiscal 1995 from $4.2 million (11% of total revenues) in fiscal
1994 and $3.5 million (14% of total revenues) in fiscal 1993. The increase in
fiscal 1995 was primarily due to increased head count and other compensation-
related expenditures. The increase in fiscal 1994 when compared to fiscal 1993
was primarily due to increases in accounts receivable reserves, which reflects
the increase in accounts receivable, and an increase in employee incentive
programs. These increases were offset in part by a decrease of general and
administrative expenses in Europe as part of the reorganization begun in the
fourth quarter of fiscal 1993.
Litigation expenses incurred in fiscal 1995 were in connection with the
Company's disputes with Lunar and 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
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 dismissed in December 1995. See Item 1 "Business - Patents and Proprietary
Rights" and Item 3 - "Legal Proceedings."
In the fourth quarter of fiscal 1993, the Company recorded a restructuring
charge of $900,000. This nonrecurring charge covered the reorganization of its
European operations, including consolidation of the distribution and
administrative infrastructure, asset write-offs including receivables and
inventory, and a reduction of its European workforce. The charges from this
restructuring were a result of the weak European economy and the Company's
desire to reallocate its resources to expanding territories with greater growth
potential. At the end of fiscal 1994, the Company's reorganization was complete
and all restructuring charges had been incurred.
INTEREST INCOME. Interest income increased to $610,000 in fiscal 1995 from
$320,000 in fiscal 1994 as the Company earned a higher rate of return on a
slightly higher investment base than in the prior year and increased the number
of long-term receivables to Latin American customers. In fiscal 1994, interest
income increased from $300,000 in fiscal 1993 as the Company earned a slightly
higher rate of return on a slightly lower investment base than in the preceding
year.
OTHER EXPENSE. In fiscal 1995 and 1994, the Company incurred other expenses
of $270,000 and $80,000, respectively. These expenses were primarily
attributable to the interest costs on a line of credit established by the
Company in the third quarter of fiscal 1994 for use 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.
27
In fiscal 1993, the Company recognized other expenses of $440,000 which
primarily represented foreign currency exchange losses, net of hedge
transactions, arising from the Company's United States dollar-denominated sales
to its three European subsidiaries. Approximately one-half of the losses for the
year were incurred in the first quarter, prior to the implementation of the
Company's program to purchase foreign currency forward contracts to hedge its
foreign currency exposure. In 1993, the United States dollar strengthened
significantly against the three foreign currencies (the French franc, the
Belgian franc and the Spanish peseta) in which the subsidiaries conducted
business causing the Company to recognize a transaction loss.
To the extent that foreign currency exchange rates fluctuate in the future,
the Company may be exposed to continued financial risk. Although the 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 25.8% in
fiscal 1995 and 30.8% in fiscal 1994. In fiscal 1993, the Company had a benefit
for income taxes as a result of that year's loss. The Company's effective tax
rate is lower than the statutory tax rates due primarily to the utilization of
tax credits, the utilization of net operating losses in foreign jurisdictions
and tax benefits associated with the Company's foreign sales corporation.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily through cash flows from
operations and the issuance of Common Stock. On December 14, 1995 the Company
filed a Registration Statement with the Securities and Exchange Commission with
respect to a proposed offering by the Company of 1,200,000 shares of its Common
Stock. The Company plans to use the net proceeds of the offering, if made, for
general corporate purposes, including working capital, new product development,
sales and marketing expansion and potential acquisitions.
At September 30, 1995, the Company's working capital was $19.4 million. At
such date, the Company had $9.9 million in cash, cash equivalents and short-term
investments. The current cash, cash equivalents and investments balance
increased approximately $540,000 from September 24, 1994 primarily due to an
increase in the Company's current liabilities, which were partially offset by an
increase in inventories and accounts receivable. The increase in current
liabilities, inventories and accounts receivable reflects the Company's
introduction of its new ACCLAIM family of bone densitometers and the increase in
sales activity. At September 30, 1995, one customer had accounts receivable
outstanding of approximately $2.2 million, which were current within their
payment terms. The Company finances certain sales to Latin America over a two to
three year time frame. At September 30, 1995, the Company had long-term accounts
receivable outstanding of approximately $800,000 relating to these sales, which
were included in other assets. Working capital increased by approximately $1.7
million in fiscal 1995, primarily from the addition of net income. In fiscal
1995, the Company
28
purchased $800,000 of property and equipment, primarily computers and other
equipment associated with the hiring of additional personnel.
