SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------------------------
FORM 10-K
(mark one)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended October 3, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
Commission file number 1-11827
TREX MEDICAL CORPORATION
(Exact name of Registrant as specified in this charter)
Delaware 06-1439626
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
36 Apple Ridge Road
Danbury, Connecticut 06810
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
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Common Stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to the filing requirements for
at least the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of October 30, 1998, was approximately $135,027,000.
As of October 30, 1998, the Registrant had 34,134,342 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended October 3, 1998, are incorporated by reference into Parts I and II.
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on March 11, 1999, are incorporated by reference
into Part III.
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PART I
Introduction
You may notice some changes in this year's Form 10-K, compared to past
years. The Securities and Exchange Commission is encouraging companies to write
financial documents in plain English. We have re-written our entire Form 10-K in
plain English. Our goal is to discuss our company in language that is more
easily understood.
Item 1. Business
(a) General Development of Business
Trex Medical Corporation, which we also refer to as "the company or the
registrant," designs, manufactures, and markets mammography equipment and
minimally invasive digital breast-biopsy systems, general-purpose and
specialized medical X-ray equipment, and dental X-ray systems. Trex Medical is
the world's largest manufacturer of mammography systems and minimally invasive
digital breast-biopsy systems, and through an acquisition in fiscal 1998, is now
the world's largest manufacturer of digital dental X-ray systems.
In September 1995, Trex Medical was incorporated as a subsidiary of
ThermoTrex Corporation. In July 1996, the company completed its initial public
offering. In July 1996, the Company sold 2,875,000 shares of its common stock in
an initial public offering and 871,832 shares of its common stock in a
concurrent rights offering at $14.00 per share, for net proceeds of $49.1
million. In December 1996, Trex Medical sold 300,000 shares of its common stock
at $14.50 per share, for net proceeds of $4.2 million. In February 1998, the
Company sold 5,175,000 shares of its common stock in a public offering at $13.75
per share for net proceeds of $66.9 million. The company's headquarters are in
Danbury, Connecticut, but it has operations in several states and in
international locations.
All of the company's imaging products use X-rays. Most of its products are
conventional X-ray systems, but some of the newer products are based on digital
X-ray technology. Like the conventional systems, the digital systems use X-rays
as the energy source, but instead of being captured on film, the image is stored
in a digital format, which enables the radiologist to use a computer screen to
view it. Because the image is digital, the physician can magnify an area of
interest and can adjust the contrast at a computer workstation in order to
reveal more detail. In addition, the image can be transmitted electronically if
a second opinion is needed.
The company has expanded its product line through acquisitions, and now
consists of five operating units: Lorad, Bennett, XRE, Continental, and Trophy
Radiologie. Radiologists and dentists are the primary customers, but
interventional cardiologists, surgeons, veterinarians, and chiropractors also
use Trex Medical equipment. The company sells its products through dealers and
direct sales. In addition, we serve as the original equipment manufacturer (OEM)
for a few products sold by other companies.
Through our Lorad division, we manufacture and market mammography systems
and minimally invasive digital breast-biopsy systems, which provide a
cost-effective, less-invasive alternative to open surgery for the biopsy of
suspicious breast lesions. Bennett's primary product line consists of
general-purpose X-ray equipment, but Bennett also manufactures mammography
systems, a breast-biopsy system, and X-ray units used by chiropractors and
veterinarians. XRE manufactures and markets X-ray imaging systems called cardiac
catheterization laboratories (cath labs) that are used during diagnostic and
interventional vascular and cardiac procedures such as balloon angioplasty. In
October 1997, XRE acquired substantially all of the assets of Digitec
Corporation for $7.2 million in cash, subject to certain liabilities. Digitec is
a manufacturer of physiological-monitoring equipment and digital-image archiving
and networking systems used in cardiac catherization procedures. Continental
manufactures and markets a broad line of high-end general-purpose X-ray systems,
as well as specialized units including radiographic/fluoroscopic (R/F) systems
used to diagnose gastrointestinal disorders and other problems. In addition,
Continental manufactures electrophysiology products that aid doctors in
diagnosing and treating cardiac arrhythmia. Trophy Radiologie was acquired in
April 1998 for $24.0 million in cash, the repayment of $8.7 million of debt, and
additional consideration that will not exceed $8.0 million if Trophy exceeds
certain earnings targets through fiscal 1999. Trophy is a French
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manufacturer of dental and medical X-ray systems, specializing in digital dental
technology. Its medical X-ray systems have not been cleared by the United States
Food and Drug Administration (FDA) for sale in the United States and are only
sold outside the United States.
Products Needing FDA Clearance
We have developed a full-field digital mammography system, which we
believe may provide better images than conventional mammography of dense breast
tissue, often found in younger women. A 510(k) application to market this system
was submitted to the FDA in December 1997. In December 1998, Trex Medical
received a letter from the FDA notifying the company that based on the data
provided, the FDA was unable to determine substantial equivalence with analog,
or "film screen," mammography. As a result, the FDA considers the company's
510(k) application seeking clearance to market a full-field digital mammography
system to be withdrawn. In its letter, the FDA outlines additional data analysis
that will be required for clearance. The company intends to work closely with
the FDA to provide the information requested and plans to meet with the FDA in
early 1999 in an effort to move the review process forward. The company's
high-end mammography systems are designed to be upgraded to incorporate this
digital technology, if it becomes available.
Stock Ownership
On October 3, 1998, our parent company, ThermoTrex Corporation, owned
22,879,568 shares of our common stock. This represented 67% of Trex Medical's
outstanding shares on that date. ThermoTrex is a majority-owned public
subsidiary of Thermo Electron Corporation. In addition to the products marketed
by Trex Medical, ThermoTrex, through its majority-owned and wholly owned
subsidiaries, supplies laser-based hair-removal services and personal-care
products. ThermoTrex also conducts advanced-technology research in
communications, avionics, X-ray detection, signal processing, and lasers. On
October 3, 1998, Thermo Electron owned 321 shares of Trex Medical's common
stock. Thermo Electron is a world leader in monitoring, analytical, and
biomedical instrumentation; biomedical products including heart-assist devices,
respiratory-care equipment, and mammography systems; and paper recycling and
papermaking equipment. Thermo Electron also develops alternative-energy systems
and clean fuels, provides a range of services including industrial outsourcing
and environmental-liability management, and conducts research and development in
advanced imaging, laser communications, and electronic information-management
technologies.
ThermoTrex intends to maintain at least 50% ownership of Trex Medical for
the foreseeable future. This may require ThermoTrex to purchase additional
shares of Trex Medical common stock from time to time if the number of
outstanding shares issued by Trex Medical increases. ThermoTrex may purchase
these shares either on the open market or directly from Trex Medical. See Notes
4 and 6 to the Consolidated Financial Statements in our Fiscal 1998* Annual
Report to Shareholders for a description of outstanding stock options and a
convertible note.
Forward-looking Statements
We make forward-looking statements throughout this document. We typically
use the words, "believe," "anticipate," "plan," "expect," "seek," "estimate,"
and similar expressions to identify forward-looking statements. Unless a passage
describes an historical event, you should consider it to be a forward-looking
statement. As you make decisions about your investments in Trex Medical, we
caution you, in keeping with the "Safe Harbor" provision of the Private
Securities Litigation Reform Act of 1995, that forward-looking statements
regarding the company's future expectations and projections are not guarantees
of future performance. They involve risks, uncertainties, and assumptions, and
many of the factors that will determine the company's future results are beyond
our ability to control
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* Reference to fiscal 1998, 1997, and 1996 herein are for the years ended
October 3, 1998, September 27, 1997, and September 28, 1996, respectively.
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or predict. Therefore, our actual results may differ significantly from those
suggested by forward-looking statements. You can find these risk factors
detailed under the heading "Forward-looking Statements" immediately following
the Management's Discussion and Analysis of Financial Condition and Results of
Operations in our Fiscal 1998 Annual Report to Shareholders, which is
incorporated in this document by reference.
(b) Financial Information About Industry Segments
Trex Medical conducts its business in one industry segment.
(c) Description of Business
(i) Principal Services and Products
Breast Cancer Detection
Mammography Systems. Through its Lorad and Bennett subsidiaries, the
company designs, manufactures, and markets mammography systems. Trex Medical
offers two high-end systems, the Lorad M-IV and the Bennett Contour 2000; two
mid-tier systems, the Lorad Elite and the Bennett Profile 2000; and two mobile
mammography systems, the Lorad T-350 and the Bennett MF-150.