The Company does not currently have any significant capital commitments and
believes that existing sources of liquidity, including the anticipated net
proceeds of the proposed offering, funds expected to be generated from
operations and a $3.0 million credit line for use by its European subsidiaries,
will provide adequate cash to fund the Company's anticipated working capital and
other cash needs for the foreseeable future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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.
29
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 24 1994
and September 30, 1995
Consolidated Statements of Operations for the years
ended September 25, 1993, September 24, 1994 and September 30, 1995
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended September 25, 1993, September 24, 1994 and September 30,
1995
Consolidated Statements of Cash Flows for the years ended September
25, 1993, September 24, 1994 and September 30, 1995
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
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
4.03 Rights Agreement dated December 22, 1992.................... C
30
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..................................
10.09 Employee Stock Purchase Plan of the Company................. F
10.10 1995 Combination Stock Option Plan.......................... *
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......................
10.24 Serex License Agreement..................................... **
11.01 Statement re: Computation of Per Share Earnings............
22.01 Subsidiaries of the Company................................. C
24.01 Consent of Arthur Andersen LLP..............................
28.01 Press Release dated December 22, 1992....................... C
28.02 Letter to Stockholders dated December 22, 1992.............. C
- -----------------------
* 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 were previously filed as an exhibit of the same number to
the Company's 1992 Annual Report on Form 10-K and are incorporated herein by
reference.
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.
31
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 same 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.
(d) Financial Statement Schedules:
The financial statement schedules required are included as part of Item
(2) above.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HOLOGIC, INC.
By: /s/ S. DAVID ELLENBOGEN
_______________________________
S. DAVID ELLENBOGEN
Chief Executive Officer
Dated: December 22, 1995
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
--------- ----- ----
/s/ S. DAVID ELLENBOGEN Director
and Chief Executive Officer December 22, 1995
____________________________
S. DAVID ELLENBOGEN
/s/ GLENN P. MUIR Vice President, Finance and
Principal Financial and
Accounting Officer December 22, 1995
____________________________
GLENN P. MUIR
/s/ JAY A. STEIN Director and
Senior Vice President December 22, 1995
____________________________
JAY A. STEIN
/s/ IRWIN JACOBS Director December 22, 1995
____________________________
IRWIN JACOBS
/s/ WILLIAM A. PECK Director December 22, 1995
____________________________
WILLIAM A. PECK
/s/ GERALD SEGEL Director December 22, 1995
____________________________
GERALD SEGEL
33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Hologic, Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in this Form 10-K, and have
issued our report thereon dated November 22, 1995. Our audits were made for the
purpose of forming an opinion on those statements taken as a whole. The schedule
listed in Item 14 (a)(2) is the responsibility of the Company's management and
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the 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 22, 1995
34
SCHEDULE II
------------
HOLOGIC, INC. AND SUBSIDIARIES
------------------------------
VALUATION AND QUALIFYING ACCOUNTS
---------------------------------
Additions
Balance at ----------
Beginning Charged to Charged to Balance
of Costs and Other Deductions at End
Description Period Expenses Accounts (1) of Period
- ----------- ------ -------- -------- ---------- ---------
Allowance for doubtful accounts
- -------------------------------
Year ended September 30, 1995 $850,000 $0 $0 $0 $850,000
Year ended September 24, 1994 $195,000 $713,192 $0 ($58,192) $850,000
Year ended September 25, 1993 $125,000 $70,000 $0 $0 $195,000
(1) Specific write-offs
HOLOGIC, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of September 24, 1994 and September 30,
1995..................................................................... F-3
Consolidated Statements of Operations for the years ended September 25,
1993, September 24, 1994 and September 30, 1995.......................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
September 25, 1993, September 24, 1994 and September 30, 1995............ F-5
Consolidated Statements of Cash Flows for the years ended September 25,
1993, September 24, 1994 and September 30, 1995.......................... F-6
Notes to Consolidated Financial Statements................................ F-7
F-1
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 24, 1994 and