We have developed a full-field digital mammography system, which we
believe may provide better screening than conventional mammography of dense
breast tissue, often found in younger women. This system is called the TDMS(TM)
Trex Digital Mammography System, and a 510(k) application to market this system
was submitted to the FDA in December 1997. In December 1998, the company
received a letter from the FDA notifying the company that based on the data
provided, the FDA was unable to determine substantial equivalence with analog,
or "film screen," mammography. As a result, the FDA considers Trex Medical's
510(k) application seeking clearance to market a full-field digital mammography
system to be withdrawn. As discussed above, the company intends to work closely
with the FDA to reach a resolution on this matter. The company's high-end
conventional mammography systems are designed to be upgraded to incorporate this
digital technology, if it becomes available.
In October 1998, the TDMS received the CE Marking, which indicates that
this system meets the safety requirements for marketing in all European Union
countries.
We believe that demand in the market for mammography systems is driven
primarily by technological innovation that results in better image quality.
Although growth of the installed base has slowed, demand for new systems
continues as older models are replaced with those offering technological
innovations. In addition, the company believes that the market outside the U.S.
will grow as more countries adopt mammography quality standards similar to those
adopted in the U.S. Sales of mammography systems accounted for 25%, 25%, and 31%
of the company's total revenue in fiscal 1998, 1997, and 1996, respectively.
Minimally Invasive Breast-biopsy Systems. Through its Lorad and Bennett
subsidiaries, the company offers three minimally invasive breast-biopsy systems.
These systems provide an alternative to open surgical biopsy, which is generally
performed under general anesthesia. Minimally invasive biopsies are typically
done on an out-patient basis under local anesthesia and are less expensive than
open surgery. Sales of breast-biopsy systems accounted for 19%, 22%, and 27% of
the company's total revenue in fiscal 1998, 1997, and 1996, respectively.
Trex Medical offers two upright systems, which are used in conjunction
with the company's mammography systems. For physicians that perform a
significant number of biopsies, Trex Medical sells a dedicated, prone biopsy
system called the Trex Universal Breast Biopsy System (formerly called the
StereoGuide(R)). This system includes a
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digital "spot" mammography system that enables the doctor to position the
sampling device at the site of the suspicious lesion. When performing a biopsy
with any Trex Medical system, the doctor has a choice of tissue-sampling
devices, which are not manufactured by the company.
Under an agreement with United States Surgical Corporation (U.S.
Surgical), the company has distributed the USS-Trex and the USS-Trex Universal
breast biopsy systems. Lorad served as the OEM for this equipment, manufacturing
all of the components (a digital guidance system and a specialized table), with
the exception of the device that excises the tissue. (Formerly, U.S. Surgical
marketed the modified system it bought from Lorad as the ABBI(TM) system.)
During 1998, U.S. Surgical was acquired by Tyco International, Ltd. As a result
of this acquisition, Trex Medical does not expect there will be any future sales
to U.S. Surgical. See "Dependency on a Single Customer."
The company's StereoGuide system is the subject of two lawsuits alleging
infringement of two Fischer Imaging Corporation patents. See "Item 3 - Legal
Proceedings."
General-purpose X-ray
Trex Medical addresses the general-purpose X-ray market primarily through
its Bennett, Continental, and Trophy divisions. Bennett designs, manufactures,
and markets basic X-ray systems generally used in medical outpatient facilities.
Bennett has focused on this segment of the market by providing low-cost,
reliable systems. Continental (and, increasingly, Bennett) markets the more
sophisticated and expensive X-ray systems typically used in hospitals and
clinics. These include the two linear tomography systems marketed by the
company. We believe that for a number of applications our linear tomography
systems may be a cost-effective alternative to computed tomography (CT) systems.
Trophy's medical X-ray systems have not been cleared by the FDA for sale in the
U.S. and are only sold outside the U.S. Bennett also manufactures and markets
imaging systems designed specifically for chiropractors and veterinarians.
The U.S. market for general-purpose X-ray systems is stable, and consists
primarily of replacement sales as customers upgrade older equipment. The company
believes that the international market is substantially larger than the U.S.
market and that the installed base of systems is still growing, particularly in
developing countries. Trex Medical recently expanded its international sales
efforts. Sales of general-purpose X-ray systems accounted for 22%, 23%, and 22%
of the company's total revenue in fiscal 1998, 1997, and 1996, respectively.
The company believes digital imaging will have significant application in
the general-purpose and specialized X-ray markets and is developing flat-panel
digital technology for these applications. In general-purpose X-ray
applications, the company believes digital imaging has the potential to produce
better quality images and reduce operating costs by reducing the need for film,
processing equipment, and chemicals. In addition, digital imaging will permit
the electronic storage of images on magnetic or optical media, as well as the
transmission of images to multiple locations. Furthermore, the company believes
digital imaging could make the image intensifiers, which are large and expensive
components in certain imaging systems, obsolete.
Cardiac Catheterization, Angiography, and Electrophysiology
XRE designs, manufactures, and markets cardiac catheterization
laboratories and positioners for cardiovascular imaging systems. XRE's imaging
equipment is used in cath labs where angiography (the examination of blood
vessels using X-rays following the injection of a radiopaque contrast medium) is
performed. XRE systems are designed to provide real-time images of peripheral
blood vessels and of the heart and coronary arteries for physicians performing
diagnostic and interventional procedures, such as balloon angioplasty, a
procedure in which a segment of a narrowed coronary artery is stretched by the
inflation of a balloon introduced into the affected artery. Sales of cardiac
cath labs and angiography equipment accounted for 16%, 14%, and 6% of the
company's total revenue in fiscal 1998, 1997, and 1996, respectively.
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XRE's products include the Unicath SP(TM), its newest cardio vascular
imaging system, with enhanced features such as a larger X-ray tube and advanced
image intensifier with Full Frame(TM) Zoom to further improve the visualization
of interventional devices such as stents, which are implanted in a blood vessel
in order to keep the restricted vessel open once it has been expanded by balloon
angioplasty.
To complement its Unicath SP labs, XRE offers a line of digital-image-
processing systems, workstations, and archive alternatives. For example, XRE's
DVFX digital video filter system acquires, enhances, and displays
high-resolution images at 30 frames per second to clearly image and freeze the
motion of the heart. In fiscal 1998, XRE introduced TREXnet(TM), a digital
data-management system that integrates digital X-ray images, blood pressure and
other physiological data, doctors' notes from the procedure, and patient
demographic information into a single database.
In addition, the company's Continental division designs, manufactures, and
sells electrophysiology systems that are used in the diagnosis and treatment of
cardiac arrhythmia, which is characterized by the sudden, erratic beating of the
heart and can result in cardiac arrest.
In recent years, significant advances have been made in the treatment of
atherosclerosis, which can lead to a narrowing of the arteries, and other
coronary artery diseases without extensive surgery. A more recent development
involves the permanent implantation of a stent. The company believes
interventional cardiologists will increasingly use balloon angioplasty and these
other less-invasive techniques to treat vascular diseases. These procedures are
performed under the guidance of X-ray imaging such as that provided by the
equipment we manufacture.
Radiographic/Fluoroscopic Systems
Through its Continental and Trophy divisions, the company designs,
manufactures, and markets radiographic/fluoroscopic (R/F) products. An R/F
system is able to record dynamic events by capturing a series of images in a
short period of time. For example, R/F systems are used for various
gastrointestinal procedures to image in real-time the progress of a radiopaque
ingested solution (typically barium) through the digestive tract.
Continental produces R/F systems using advanced high-frequency generators
that provide pulsed power, resulting in substantially reduced radiation exposure
to the patient. Continental's R/F products include the DigiSpot(TM) 2000, a
high-speed digital imaging system that records the image in an electronic
format, permitting the electronic storage of images on magnetic or optical
media, and the transmission of images to multiple locations with image quality
comparable to film-based systems.
Outside the U.S., Trophy sells an R/F system called the Evolution HV
remote control table. This product has not been cleared by the FDA for sale in
the U.S. The system is remotely controlled, which means that the operator can
stand some feet away, thereby significantly reducing the operator's X-ray
exposure.