September 30, 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 1995. 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 24, 1994 and September 30, 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended September 30, 1995, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
November 22, 1995 (except with respect to the matter discussed in Note 13, as
to which the date is December 14, 1995)
F-2
HOLOGIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER SEPTEMBER
24, 1994 30, 1995
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 5,880,010 $ 7,447,813
Short-term investments............................. 3,519,515 2,492,671
Accounts receivable, less reserves of $850,000..... 10,893,649 11,643,883
Inventories........................................ 4,435,033 6,917,000
Prepaid expenses and other current assets.......... 1,584,132 2,058,707
----------- -----------
Total current assets............................. 26,312,339 30,560,074
----------- -----------
Property and Equipment, at cost:
Equipment.......................................... 1,922,473 2,600,381
Furniture and fixtures............................. 553,393 652,446
Leasehold improvements............................. 448,529 506,495
----------- -----------
2,924,395 3,759,322
Less--Accumulated depreciation and amortization.... 1,796,826 2,298,168
----------- -----------
1,127,569 1,461,154
----------- -----------
Other Assets, net.................................... 1,057,254 1,840,785
----------- -----------
$28,497,162 $33,862,013
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit..................................... $ 2,417,034 $ 2,058,898
Accounts payable................................... 1,865,413 3,773,000
Accrued expenses................................... 3,474,482 3,965,750
Deferred revenue................................... 867,861 1,392,667
----------- -----------
Total current liabilities........................ 8,624,790 11,190,315
----------- -----------
Commitments and Contingencies (Notes 8 and 13)
Stockholders' Equity:
Preferred stock, $.01 par value--
Authorized--1,622,685 shares
Issued and outstanding--none..................... -- --
Common stock, $.01 par value--
Authorized--10,000,000 shares
Issued and outstanding--4,024,581 shares and
4,122,100 shares in 1994 and 1995, respectively. 40,246 41,221
Capital in excess of par value....................... 14,450,085 15,354,893
Retained earnings.................................... 5,551,074 7,420,593
Cumulative translation adjustment.................... (169,033) (145,009)
----------- -----------
Total stockholders' equity....................... 19,872,372 22,671,698
----------- -----------
$28,497,162 $33,862,013
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
HOLOGIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED
-------------------------------------
SEPTEMBER SEPTEMBER SEPTEMBER
25, 1993 24, 1994 30, 1995
----------- ----------- -----------
Revenues:
Product sales........................ $24,139,565 $37,056,109 $41,129,782
Other revenue........................ 708,831 1,427,634 2,270,068
----------- ----------- -----------
24,848,396 38,483,743 43,399,850
----------- ----------- -----------
Costs and Expenses:
Cost of product sales................ 13,729,012 20,865,075 22,090,963
Research and development............. 3,182,412 3,441,871 4,300,474
Selling and marketing................ 5,472,413 5,892,377 7,835,418
General and administrative........... 3,500,998 4,189,377 4,461,335
Litigation expenses.................. -- -- 2,533,493
Restructuring costs.................. 900,000 -- --
----------- ----------- -----------
26,784,835 34,388,700 41,221,683
----------- ----------- -----------
Income (loss) from operations...... (1,936,439) 4,095,043 2,178,167
Interest Income........................ 300,468 315,886 609,678
Other Expense.......................... (438,869) (80,752) (268,326)
----------- ----------- -----------
Income (loss) before income taxes.. (2,074,840) 4,330,177 2,519,519
Provision (Benefit) for Income Taxes... (300,000) 1,335,000 650,000
----------- ----------- -----------
Net income (loss).................. $(1,774,840) $ 2,995,177 $ 1,869,519
=========== =========== ===========
Net Income (Loss) Per Common and Common
Equivalent Share:
Primary.............................. $ (.45) $ .71 $ .43
=========== =========== ===========
Fully diluted........................ $ .69 $ .41
=========== ===========
Weighted Average Number of Common and
Common Equivalent Shares Outstanding:
Primary.............................. 3,930,068 4,194,914 4,375,880
=========== =========== ===========
Fully diluted........................ 4,341,810 4,575,426
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
HOLOGIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
-----------------
$.01 CAPITAL IN CUMULATIVE TOTAL
NUMBER OF PAR EXCESS OF RETAINED TRANSLATION STOCKHOLDERS'
SHARES VALUE PAR VALUE EARNINGS ADJUSTMENT EQUITY
--------- ------- ----------- ---------- ----------- -------------
Balance, September 30,
1992................... 3,906,100 $39,061 $13,824,437 $4,330,737 $ (77,475) $18,116,760
Exercise of stock op-
tions and stock pur-
chase warrants....... 29,650 296 10,107 -- -- 10,403
Issuance of common
stock for patent ac-