Dental X-ray Systems
In April 1998, the company acquired Paris-based Trophy Radiologie, the
world's largest manufacturer of digital dental X-ray systems. Through this
division, the company designs, manufactures, and markets a variety of
conventional and digital dental X-ray systems. In 1987, Trophy introduced the
first digital X-ray system for dentists. The current-generation product line
includes the RVG(TM) digital X-ray system, which uses 90 percent less radiation
than conventional dental X-rays and eliminates the need for film and the
chemicals required to develop it. The RVG can be upgraded to incorporate the
latest software, such as the Logicon(TM) Caries Detector, which was approved by
the FDA in October 1998. This software assists dentists in analyzing and
diagnosing difficult-to-see lesions by graphically displaying changes in tooth
density as well as lesion probability. Trophy has entered into a letter of
intent to be the exclusive worldwide distributor of this software, which is
designed to detect decay, or "caries," particularly
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between teeth. This distributorship arrangement remains subject to the
negotiation of a mutually acceptable definitive agreement.
In addition, Trophy also offers an intra-oral camera used to help dentists
communicate with their patients and a panoramic system, which allows the dentist
to image the patient's entire jaw.
Other Products
The company uses its technological and manufacturing expertise to produce
a number of other products.
The company's LPX-160 portable imaging system, based on the company's
medical imaging technology, is designed to produce high-resolution images of
metals, composites, and plastics. Customers for this system have included the
United States Air Force, several commercial airlines, and Canadian and American
utilities.
The company manufactures the lasers used in ThermoLase's hair-removal
process. ThermoLase is a publicly traded, majority-owned subsidiary of
ThermoTrex. Sales of these lasers totaled $2.9 million in fiscal 1998, $11.4
million in fiscal 1997, and $8.5 million in fiscal 1996.
Sales and Distribution
We sell our products through a worldwide network of more than 100
independent dealers and, to a lesser extent, on a direct basis. Each of the
company's operating units employs regional sales managers who oversee the
performance of the independent dealers on a domestic and international basis
and, in certain instances, support direct sales efforts. The company and its
independent dealers maintain a staff of factory-trained service technicians to
support its systems on a worldwide basis.
OEM Agreements
In addition to manufacturing and marketing its own systems, the company
manufactures systems and system components as an OEM for other medical equipment
companies such as the GE Medical Systems division of General Electric Company
(GE). During 1998, U.S. Surgical, a former significant OEM customer, was
acquired by Tyco International, Ltd. As a result of this acquisition, Trex
Medical does not expect there will be any future sales to U.S. Surgical. See
"Dependency on a Single Customer."
Government Regulation
Trex Medical's products as well as its research, development, and
manufacturing activities are subject to regulation by numerous governmental
authorities in the United States and other countries. In the United States,
medical devices are subject to rigorous FDA review. The Federal Food, Drug, and
Cosmetic Act, the Public Health Services Act, and other federal statutes and
regulations govern or influence the testing, manufacture, safety, labeling,
storage, record-keeping, reporting, approval, advertising, and promotion of
products such as those offered by the company. Noncompliance with applicable
requirements can result in fines, recalls, or seizures of products, total or
partial suspension of production, and criminal prosecution.
The company is also subject to periodic inspections by the FDA, which
audits the company's compliance with current good manufacturing practices, which
are set forth in the Quality System Regulation (QSR) during such inspections.
Enforcement of QSR regulations has increased significantly in the last several
years. If Trex Medical or any of its facilities was determined to be in
noncompliance, and it was not possible to convince the FDA of the adequacy of
its compliance, the FDA could assert penalties or remedies, including a recall
or temporary suspension of product shipments until compliance was achieved.
These penalties or remedies could have a material adverse effect on the
company's business and results of operations.
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The company is also regulated by the FDA under the Radiation Control for
Health and Safety Act of 1968 (Public Law 90-602), which specifically addresses
radiation-emitting products. Under this law, the company is responsible for
submitting initial reports on all new X-ray systems that require certification
to FDA performance standards, as well as annual reports and reports of
accidental radiation occurrences.
Trex Medical has been subject to recalls of certain of its products from
time to time under Public Law 90-602. Under this law, the manufacturer must
repair, replace, or refund the cost of any product that is not in compliance
with the relevant performance standard.
(ii) and (xi) New Products; Research and Development
The company maintains active programs for the development of new
mammography and X-ray imaging systems. The company's current development efforts
are focused on refining and conducting continuing research on the full-field
digital mammography system that it has developed, the enhancement of existing
mammography products, and the introduction of a flat-panel digital detector for
use in its general-purpose and specialized X-ray systems.
Until the end of fiscal 1998, the company was supporting the development
of a mammography system based on flat-panel direct-detection digital imaging
technology being developed by scientists at ThermoTrex. ThermoTrex has granted
the company a fully paid, exclusive, worldwide, perpetual license to use such
technology in the fields of mammography and general radiography. Under the terms
of the license agreement with ThermoTrex, the company elected to fund
approximately $6.0 million of the research and development in the fields of R/F,
mobile C-arm fluoroscopy, and cardiography/angiography over a three-year period,
so the company's license was extended to cover such fields. As of October 3,
1998, the company had completed its funding obligation of $6.0 million under the
agreement. As a result of a reevaluation of limited resources, the company has
elected to discontinue funding of this development.
Trex Medical's research and development expenses were $32.4 million in
fiscal 1998, $24.7 million in fiscal 1997, and $18.9 million in fiscal 1996.
(iii) Raw Materials
The raw materials, components, and supplies we purchase are available from
a number of different suppliers. If necessary, we believe we could develop
alternative sources without a material adverse effect on our results. To date,
we have not experienced any difficulty in obtaining raw materials, components,
or supplies.
(iv) Patents, Licenses, and Trademarks
Trex Medical protects its intellectual property rights and applies for
patent protection when the company believes it is appropriate. The company
currently holds numerous issued U.S. patents expiring at various dates ranging
from 2003 to 2014. The company also has more than 10 applications pending for
additional U.S. patents and a number of foreign counterparts for its patents in
various foreign countries. Although patent protection may provide the company
with competitive advantages with respect to certain systems, the company
believes that technical know-how and trade secrets are more important to its
business than patent protection.
Competitors and other third parties hold issued patents and pending patent
applications relating to imaging and other related technologies, and it is
uncertain whether these patents and patent applications will require the company
to alter its products or processes, pay licensing fees, or cease certain
activities. Trex Medical is a defendant in two patent infringement lawsuits and
a lawsuit alleging it misappropriated certain other technology owned by a third
party. See information under the heading "Risks Associated With Patent and Other
Litigation" under the caption "Forward-looking Statements" in the Registrant's
Fiscal 1998 Annual Report to Shareholders (which statements are incorporated in
this document by reference), and "Item 3 - Legal Proceedings."
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(v) Seasonal Influences
There are no significant seasonal influences on our sales of products and
services.
(vi) Working Capital Requirements
There are no special inventory requirements or credit terms extended to
customers that would have a material adverse effect on our working capital.
(vii) Dependency on a Single Customer
Revenues from OEM sales of a modified design of the company's stereotactic
prone breast-biopsy system to U.S. Surgical accounted for 14% of the company's
total revenues in fiscal 1998. During 1998, U.S. Surgical was acquired by Tyco
International, Ltd. As a result of this acquisition, Trex Medical does not
expect that there will be any future OEM sales to U.S. Surgical.
(viii) Backlog
Our backlog of firm orders was $62.7 million at October 3, 1998, compared
with $54.3 million at September 27, 1997. We anticipate that substantially all
of our fiscal 1998 backlog will be shipped during fiscal 1999.
(ix) Government Contracts
Less than 1% of Trex Medical's total revenues in fiscal 1998 were derived
from contracts or subcontracts with the federal government, that are subject to
renegotiation of profits or termination. The company does not have knowledge of
threatened or pending renegotiation or termination of any material government
contract or subcontract.
(x) Competition
The healthcare industry in general, and the market for imaging products in
particular, is highly competitive. In the medical imaging field, Trex Medical
competes with a number of companies, many of which have substantially greater
financial, marketing, and other resources. The company's competitors include
large companies such as GE Medical Systems, the Philips Medical Systems
subsidiary of Philips N.V., Siemens AG, Toshiba, Shimadzu Corporation, and
Picker International, Inc., which compete in most diagnostic imaging modalities,
including X-ray imaging. Outside the U.S., in the dental imaging field, the
company's competitors include Planmeca OY, Sirona Dental Systems, and the
Soredex division of Orion Corporation. In the U.S., in the dental imaging field,
the company's competitors include Schick Technologies, Inc., Dexis, the Gendex
and New Image divisions of DENTSPLY International, Inc., Sygnus Imaging, and the
Dent-X subsidiary of AFP Imaging Corporation. In addition, a significant portion
of the company's sales are through OEM arrangements. The products sold through
such OEM agreements compete with those offered by the company directly and
through its independent dealers. The company's three minimally invasive
breast-biopsy systems compete with products offered by GE, Fischer Imaging
Corporation, and Philips, and with conventional surgical biopsy procedures. The
company competes primarily on the basis of product features, product
performance, and reputation as well as price and service. Trex Medical believes
that competition is likely to increase as a result of healthcare
cost-containment pressures and the development of alternative diagnostic and
interventional technologies.
(xii) Environmental Protection Regulations
We believe that compliance with federal, state, and local environmental
regulations will not have a material adverse effect on our capital expenditures,
earnings, or competitive position.
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(xiii) Number of Employees
As of October 3, 1998, Trex Medical employed 336 people.
(d) Financial Information about Exports by Domestic Operations
We summarize financial information about exports by domestic operations in
Note 9 to Consolidated Financial Statements in Trex Medical's Fiscal 1998 Annual
Report to Shareholders, which is incorporated in this document by reference.
(e) Executive Officers of the Registrant
<TABLE>
<CAPTION>
<S> <C> <C>
Name Age Present Title (Fiscal Year First Became Executive
Officer)
---------------------------- ------ -----------------------------------------------------
Gary S. Weinstein 41 Interim Co-Chief Executive Officer (1998)
John T. Keiser 62 Interim Co-Chief Executive Officer (1998)
John N. Hatsopoulos* 64 Chief Financial Officer and Senior Vice President
(1995)
John M. Brenna 52 Vice President (1997)
Paul F. Kelleher 56 Chief Accounting Officer (1995)
--------------------
* John N. Hatsopoulos will retire as chief financial officer and senior
vice president effective December 31, 1998. Theo Melas-Kyriazi has been
appointed to succeed Mr. Hatsopoulos chief financial officer.
</TABLE>
Each executive officer serves until his or her successor is chosen or
appointed by the board of directors and qualified, or until earlier resignation,
death, or removal. Mr. Hatsopoulos and Mr. Kelleher have held comparable
positions for at least five years with Trex Medical or Thermo Electron. Mr.
Weinstein has been chief executive officer of ThermoTrex since February 1996.
For at least five years prior to joining the company, Mr. Weinstein held various
positions at Lehman Brothers, an investment banking firm, including heading its
global syndicate and equity capital market group from March 1995 until joining
the company. Mr. Keiser has served as chief operating officer for biomedical and
new technologies at Thermo Electron since September 1998. Mr. Keiser also serves
as president of Thermedics Inc., a majority-owned subsidiary of Thermo Electron,
a position he has held since March 1998 and was named chief executive officer of
Thermedics Inc. in December 1998. He served as a senior vice president of
Thermedics Inc. from 1994 to 1998. From 1985 until 1994, Mr. Keiser was
president of the Eberline Instrument division of Thermo Instrument Systems Inc.,
a majority-owned public subsidiary of Thermo Electron. Mr. Brenna has been a
vice president since joining the company in March 1996. Prior to joining Trex
Medical, Mr. Brenna was director of marketing, North America, for Philips
Medical Systems, a position he held for seven years. Mr. Hatsopoulos, Mr.
Kelleher, and Mr. Keiser are full-time employees of Thermo Electron, and Mr.
Weinstein is a full-time employee of ThermoTrex, but they devote as much time to
the affairs of the company as is reasonably required. Mr. Melas-Kyriazi joined
Thermo Electron in 1986 as assistant treasurer, and became treasurer in 1988. He
was named president and chief executive officer of ThermoSpectra Corporation, a
public subsidiary of Thermo Instrument Systems Inc., in 1994. In 1997, he became
vice president of corporate strategy for Thermo Electron. Mr. Melas-Kyriazi will
remain a full-time employee of Thermo Electron, and, when he succeeds Mr.
Hatsopoulos as chief financial officer, will also devote such time to the
affairs of the company as the company's needs reasonably require.
Item 2. Properties
Trex Medical owns four office and manufacturing facilities: a
62,500-square-foot facility in Danbury, Connecticut; a 145,000-square-foot
facility in Broadview, Illinois; a 129,000-square-foot facility in Bolu, Turkey;
and a 7,500-square-foot facility in Jakarta, Indonesia. The company leases a
120,000-square-foot office and manufacturing facility in Copiague, New York,
under a lease expiring in 2005; a 156,000-square-foot office and manufacturing
facility in Littleton, Massachusetts, under a lease expiring in 2012; a
60,000-square-foot office and manufacturing
10
<PAGE>
facility in Danbury, Connecticut, under a lease expiring in 2007; a
120,000-square-foot office, manufacturing, and lab facility in Paris, France,
under a lease expiring in 2002; and a 10,750-square-foot office and
manufacturing facility in Saint Eitenne, France, under a lease expiring in 2007.
The company also leases facilities in Italy, Germany, Japan, Belgium, Spain, and
the United Kingdom.
We believe these facilities are in good condition and are suitable and
adequate to meet our current needs.
Item 3. Legal Proceedings
On April 2, 1992, Fischer Imaging Corporation filed a lawsuit in the
United States District Court, District of Colorado, against Trex Medical's Lorad
division, alleging that Lorad's prone breast-biopsy system infringes a Fischer
patent on a precision mammographic needle-biopsy system. As of October 3, 1998,
Trex Medical had recorded revenues of approximately $145.7 million from the sale
of these systems; $34.4 million of the total was from sales that were recorded
before October 16, 1995, which is the date that Lorad was transferred from
ThermoTrex to Trex Medical. On April 7, 1998, Fischer filed a second lawsuit in
the United States District Court, district of Colorado, against Trex Medical's
Lorad division, alleging that Lorad's manufacture of breast-imaging equipment
and breast-biopsy system infringes on a second Fischer patent which was issued
April 7, 1998. These two lawsuits have been consolidated into a single lawsuit.
Fisher is seeking a permanent injunction, treble damages, and attorneys'
fees and expenses. If the company is unsuccessful in defending this lawsuit, it
may be enjoined from manufacturing and selling its prone breast-biopsy system
without a license from Fischer. If a license were required, there is no
assurance that the company will be able to obtain one on commercially reasonable
terms, or on any terms. In addition, the company may be subject to damages for
past infringement.
When Trex Medical was incorporated, ThermoTrex agreed to indemnify Trex
Medical for any and all cash damages related to sales of the prone breast-biopsy
system prior to October 16, 1995, the date that Lorad was transferred to Trex
Medical. As of October 3, 1998, Trex Medical had accrued approximately $1.1
million for costs associated with this litigation. Any indemnification payment
that Trex Medical would receive from ThermoTrex would be treated as a
contribution to shareholders' investment.
Our newly acquired division Trophy Radiologie, is party to a lawsuit filed
March 21, 1996, in the United States District Court for the Eastern District of
New York against Schick Technologies, Inc., alleging infringement of a Trophy
patent relating to dental X-ray apparatus. Schick has filed a counterclaim
against Trophy alleging infringement of a Schick patent that also relates to
dental X-ray apparatus. Each of the parties is seeking a declaration that the
opposing party's patent is invalid, a permanent injunction, treble damages, and
attorneys' fees and expenses.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
11
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information concerning the market and market price for the Registrant's
Common Stock, $.01 par value, and dividend policy is included under the sections
labeled "Common Stock Market Information" and "Dividend Policy" in the
Registrant's Fiscal 1998 Annual Report to Shareholders and is incorporated in
this document by reference.
Item 6. Selected Financial Data
The information required under this item is included under the sections
labeled "Selected Financial Information" and "Dividend Policy" in the
Registrant's Fiscal 1998 Annual Report to Shareholders and is incorporated in
this document by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required under this item is included under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Registrant's Fiscal 1998 Annual Report to Shareholders and is
incorporated in this document by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required under this item is included under the caption
"Market Risk" in the Registrant's Fiscal 1998 Annual Report to Shareholders and
is incorporated in this document by reference.