quisition............ 10,667 107 49,893 -- -- 50,000
Net loss.............. -- -- -- (1,774,840) -- (1,774,840)
Translation adjust-
ments................ -- -- -- -- (90,104) (90,104)
--------- ------- ----------- ---------- --------- -----------
Balance, September 25,
1993................... 3,946,417 39,464 13,884,437 2,555,897 (167,579) 16,312,219
Exercise of stock op-
tions................ 78,164 782 365,648 -- -- 366,430
Tax benefit from stock
options exercised.... -- -- 200,000 -- -- 200,000
Net income............ -- -- -- 2,995,177 -- 2,995,177
Translation adjust-
ments................ -- -- -- -- (1,454) (1,454)
--------- ------- ----------- ---------- --------- -----------
Balance, September 24,
1994................... 4,024,581 40,246 14,450,085 5,551,074 (169,033) 19,872,372
Exercise of stock op-
tions................ 64,718 647 241,895 -- -- 242,542
Issuance of common
stock under employee
stock purchase plan.. 4,780 48 59,105 -- -- 59,153
Stock issuance in con-
junction with collab-
oration agreement.... 28,021 280 323,808 -- -- 324,088
Tax benefit from stock
options exercised.... -- -- 280,000 -- -- 280,000
Net income............ -- -- -- 1,869,519 -- 1,869,519
Translation adjust-
ments................ -- -- -- -- 24,024 24,024
--------- ------- ----------- ---------- --------- -----------
Balance, September 30,
1995................... 4,122,100 $41,221 $15,354,893 $7,420,593 $(145,009) $22,671,698
========= ======= =========== ========== ========= ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
HOLOGIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED
-----------------------------------------
SEPTEMBER 25, SEPTEMBER 24, SEPTEMBER 30,
1993 1994 1995
------------- ------------- -------------
Cash Flows from Operating Activities:
Net income (loss).................. $(1,774,840) $2,995,177 $1,869,519
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities--
Depreciation and amortization.... 424,787 593,519 565,806
Changes in assets and liabili-
ties--
Accounts receivable............ (680,391) (5,738,374) (883,961)
Inventories.................... 238,727 (387,204) (2,445,327)
Prepaid expenses and other cur-
rent assets................... (21,539) (580,031) (411,442)
Accounts payable............... 518,306 (131,964) 1,781,387
Accrued expenses............... 884,779 241,960 525,350
Deferred revenue............... 121,604 27,344 505,765
----------- ---------- ----------
Net cash provided by (used
in) operating activities.... (288,567) (2,979,573) 1,507,097
----------- ---------- ----------
Cash Flows from Investing Activities:
Net (purchases) sales of short-term
investments....................... 4,736,921 (79,340) 1,026,844
Purchase of property and equipment,
net............................... (213,426) (495,159) (802,822)
Increase in other assets........... (286,448) (37,579) (193,729)
----------- ---------- ----------
Net cash provided by (used
in) investing activities.... 4,237,047 (612,078) 30,293
----------- ---------- ----------
Cash Flows from Financing Activities:
Borrowings (settlement) under line
of credit......................... -- 2,311,352 (536,200)
Net proceeds from sale of common
stock............................. 10,403 366,430 301,695
Tax benefit from stock options ex-
ercised........................... -- 200,000 280,000
----------- ---------- ----------
Net cash provided by financ-
ing activities.............. 10,403 2,877,782 45,495
----------- ---------- ----------
Effect of Exchange Rate Changes on
Cash................................ 359,645 (94,627) (15,082)
----------- ---------- ----------
Net Increase (Decrease) in Cash and
Cash Equivalents.................... 4,318,528 (808,496) 1,567,803
Cash and Cash Equivalents, beginning
of year............................. 2,369,978 6,688,506 5,880,010
----------- ---------- ----------
Cash and Cash Equivalents, end of
year................................ $ 6,688,506 $5,880,010 $7,447,813
=========== ========== ==========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the year for in-
come taxes........................ $ 214,072 $1,259,940 $ 182,809
=========== ========== ==========
Supplemental Schedule of Noncash
Transactions:
Common stock issued for patent ac-
quisition......................... $ 50,000 $ -- $ --
=========== ========== ==========
Preferred stock investment acquired
in exchange for common stock...... $ -- $ -- $ 324,088
=========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
HOLOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS
Hologic, Inc. (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) Change in Fiscal Year
During fiscal 1993, the Company elected to change its fiscal year-end from
September 30 to the last Saturday in September. Fiscal 1993, 1994 and 1995
ended on September 25, 1993, September 24, 1994 and September 30, 1995.
(c) Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) Cash and Cash Equivalents and Short-term 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 24, 1994 is approximately $4,804,000 of
securities purchased under agreements to resell. Included in cash equivalents
at September 30, 1995 is approximately $4,217,000 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
securities issued by the U.S. Government and its agencies.