Item 8. Financial Statements and Supplementary Data
The Registrant's Consolidated Financial Statements and Supplementary Data
are included in the Registrant's Fiscal 1998 Annual Report to Shareholders and
are incorporated in this document by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not applicable.
12
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information concerning directors required under this item is
incorporated in this document by reference from the material contained under the
caption "Election of Directors" in the Registrant's definitive proxy statement
to be filed with the Securities and Exchange Commission pursuant to Regulation
14A, not later than 120 days after the close of the fiscal year. The information
concerning delinquent filers pursuant to Item 405 of Regulation S-K is
incorporated herein by reference from the material contained under the heading
"Section 16(a) Beneficial Ownership Reporting Compliance" under the caption
"Stock Ownership" in the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A, not
later than 120 days after the close of the fiscal year.
Item 11. Executive Compensation
The information required under this item is incorporated in this document
by reference from the material contained under the caption "Executive
Compensation" in the Registrant's definitive proxy statement to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A, not later
than 120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this item is incorporated in this document
by reference from the material contained under the caption "Stock Ownership" in
the Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
The information required under this item is incorporated in this document
by reference from the material contained under the caption "Relationship with
Affiliates" in the Registrant's definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the close of the fiscal year.
13
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a, d) Financial Statements and Schedules
(1) The consolidated financial statements set forth in the list below
are filed as part of this Report.
(2) The consolidated financial statement schedule set forth in the
list below is filed as part of this Report.
(3) Exhibits filed herewith or incorporated herein by reference are
set forth in Item 14(c) below.
List of Financial Statements and Schedules Referenced in this Item 14
Information incorporated by reference from Exhibit 13 filed herewith:
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Shareholders' Investment
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Financial Statement Schedules filed herewith:
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or not
required, or because the required information is shown either in the
financial statements or in the notes thereto.
(b) Reports on Form 8-K
None.
(c) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed by
the undersigned, thereunto duly authorized.
Date: December 23, 1998 TREX MEDICAL CORPORATION
By: /s/ Gary S. Weinstein
Gary S. Weinstein
Interim Co-Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated, as of December 23, 1998.
Signature Title
By: /s/ Gary S. Weinstein Interim Co-Chief Executive Officer,
Gary S. Weinstein Chairman of the Board, and Director
By: /s/ John T. Keiser Interim Co-Chief Executive Officer
John T. Keiser andDirector
By: /s/ John N. Hatsopoulos Chief Financial Officer and Senior
John N. Hatsopoulos Vice President
By: /s/ Paul F. Kelleher Chief Accounting Officer
Paul F. Kelleher
By: /s/ Dr. Elias P. Gyftopoulos Director
Dr. Elias P. Gyftopoulos
By: /s/ Dr. James W. May, Jr. Director
Dr. James W. May, Jr.
By: /s/ Hutham S. Olayan Director
Hutham S. Olayan
By: /s/ Firooz Rufeh Director
Firooz Rufeh
15
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Trex Medical Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in Trex Medical Corporation's
Annual Report to Shareholders incorporated by reference in this Form 10-K, and
we have issued our report thereon dated December 21, 1998. Our audits were made
for the purpose of forming an opinion on the basic consolidated financial
statements taken as a whole. The schedule listed in Item 14 on page 14 is the
responsibility of the company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
December 21, 1998
16
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
TREX MEDICAL CORPORATION
Valuation and Qualifying Accounts
(In thousands)
<S> <C> <C> <C> <C> <C>
Description Balance at Provision Accounts Other (a) Balance
Beginning Charged Written at End
of to of Year
Year Expense Off
- ------------------------------------------- ----------- ------------- ------------ ------------ ------------
Allowance for Doubtful Accounts
Year Ended October 3, 1998 $1,298 $ 697 $ (542) $1,214 $ 2,667
Year Ended September 27, 1997 $1,264 $ 170 $ (136) $ - $ 1,298
Year Ended September 28, 1996 $ 870 $ 273 $ (151) $ 272 $ 1,264
(a) Includes allowances of businesses acquired during the year as described in
Note 2 to Consolidated Financial Statements in the Registrant's Fiscal 1998
Annual Report to Shareholders and the effect of foreign currency
translation.
Description Balance at Established Activity Other (c) Balance
Beginning as Cost Charged at End
of of to of Year
Year Acquisitions Reserve
- ------------------------------------------- ----------- ------------- ------------ ------------ ------------
Accrued Acquisition Expenses (b)
Year Ended October 3, 1998 $2,506 $ 2,335 $(1,853) $ 174 $3,162
Year Ended September 27, 1997 $3,317 $ - $ (811) $ - $2,506
Year Ended September 28, 1996 $3,452 $ 1,159 $(1,294) $ - $3,317
(b) The nature of activity in this account is described in Note 2 to
consolidated Financial Statements in the Registrant's Fiscal 1998 Annual
Report to Shareholders.
(c) Includes the effect of foreign currency translation
</TABLE>
17
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
3.1 Certificate of Incorporation, as amended, of the Registrant
(filed as Exhibit 3.1 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 333-2926] and incorporated
herein by reference).
3.2 By-Laws of the Registrant (filed as Exhibit 3.2 to the
Registrant's Registration Statement on Form S-1 [Reg. No.
333-2926] and incorporated herein by reference).
4.1 $42,000,000 Subordinated Convertible Note due 2000 of the Registrant
issued to ThermoTrex Corporation (filed as Exhibit 4.2 to the
Registrant's Registration Statement on Form S-1 [Reg. No. 333-2926]
and incorporated herein by reference).
10.1 Corporate Services Agreement dated as of September 27, 1995, between
Thermo Electron Corporation and the Registrant (filed as Exhibit 10.1
to the Registrant's Registration Statement on Form S-1 [Reg. No.
333-2926] and incorporated herein by reference).
10.2 Thermo Electron Corporate Charter, as amended and restated effective
January 3, 1993 (filed as Exhibit 10.1 to Thermo Electron's Annual
Report on Form 10-K for the fiscal year ended January 2, 1993 [File
No. 1-8002] and incorporated herein by reference).
10.3 Tax Allocation Agreement dated as of September 27, 1995, between
Thermo Electron and the Registrant (filed as Exhibit 10.3 to the
Registrant's Registration Statement on Form S-1 [Reg. No. 333-2926]
and incorporated herein by reference).
10.4 Master Repurchase Agreement dated as of September 27, 1995, between
Thermo Electron and the Registrant (filed as Exhibit 10.4 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 27, 1997 [File No. 1-11827] and incorporated herein by
reference).
10.5 Amended and Restated Master Guarantee Reimbursement and Loan
Agreement dated as of December 12, 1997, between Thermo Electron and
the Registrant (filed as Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended January 3, 1998 [File No.
1-11827] and incorporated herein by reference).
10.6 Amended and Restated Master Guarantee Reimbursement and Loan
Agreement dated as of December 12, 1997, between ThermoTrex and the
Registrant (filed as Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended January 3, 1998 [File No.
1-11827] and incorporated herein by reference).
10.7 Purchase Agreement between General Electric company and Bennett dated
November 17, 1994 (filed as Exhibit 10.9 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 333-2926] and
incorporated herein by reference).
10.8 Agreement between Philips Medizin Systeme Unternehmensbereich der
Philips GmbH and Bennett dated February 12, 1992 (filed as Exhibit
10.10 to the Registrant's Registration Statement on Form S-1 [Reg.
No. 333-2926] and incorporated herein by reference).
10.9 Distributorship Agreement between ThermoTrex and U.S. Surgical
Corporation dated as of October 20, 1995, as amended (filed as
Exhibit 10.11 to the Registrant's Registration Statement on
Form S-1 [Reg. No. 333-2926] and incorporated herein by
reference).
18
<PAGE>
Exhibit
Number Description of Exhibit
10.10 Note Purchase and Sale Agreement dated as of October 2, 1995, between
ThermoTrex and the Registrant (filed as Exhibit 10.12 to the
Registrant's Registration Statement on Form S-1 [Reg. No. 333-2926]
and incorporated herein by reference).
10.11 Lease dated as of September 15, 1995, by and among ThermoTrex and BK
Realty Associates, L.P. and Calrob Realty Associates (filed as
Exhibit 10.26 to ThermoTrex's Annual Report on Form 10-K for the
fiscal year ended September 30, 1995 [File No. 1-10791] and
incorporated herein by reference).