The Company accounts for investments in accordance with the Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Under 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. These investments include cash, cash
equivalents and securities issued by U.S. Government agencies, which total
$6,522,000 at September 30, 1995. Investments purchased to be held for
indefinite periods of time and not intended at the time of purchase to be held
until maturity are classified as available-for-sale, which total $1,803,000 at
September 30, 1995. These investments consist of securities issued by the U.S.
Government and are carried at cost which approximates fair market value.
F-7
HOLOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(e) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentration of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. Financial instruments that subject the Company to credit risk
consist primarily of trade 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 $4,817,000 and $2,231,000 as of September 24, 1994 and September
30, 1995, respectively. This distributor accounted for 14%, 28% and 20% of
product sales for fiscal 1993, 1994 and 1995, respectively.
(f) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
SEPTEMBER 24, SEPTEMBER 30,
1994 1995
------------- -------------
Raw materials and work-in-process............. $3,258,076 $4,030,275
Finished goods................................ 1,176,957 2,886,725
---------- ----------
$4,435,033 $6,917,000
========== ==========
Work-in-process and finished goods inventories consist of materials, labor
and manufacturing overhead.
(g) 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
(h) Intangible Assets
The Company assesses the realizability of intangible assets in accordance
with SFAS No. 121, Accounting for Impairment of Long-lived Assets and for
Long-lived Assets To Be Disposed Of.
(i) Foreign Currency Translation
The Company translates certain of its accounts and 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 losses of approximately $430,000 in fiscal 1993 are included in
other expense in the accompanying consolidated statements of operations.
Transaction gains in fiscal 1994 and 1995 were not significant.
F-8
HOLOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(j) 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 rendered.
Maintenance revenues are recognized over the term of the contract. Cash
received in excess of revenues recognized is included in deferred revenue in
the accompanying consolidated balance sheets.
(k) Research and Development and Software Development Costs
Research and development costs, other than software 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.
(l) Net Income (Loss) per Common and Common Equivalent Share
Net income (loss) per share data are computed using the weighted average
number of shares of common stock outstanding during each period. Common
equivalent shares from stock options have been included in the computation
using the treasury stock method only when their effect would be dilutive.
Fully dilutive net income per share has been separately presented only when
the difference from primary net income per share is significant.
(m) Restructuring Charge
In fiscal 1993, the Company recorded a nonrecurring restructuring charge of
$900,000, representing the costs associated with reorganizing its European
operations. These costs included a reduction in work force, consolidation of
distribution and administrative functions, and asset write-offs and write-
downs. The restructuring was completed during the fourth quarter of fiscal
1994.
(n) Derivative Financial Instruments
During October 1994, the Financial Accounting Standards Board issued SFAS
No. 119, Disclosure About Derivative Financial Instruments and Fair Value of
Financial Instruments, which requires disclosures about derivative financial
instruments. SFAS No. 119 will be effective for fiscal 1996. The Company does
not expect the adoption of this standard to have a material effect on its
consolidated financial position or results of operations. At September 30,
1995, the Company had no instruments requiring disclosure under SFAS No. 119.
(3) LINE OF CREDIT
The Company maintains a line of credit with a bank for the equivalent of
$3,000,000, which bears interest at the Paris Interbank Offered Rate (6.375%
at September 30, 1995) plus 2.25%. 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. Interest expense on this line of credit of approximately $79,000 and
$204,000 has been included in other expenses in the accompanying consolidated
statements of operations for 1994 and 1995, respectively.
F-9
HOLOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) INCOME TAXES
The Company provides for income taxes under the liability method in
accordance with SFAS No. 109, Accounting for Income Taxes.
The provision (benefit) for income taxes in the accompanying consolidated
statements of operations consists of the following:
YEARS ENDED
-----------------------------------------
SEPTEMBER 25, SEPTEMBER 24, SEPTEMBER 30,
1993 1994 1995
------------- ------------- -------------
Federal--
Current....................... $(295,000) $1,395,000 $415,000
Deferred...................... (15,000) (105,000) 135,000
--------- ---------- --------
(310,000) 1,290,000 550,000
--------- ---------- --------
State--
Current....................... 10,000 45,000 90,000
--------- ---------- --------
Foreign--
Current....................... -- -- 10,000
--------- ---------- --------
$(300,000) $1,335,000 $650,000
========= ========== ========
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
YEARS ENDED
-----------------------------------------
SEPTEMBER 25, SEPTEMBER 24, SEPTEMBER 30,
1993 1994 1995
------------- ------------- -------------
Income tax provision (benefit) at
federal statutory rate.............. (34.0)% 34.0% 34.0%
Increase (decrease) in tax resulting
from--
Net effect of (income) losses of
foreign subsidiaries not
(provided) benefited.............. 20.5 (0.9) (6.7)
State tax provision, net of federal
benefit........................... 0.3 0.7 2.4
Research and development tax cred-
it................................ (1.3) (0.5) (1.9)
Effect of not providing U.S. taxes
on exempt FSC income.............. (3.5) (4.5) (5.3)
Other.............................. 3.5 2.0 3.3
----- ---- ----
Effective tax rate................... (14.5)% 30.8% 25.8%
===== ==== ====
The components of domestic and foreign income (loss) before the provision
for income taxes are as follows:
YEARS ENDED
-----------------------------------------
SEPTEMBER 25, SEPTEMBER 24, SEPTEMBER 30,
1993 1994 1995
------------- ------------- -------------
Domestic........................ $ (823,792) $4,211,439 $1,988,346
Foreign......................... (1,251,048) 118,738 531,173
----------- ---------- ----------
$(2,074,840) $4,330,177 $2,519,519
=========== ========== ==========
During fiscal 1994 and 1995, the Company realized tax benefits of
approximately $200,000 and $280,000, respectively, relating to the exercise of
certain stock options. These benefits are reflected as a component of capital
in excess of par value.
F-10
HOLOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the net deferred tax amount recognized in the accompanying
consolidated balance sheets are as follows:
SEPTEMBER 24, SEPTEMBER 30,
1994 1995
------------- -------------
Deferred tax assets........................... $1,450,000 $1,175,000
Valuation allowance........................... (696,000) (488,000)
---------- ----------
$ 754,000 $ 687,000
========== ==========
The approximate income tax effect of each type of temporary difference and
carryforward before allocation of the valuation allowance is approximately as
follows:
SEPTEMBER 24, SEPTEMBER 30,
1994 1995
------------- -------------
Foreign net operating loss carryforwards..... $ 561,000 $ 353,000
Nondeductible accruals....................... 389,000 290,000
Nondeductible reserves....................... 496,000 511,000
Other temporary differences.................. 4,000 21,000
---------- ----------
$1,450,000 $1,175,000
========== ==========
The valuation allowance relates primarily to certain deferred tax assets in
foreign jurisdictions, for which realization is uncertain. The reduction in
the valuation allowance in 1995 is directly attributable to the reduction of
foreign net operating losses.
(5) COMMON STOCK
(a) Stock Option Plans
The Company's 1986 Combination Stock Option Plan (the 1986 Plan) is
administered by the Board of Directors and authorizes the Company to issue
options to purchase up to 950,000 shares that have been reserved by the
Company. Under the terms of the 1986 Plan, the Company may grant 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. As of September 30, 1995, the Company had
granted options to purchase 927,502 shares, of which options to purchase
345,819 shares had been exercised. These options vest over a five-year period
and are exercisable at varying dates.
The Company's 1990 Nonemployee Director Stock Option Plan (the Directors'
Plan) allows for eligible directors to receive options to purchase 5,000
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 2,000 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 75,000 shares
of common stock for issuance under the Directors' Plan. As of September 30,
1995, the Company had granted options to purchase 35,000 shares, of which
options to purchase 7,000 shares had been exercised.
In June 1995, the Board of Directors adopted, subject to stockholders'
approval, the 1995 Combination Stock Option Plan, pursuant to which the
Company is authorized to issue 550,000 options to purchase shares. Pending
stockholder approval, the Company had granted 275,000 options under this plan.
F-11
HOLOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes all stock option activity under the 1986 and
1995 Plans and the Directors' Plan for the three years ended September 30,
1995.
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
--------- --------------
Outstanding, September 30, 1992................. 297,413 $ .10-$22.75
Granted....................................... 252,450 4.38- 5.63
Terminated.................................... (164,363) .10- 22.75
Exercised..................................... (13,850) .10- 1.00
-------- -------------
Outstanding, September 25, 1993................. 371,650 .10- 17.75
Granted....................................... 303,400 3.63- 10.50
Terminated.................................... (13,185) 1.00- 7.38
Exercised..................................... (78,164) .10- 8.50
-------- -------------
Outstanding, September 24, 1994................. 583,701 .10- 17.75
Granted....................................... 373,300 12.38- 18.88
Terminated.................................... (7,600) 3.88- 14.13
Exercised..................................... (64,718) .10- 14.13
-------- -------------
Outstanding, September 30, 1995................. 884,683 $ .10-$18.88
======== =============
Exercisable, September 30, 1995................. 234,733 $ .10-$14.13
======== =============
(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 12 consecutive months or two years, 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 100,000 shares under the ESP Plan. During fiscal 1995, the Company issued
4,780 shares under the ESP Plan. At September 30, 1995, the Company has 95,220
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
$30, 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 are 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 which at the time of such transaction would have a
market value of two times the $30 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.