10.12 Lease dated as of December 20, 1995, between Melvyn J. Powers and
Mary P. Powers D/B/A M&M Realty and Lorad, as amended (filed as
Exhibit 10.14 to the Registrant's Registration Statement on Form S-1
[Reg. No. 333-2926] and incorporated herein by reference).
10.13 Equity Incentive Plan of the Registrant (filed as Exhibit 10.15
to the Registrant's Registration Statement on Form S-1 [Reg.
No. 333-2926] and incorporated herein by reference).
10.14 Deferred Compensation Plan for Directors of the Registrant
(filed as Exhibit 10.16 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 333-2926] and incorporated
herein by reference).
10.15 Directors Stock Option Plan of the Registrant (filed as Exhibit
10.17 to the Registrant's Registration Statement on Form S-1
[Reg. No. 333-2926] and incorporated herein by reference).
10.16 Form of Indemnification Agreement for Officers and Directors
(filed as Exhibit 10.18 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 333-2926] and incorporated
herein by reference).
In addition to the stock-based compensation plans of the Registrant,
the executive officers of the Registrant may be granted awards under
stock-based compensation plans of Thermo Electron and ThermoTrex for
services rendered to the Registrant. The terms of such plans are
substantially the same as those of the Registrant's Equity Incentive
Plan.
10.17 License Agreement between the Registrant and ThermoTrex dated
as of October 16, 1995 (filed as Exhibit 10.88 to the
Registrant's Registration Statement on Form S-1 [Reg. No.
333-2926] and incorporated herein by reference).
10.18 Amended and Restated Stock Holding Assistance Plan and Form of
Promissory Note (filed as Exhibit 10.18 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 27, 1997
[File No. 1-11827] and incorporated herein by reference).
1019 Lease dated May 29, 1996, between John K. Grady, Trustee of Concord
Associates Foster Street Trust, and XRE Acquisition Corp.
(filed as Exhibit 10.89 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 333-2926] and incorporated
herein by reference).
10.20 Asset Purchase Agreement dated September 4, 1996, by and among CXR
Acquisition Corp., the Registrant, Continental X-Ray Corporation,
Alphatek Corporation, Broadview Manufacturing Corporation, Haymarket
Square Associates, Advanced Medical Imaging, Inc., Trans-Continental
X-Ray Corporation, and the Stockholders and Partners thereof (filed
as Exhibit 10.21 to the Registrant's Registration Statement on Form
S-1 [Reg. No. 333-15381] and incorporated herein by reference).
19
<PAGE>
Exhibit
Number Description of Exhibit
10.21 Letter Agreement dated January 13, 1997, between the Registrant and
Philips Medical Systems (filed as Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 28, 1996
[File No. 1-11827] and incorporated herein by reference).
10.22 Form of Purchase Order and Terms and Conditions for Purchases of
Lasers by ThermoLase Corporation from the Registrant (filed as
Exhibit 10.30 to ThermoLase's Annual Report on Form 10-K for the
fiscal year ended September 27, 1997 [File No. 1-13104] and
incorporated herein by reference).
*10.23 Amendment to Distributorship Agreement, dated March 26, 1998,
amending Distributorship Agreement dated October 20, 1995,
between the Registrant and U.S. Surgical Corporation.
*10.24 Amended Agreement, dated July 2, 1998, amending Distributorship
Agreement dated October 20, 1995, between the Registrant and
U.S. Surgical Corporation.
*10.25 Letter Agreement, dated August 20, 1998, amending
Distributorship Agreement dated October 20, 1995, between the
Registrant and U.S. Surgical Corporation.
13 Annual Report to Shareholders for the fiscal year ended October 3,
1998 (only those portions incorporated herein by reference).
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
* Confidential treatment as to certain portions are omitted and filed separately
with the Securities and Exchange Commission.
Exhibit 10.23
AMENDMENT TO DISTRIBUTORSHIP AGREEMENT
For their mutual benefit, the undersigned parties, Trex Medical Corporation,
acting on behalf of its Lorad division (hereinafter referred to as "Trex") and
United States Surgical Corporation (hereinafter referred to as "USSC") hereby
agree to the following amendment to their Distributorship Agreement dated
October 20, 1995 (the "Agreement").
I. Amendment to Agreement. The following provisions are
hereby made a part of this Agreement, and shall supersede
any inconsistent provision thereof to the extent of the
inconsistency:
1. Trex hereby grants to USSC the exclusive worldwide right to distribute
Tables (i.e., any and all prone steroguide tables, to include ABBI, Trex,
Lorad and any other brand table manufactured by Trex).
2. USSC agrees to purchase **** Tables per month beginning in ************ up
to and including *************.
3. USSC shall purchase a minimum of **** Tables for ***********. It is
acknowledged by both parties that through ******* ***************, *****
systems had been shipped toward this goal.
4. USSC will retain its exclusivity rights under the Agreement if the
purchase goals in sections 2 and 3 above are satisfied.
5. Lorad agrees to inform its distributors worldwide that USSC
is now the exclusive agent to sell Tables and agrees to work
with these distributors to foster a spirit of cooperation
between the distributors and USSC, Auto Suture Companies and
its international distributors. The parties hereto shall
coordinate said notification, which will be made immediately
upon the signing of this Amendment, but will allow for a 30
day grace period for Lorad distributors to conclude ongoing
sales activities.
6. Trex's sales force shall sell a minimum of ***** Tables (to be purchased
by third parties from USSC) during *************. If Trex's sales force
fails to sell at least ***** Tables, Trex shall, at USSC's option, either
************************************
************************************************************************
************************************************************************
**************************************************. Sales
goals and territorial responsibilities will be
*************************************, and designated Trex
sales personnel will be given independent transactional
authority under general USSC guidelines.
7. USSC and Trex agree that at the ************************
they will negotiate in good faith to
************************************************************
*********.
8. Commencing ***********, all ABBI unit pricing will be at
********. When available, the new USSC/Trex units will be
priced at ******** per unit and the ABBI upgrade kit will be
priced at ****** per unit. Projected availability of the
new platform and upgrade kit is *********. Such new
platform units shall carry the trademark designations of
both parties hereto. All of the Table systems will also
include an additional charge of $****** for table
installation services. Payment terms shall be
*************************** *********.
9. USSC hereby grants Trex *********** sales agency on USSC's MIBB line of
products. The Parties will agree on minimum purchases to be made by Trex
from USSC in good faith following Clinical Acceptance (defined below).
10. Trex will receive a *** royalty on MIBB DLU sales during
the first *** months of commercial availability.
Thereafter, the royalty rate shall be reduced to *** for the
next ***** years. Trex will also receive a *** royalty on
all sales of USSC disposable products marketed and sold by
USSC for use in biopsy and therapeutic applications with
ABBI, MIBBs or Sonopsy, or with future generations of ABBI,
MIBBs or Sonopsy, or like systems for breast care (with the
exception of core needle biopsies of 12 gauge or smaller)
sold for a period of ******** from the date of the signing
of this Amendment.
11. Trex may purchase USSC's MIBB Drivers. Pricing for such Drivers during
****** shall be at ************************. Pricing thereafter shall be
subject to ************
******************.
12. Trex agrees that it shall
************************************************
*********** Trex will also
*********************************************************************
***************************************.
USSC agrees that, other than as permitted herein, it shall
******************************* ************************.
13. Upon Clinical Acceptance, Trex agrees that it shall also not
***********************
************************************************************************
************************************************************************
***********.
14. Upon Clinical Acceptance, Trex will, as USSC directs, install USSC's MIBB
drivers on prone Tables purchased by USSC from Trex pursuant to this
Amendment. These drivers will be provided to Trex at ************.
15. "Clinical Acceptance," as used in this Amendment, means
that the parties have received reports of positive results
for a period of at least 30 days from 5 mutually agreed-upon
sits where MIBB systems have been installed with upright
stereotactic units. Within one week after the conclusion of
said 30-day period, Trex shall inform USSC whether or not it
accepts the said reports as satisfactory. If within said
week Trex notifies USSC that the reports are not acceptable
to Trex, or if Trex does not provide any notice to USSC of
its decision, USSC will be free to
************************** without thereby being in
violation of the Agreement or this Amendment.
16. The Parties intend to provide Sonopsy systems as an add-on to the prone
Table as well as to the upright mammography systems. The parties will
cooperate to assist in this development promptly and will commercially
launch the product upon technical and clinical market acceptance.