(6) 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 $98,000,
$120,000 and $135,000 as a provision for the profit-sharing contribution for
fiscal 1993, 1994 and 1995, respectively.
F-12
HOLOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) 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 leases a portion of its
facilities to Vivid through June 1996 for approximately $15,000 per month.
Vivid pays 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 has charged Vivid approximately
$304,000, $544,000 and $530,000 under the agreement during fiscal 1993, 1994
and 1995, respectively, which has been offset against operating expenses of
the Company. Vivid also purchased approximately $154,000, $229,000 and
$210,000 of inventory and spare parts from the Company in fiscal 1993, 1994
and 1995, respectively. Of these amounts, approximately $291,000 and $463,000
was unpaid as of September 24, 1994 and September 30, 1995, 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. Royalty payments to the Company under the agreement 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. No royalty payments will be made on
aggregate revenues in excess of $200 million. The agreement terminates by
mutual agreement of the two parties or under certain other circumstances, as
defined. The Company recognized approximately $138,000, $688,000 and $719,000
of royalty revenue under the agreement for fiscal 1993, 1994 and 1995,
respectively. Approximately $189,000 and $351,000 was outstanding at September
24, 1994 and September 30, 1995, respectively.
(8) 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 YEAR ENDING AMOUNT
------------------ ----------
September 28, 1996............ $ 890,000
September 27, 1997............ 811,000
September 26, 1998............ 775,000
September 25, 1999............ 760,000
September 24, 2000............ 760,000
Thereafter.................... 931,000
----------
$4,927,000
==========
Rental expense, net of subrentals from Vivid, was approximately $784,000,
$647,000 and $632,000 for fiscal 1993, 1994 and 1995, respectively.
The lease agreement for the Company's headquarters included a free rent and
reduced rent period. The Company is recognizing the rent expense evenly over
the term of the lease agreement.
F-13
HOLOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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 $245,000 for these patents and related expenses upon
entering into the agreement. In May 1993, this agreement was amended such that
the Company paid approximately $344,000 for additional patent rights and
related expenses, of which $50,000 was paid through the issuance of 10,667
shares of common stock. The Company may be required to make additional
payments of common stock (up to a maximum of 32,000 shares) for certain
additional patent rights, if and when available. The cost of these patents are
being amortized over their expected life of 10 years.
(9) COLLABORATION AGREEMENT
In June 1995, the Company acquired a 5% minority interest in a collaborating
company. To acquire this minority interest, the Company issued 28,021 shares
of common stock and paid $75,912 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. 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.
(10) 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 $500,000. At September 30, 1995, the Company was liable for
approximately $89,000. A portion of the program is guaranteed by a third
party.
(11) GEOGRAPHIC INFORMATION
Revenues, net income (loss) and identifiable assets for the Company's U.S.
and European operations are summarized as follows:
1993
-----------------------------------------------------
UNITED EUROPEAN
STATES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------
Revenues from unaffiliated
customers................. $15,997,129 $ 8,851,267 $ -- $24,848,396
Transfers between geo-
graphic areas............. 4,398,089 588,631 (4,986,720) --
----------- ----------- ----------- -----------
Total revenues......... $20,395,218 $ 9,439,898 $(4,986,720) $24,848,396
=========== =========== =========== ===========
Net loss................... $ (404,526) $(1,251,048) $ (119,266) $(1,774,840)
=========== =========== =========== ===========
Identifiable assets........ $19,264,066 $ 4,001,885 $(1,099,827) $22,166,124
=========== =========== =========== ===========
F-14
HOLOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1994
---------------------------------------------------
UNITED EUROPEAN
STATES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------
Revenues from unaffiliated
customers.................. $29,646,443 $ 8,837,300 $ -- $38,483,743
Transfers between geographic
areas...................... 2,833,417 1,452,712 (4,286,129) --
----------- ----------- ----------- -----------
Total revenues.......... $32,479,860 $10,290,012 $(4,286,129) $38,483,743
=========== =========== =========== ===========
Net income.................. $ 2,869,578 $ 118,738 $ 6,861 $ 2,995,177
=========== =========== =========== ===========
Identifiable assets......... $24,698,626 $ 5,091,193 $(1,292,657) $28,497,162
=========== =========== =========== ===========
1995
---------------------------------------------------
UNITED EUROPEAN
STATES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------
Revenues from unaffiliated
customers.................. $31,249,364 $12,150,486 $ -- $43,399,850
Transfers between geographic
areas...................... 4,105,914 2,085,185 (6,191,099) --
----------- ----------- ----------- -----------
Total revenues.......... $35,355,278 $14,235,671 $(6,191,099) $43,399,850
=========== =========== =========== ===========
Net income (loss)........... $ 1,364,676 $ 519,941 $ (15,098) $ 1,869,519
=========== =========== =========== ===========
Identifiable assets......... $28,993,088 $ 6,353,095 $(1,484,170) $33,862,013
=========== =========== =========== ===========
Export sales from the United States to unaffiliated customers primarily in
Europe and Asia during fiscal 1993, 1994 and 1995 totaled approximately
$8,944,000, $16,166,000 and $15,601,000, 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 25, SEPTEMBER 24, SEPTEMBER 30,
1993 1994 1995
------------- ------------- -------------
Europe.......................... 51% 31% 37%
Asia............................ 17 38 29
All others...................... 6 5 9
--- --- ---
74% 74% 75%
=== === ===
(12) ACCRUED EXPENSES
Accrued expenses consist of the following:
SEPTEMBER 24, SEPTEMBER 30,
1994 1995
------------- -------------
Accrued payroll and employee benefits......... $1,007,867 $ 869,752
Accrued income taxes.......................... 578,073 581,222
Accrued commissions........................... 511,330 914,259
Accrued legal................................. 250,000 586,738
Other accrued expenses........................ 1,127,212 1,013,779
---------- ----------
$3,474,482 $3,965,750
========== ==========
F-15
HOLOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(13) LITIGATION
On September 7, 1994, Lunar Corporation (Lunar) filed a complaint in United
States District Court against the Company, alleging, among other things, that
two of the Company's patents are not valid and infringe on three of Lunar's
patents. The Company filed a counterclaim against Lunar with respect to the
infringement of two of the Company's patents and a declaration that certain of
Lunar's patents are invalid and unenforceable.
On November 22, 1995, the Company and Lunar executed a definitive agreement
settling all disputes between the parties. The agreement provides for the
cross-licensing of certain patent rights and continuing payments between the
parties related to future sales. The Company and Lunar have agreed not to
engage each other in patent litigation in the area of x-ray densitometry and
ultrasound for a ten-year period. Management believes that the financial terms
of this agreement will not have a material adverse effect on the Company's
financial position or results of operations.
On January 24, 1995, B.V. Optische Industrie de Oude Delft (Oldelft) filed
suit in the United States District Court against the Company seeking
unspecified treble damages, attorneys' fees and costs relating to a prior
patent dispute between the Company and Oldelft relating to equalization
radiography. On December 14, 1995, the litigation was dismissed by the United
States District Court. Management believes that the outcome of this dispute
will not have a material adverse effect on the Company's financial position or
results of operations.
(14) QUARTERLY INCOME STATEMENT INFORMATION (UNAUDITED)
The following table presents a summary of quarterly results of operations
for 1994 and 1995:
1994
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ---------- ----------- -----------
Total revenue................... $ 7,647,423 $9,907,203 $10,948,026 $ 9,981,091
Net income...................... 413,415 873,989 1,195,525 512,248
Primary net income per common
and common
equivalent share............... .10 .21 .28 .12
1995
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ---------- ----------- -----------
Total revenue................... $10,198,855 $9,031,119 $11,301,320 $12,868,556
Net income...................... 643,720 153,610 487,668 584,521
Primary net income per common
and common
equivalent share............... .15 .03 .11 .13
F-16
EXHIBIT INDEX
Exhibit
Number Reference
- ------- ---------
2.01 Merger Agreement between the Company and
its Massachusetts predecessor............................... A
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
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.................................. *
10.09 Employee Stock Purchase Plan of the Company................. F
10.10 1995 Combination Stock Option Plan.......................... *
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......................
10.24 Serex License Agreement..................................... **
11.01 Statement re: Computation of Per Share Earnings............
22.01 Subsidiaries of the Company................................. C
24.01 Consent of Arthur Andersen LLP..............................
28.01 Press Release dated December 22, 1992....................... C
28.02 Letter to Stockholders dated December 22, 1992.............. C
- -----------------------
* 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 were previously filed as an exhibit of the same number to
the Company's 1992 Annual Report on Form 10-K and are incorporated herein by
reference.
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 same 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.