17. Trex Applications Support Services will continue per the Agreement.
18. Regarding Trex Field Sales Support Services; USSC will reimburse
**************, for Trex's ******************* field sales organization,
through **************. ********** expense guidelines will be followed.
Expenses per ************* field sales organization representative will
not be reimbursed above ************ per quarter. No reimbursements will
be provided after ****************.
II. Other Terms and Conditions. All other terms and conditions of the Agreement
(as previously amended), not inconsistent herewith, shall continue in full force
and effect.
Accepted and agreed to:
UNITED STATES SURGICAL CORPORATION
By: /s/Eitan Nahum_________
Title: Vice President__________
Date: March 26, 1998________
TREX MEDICAL CORPORATION
By: /s/Curt Mills____________
Title: Vice President Sales MIT__
Date: March 26, 1998_________
By:______/s/John Brenna_________
Title: President______________
Date: March 26, 1998________
TXM #6888
Exhibit 10.24
TREX / USSC AMENDED AGREEMENT
JULY 2, 1998
USSC will ************************** order (P.O. #386510) on
*************. In consideration of the following:
1. USSC makes ***************************************.
2. At which point USSC and Trex
********************************************* **********.
3. If USSC and Trex
********************************************************
***********************************************************************.
and Trex agrees to the following:
1. To require
************************************************************.
2. Any sale made by
********************************************************
************************************************************************.
3. Trex agrees to extend USSC's exclusivity (as defined in agreement) until
*********** ***************.
4. Trex agrees to work in cooperation and good faith with USSC
********************* ************************************.
Agreed upon this 2nd day of July, 1998.
TREX MEDICAL CORPORATION U.S. SURGICAL CORPORATION
By: /s/Hal Kirshner
By: /s/Howard Rosenkrantz___
Hal Kirshner Howard Rosenkrantz
President & CEO President and CEO
TXM #6889
Exhibit 10.25
August 20, 1998
Mr. John M. Brenna
President
LORAD,
a division of Trex Medical Corporation
36 Apple Ridge Road
Danbury, CT 06810
Dear John:
This letter agreement entered into between LORAD, a division of Trex
Medical Corporation and United States Surgical Corporation ("USSC") hereby
amends the Distributorship Agreement dated as of October 20, 1995 between the
parties; as such Distributorship Agreement is amended to date by the letter
agreement dated March 19, 1996, the Amendment to Distributorship Agreement dated
March 26, 1998, and the Amended Agreement dated July 2, 1998 (the "Agreement").
The following provisions are hereby made a part of the Agreement and shall
supersede any inconsistent provisions thereof to the extent of the
inconsistency.
1. During July, August, September, October, November and
December *****, **********
***********************************************************
USSC for the purchase of "Tables" (as defined in the Amendment to
Distributorship Agreement dated March 26, 1998) will be
***********************************************************************
**************************************.
2. During July, August and September *****
**********************************************************************
*******************.
3. In exchange,
*************************************************************
*****************************, pursuant to Section 2 of the March 1998
Amendment to Distributorship Agreement, if LORAD's total gross profit on
all Tables sold by it during ********************** is less than
$************, USSC shall pay the shortfall in gross profits to LORAD,
subject to USSC's right to audit all profit calculations. Said payment
shall be payable on or before **************** by USSC to LORAD.
4. During October, November and December ****
*********************************************************************
****************************Tables
that are physically identifiable, with serial numbers;
provided*********************************within any area
not included within the territory covered by
*******************************************************************
****************************************of
Tables as of the date of such sale. Notwithstanding the
foregoing, LORAD shall have ******************in connection
with the collection of receivables owing ********
***********.
5. **********USSC's status as an exclusive distributor is hereby converted
to a dual distributorship between USSC and LORAD. Such exclusive
distributorship shall not be assignable by either party.
6. (i) During ***********************************************************
***************, all orders ************ for the sale
of Tables shall be
******************************************************************;
thereafter, ***********************orders for the sale
of Tables *****************************************************
*********************, thereafter, all orders for the purchase of
additional Tables obtained ********************shall be
**************************************. ********.
(ii) ***********************************, the foregoing shall continue to
apply, except that ************** orders for the purchase of Tables
to ***********************************************************.
(iii)************************** the foregoing shall continue to apply,
except that **************orders for the purchase of Tables
************************* ******during the period, and after
************* sells *** Tables during such period
(iv) By April 1, 2000, the parties expect and intend that ***** total
************* Tables shall be ***** or fewer.
7. LORAD shall ******************************************************* or in
accordance with the above, refer to ********* for the purchase of Tables
**************** *********** .
8. The royalty on USSC disposable products, provided for in Section 10 of the
Amendment to Distributorship Agreement dated March 26, 1998, shall be unaffected
by the above management, and shall survive any cancellation or termination of
that arrangement or this agreement.
9. As of and following the date of this letter, USSC shall not have any further
liability or obligation to purchase any additional Tables from LORAD.
10. The parties expressly reaffirm their rights and obligations under Section
6.9 of the October 1995 Distributorship Agreement.
11. After January 1, 1999, if either party feels that the intended results of
this arrangement are not being achieved, or that an alternative arrangement
would be preferable, the parties will meet and negotiate in good faith.
12. All other terms and conditions of the Agreement (as previously amended), not
inconsistent herewith, shall continue in full force and effect.
Accepted and Agreed to:
UNITED STATES SURGICAL CORPORATION
By:______/s/Robert Knarr_____________
Title:_____Executive Vice President_____
Date:_____September 8, 1998__________
TREX MEDICAL CORPORATION
By:_______/s/John Brenna_____________
Title:______President_________________
Date:______September 8, 1998_________
Exhibit 13
Trex Medical Corporation
Consolidated Financial Statements
Fiscal Year 1998
<PAGE>
<TABLE>
<CAPTION>
Trex Medical Corporation 1998 Financial Statements
Consolidated Statement of Income
Year Ended
-------------------------------
<S> <C> <C> <C>
(In thousands except per share amounts) Oct. 3, Sept. 27, Sept. 28,
1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Revenues (includes $3,308, $11,427, and $8,910 to affiliated $266,964 $229,294 $150,195
companies; Notes 8 and 9)
-------- -------- --------
Costs and Operating Expenses:
Cost of revenues (includes $1,377, $7,238, and $4,698 for 151,970 139,062 86,642
revenues to affiliated companies; Note 8)
Selling, general, and administrative expenses (Note 8) 55,006 40,181 27,156
Research and development expenses (Note 8) 32,417 24,705 18,862
-------- -------- --------
239,393 203,948 132,660
-------- -------- --------
Operating Income 27,571 25,346 17,535
Interest Income 2,590 1,895 1,290
Interest Expense, Related Party (Note 6) (336) (336) (1,373)
Other Income, Net 15 559 60
-------- -------- --------
Income Before Provision for Income Taxes 29,840 27,464 17,512
Provision for Income Taxes (Note 5) 11,636 12,790 8,168
-------- --------- --------
Net Income $ 18,204 $ 14,674 $ 9,344
======== ======== ========
Earnings per Share (Note 11)
Basic $ .57 $ .51 $ .40
======== ======== ========
Diluted $ .56 $ .50 $ .39
======== ======== ========
Weighted Average Shares (Note 11)
Basic 32,213 28,826 23,365
======== ======== ========
Diluted 33,132 29,685 26,252
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
<TABLE>
<CAPTION>
Trex Medical Corporation 1998 Financial Statements
Consolidated Balance Sheet
1
<S> <C> <C>
(In thousands) Oct. 3, Sept. 27,
1998 1997
- -------------------------------------------------------------------------------------- ---------- ---------
Assets
Current Assets:
Cash and cash equivalents (includes $34,054 and $34,587 under repurchase $ 42,709 $ 36,490
agreement with affiliated company)
Accounts receivable, less allowances of $2,667 and $1,298 72,622 44,774
Inventories 76,268 43,341
Prepaid income taxes (Note 5) 6,479 6,147
Prepaid expenses 3,154 971
-------- --------
201,232 131,723
-------- --------
Property, Plant, and Equipment, at Cost, Net 19,099 16,415
-------- --------
Deferred Charges and Other Assets 938 -
-------- --------
Cost in Excess of Net Assets of Acquired Companies (Note 2) 121,252 81,299
-------- --------
$342,521 $229,437
======== ========
3
<PAGE>
Trex Medical Corporation 1998 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) Oct. 3, Sept. 27,
1998 1997
- -------------------------------------------------------------------------------------- ---------- ---------
Liabilities and Shareholders' Investment
Current Liabilities:
Accounts payable $ 23,809 $ 13,837
Current maturities of long-term obligations (Note 6) 435 63
Accrued payroll and employee benefits 8,606 4,494
Accrued warranty costs 9,004 5,740
Accrued commissions 7,383 3,721
Customer deposits 3,126 3,074
Accrued income taxes (includes $3,998 and $7,458 due to parent company) 4,647 10,835
Other accrued expenses (Note 2) 17,170 8,998
Due to affiliated companies 1,112 1,312
-------- --------
75,292 52,074
-------- --------
Deferred Income Taxes (Note 5) 435 222
-------- --------
Long-term Obligations (Note 6):
4.2% Subordinated convertible note, due to parent company 8,000 8,000
Other 631 47
-------- --------
8,631 8,047
-------- --------
Minority Interest 117 -
-------- --------
Commitments and Contingencies (Notes 2, 7, and 8)
Shareholders' Investment (Notes 3 and 4):
Common stock, $.01 par value, 50,000,000 shares authorized; 34,139,967 341 289
and 28,894,630 shares issued
Capital in excess of par value 213,513 144,787
Retained earnings 42,222 24,018
Treasury stock at cost, 5,625 shares (94) -
Cumulative translation adjustment 2,064 -
-------- --------
258,046 169,094
-------- --------
$342,521 $229,437
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Trex Medical Corporation 1998 Financial Statements
Consolidated Statement of Cash Flows
1
Year Ended
-------------------------------
<S> <C> <C> <C>
(In thousands) Oct. 3, Sept. 27, Sept. 28,
1998 1997 1996
- -------------------------------------------------------------------------- ---------- ---------- ----------
Operating Activities
Net income $ 18,204 $ 14,674 $ 9,344
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 7,381 4,996 3,195
Provision for losses on accounts receivable 697 170 273
Increase (decrease) in deferred income taxes 213 52 (26)
Other noncash items (375) (67) (32)
Changes in current accounts, excluding the effects of acquisitions:
Accounts receivable (12,783) (15,840) (7,681)
Inventories (21,014) (10,331) (2,105)
Other current assets (1,314) 470 (1,835)
Accounts payable (1,157) 1,302 106
Other current liabilities (9,039) 8,480 4,711
-------- -------- --------
Net cash provided by (used in) operating activities (19,187) 3,906 5,950
-------- -------- --------
Investing Activities
Acquisitions, net of cash acquired (Note 2) (37,446) - (36,888)
Purchases of property, plant, and equipment (4,503) (5,461) (3,071)
Other, net 610 - 16
-------- -------- --------
Net cash used in investing activities (41,339) (5,461) (39,943)
-------- -------- --------
Financing Activities
Net proceeds from issuance of Company common stock (Note 3) 68,684 4,141 67,757
Repayment of short-term borrowings and capital lease (1,323) - -
obligations
Other - (62) -
-------- -------- --------
Net cash provided by financing activities 67,361 4,079 67,757
-------- -------- --------
Exchange Rate Effect on Cash (616) - -
-------- -------- --------
Increase in Cash and Cash Equivalents 6,219 2,524 33,764
Cash and Cash Equivalents at Beginning of Year 36,490 33,966 202
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 42,709 $ 36,490 $ 33,966
======== ======== ========
Cash Paid For
Interest $ 336 $ 182 $ 1,373
Income taxes $ 17,635 $ 8,304 $ 1,294
5
<PAGE>
Trex Medical Corporation 1998 Financial Statements
Consolidated Statement of Cash Flows (continued)
Year Ended
-------------------------------
(In thousands) Oct. 3, Sept. 27, Sept. 28,
1998 1997 1996
- -------------------------------------------------------------------------- ---------- ---------- ----------
Noncash Activities
Fair value of assets of acquired companies $ 73,821 $ - $ 53,519
Cash paid for acquired companies (39,862) - (38,178)
-------- -------- --------
Liabilities assumed of acquired companies $ 33,959 $ - $ 15,341
======== ======== ========
Issuance of subordinated convertible note to parent company $ - $ - $ 42,000
Conversions of subordinated convertible note by parent company $ - $ - $ 34,000
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
Trex Medical Corporation 1998 Financial Statements
Consolidated Statement of Shareholders' Investment
Year Ended
-------------------------------
(In thousands) Oct. 3, Sept. 27, Sept. 28,
1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Common Stock, $.01 Par Value
Balance at beginning of year $ 289 $ 286 $ -
Net proceeds from issuance of Company common stock (Note 3) 52 3 57
Capitalization of Company - - 200
Conversions of subordinated convertible note by parent company (Note 6) - - 29
-------- -------- --------
Balance at end of year 341 289 286
-------- -------- --------
Capital in Excess of Par Value
Balance at beginning of year 144,787 139,667 -
Net proceeds from issuance of Company common stock (Note 3) 66,892 4,116 67,700
Issuance of stock under employees' and directors' stock plans 834 22 -
Tax benefit related to employees' and directors' stock plans 1,000 982 186
Issuance of subordinated convertible note to parent company (Note 6) - - (42,000)
Capitalization of Company - - 79,810
Conversions of subordinated convertible note by parent company (Note 6) - - 33,971
-------- -------- --------
Balance at end of year 213,513 144,787 139,667
-------- -------- --------
Retained Earnings
Balance at beginning of year 24,018 9,344 -
Net income 18,204 14,674 9,344
-------- -------- --------
Balance at end of year 42,222 24,018 9,344
-------- -------- --------
Treasury Stock
Balance at beginning of year - - -
Activity under employees' and directors' stock plans (94) - -
-------- -------- --------
Balance at end of year (94) - -
-------- -------- --------
Cumulative Translation Adjustment
Balance at beginning of year - - -
Translation adjustment 2,064 - -
-------- -------- --------
Balance at end of year 2,064 - -
-------- -------- --------
Net Parent Company Investment
Balance at beginning of year - - 80,010
Capitalization of Company - - (80,010)
-------- -------- --------
Balance at end of year - - -
-------- -------- --------
Total Shareholders' Investment $258,046 $169,094 $149,297
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
Trex Medical Corporation 1998 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Trex Medical Corporation (the Company) designs, manufactures, and markets
mammography equipment and minimally invasive digital breast-biopsy systems;
general-purpose and specialized medical X-ray equipment, including imaging
systems used during interventional cardiac procedures such as balloon
angioplasty; and dental X-ray systems.
Relationship with ThermoTrex Corporation and Principles of Consolidation
The Company was incorporated in September 1995 as a wholly owned
subsidiary of ThermoTrex Corporation. On October 2, 1995, ThermoTrex transferred
to the Company all of the outstanding shares of capital stock of Bennett X-ray
Corporation, in exchange for a $42,000,000 principal amount 4.2% subordinated
convertible note (Note 6). As of October 3, 1998, ThermoTrex had converted
$34,000,000 principal amount of this note. On October 16, 1995, ThermoTrex
transferred to the Company the assets, liabilities, and businesses of
ThermoTrex's Lorad division and ThermoTrex's research and development activities
pertaining to its Sonic CT(TM) system in exchange for 20,000,000 shares of the
Company's common stock. ThermoTrex acquired Lorad and Bennett in November 1992
and September 1995, respectively.
As of October 3, 1998, ThermoTrex owned 22,879,568 shares of the Company's
common stock, representing 67% of such stock outstanding. ThermoTrex is a
62%-owned subsidiary of Thermo Electron Corporation. As of October 3, 1998,
Thermo Electron owned 321 shares of the Company's common stock. The accompanying
financial statements include the accounts of the Company and its wholly owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest
September 30. References to fiscal 1998, 1997, and 1996 are for the years ended
October 3, 1998, September 27, 1997, and September 28, 1996, respectively.
Fiscal 1998 included 53 weeks; 1997 and 1996 each included 52 weeks.
Revenue Recognition
The Company recognizes revenues upon shipment of its products. The Company
provides a reserve for its estimate of warranty costs at the time of shipment.
Concentration of Credit Risk
The Company sells its products primarily to customers in the healthcare
industry. The Company does not normally require collateral or other security to
support its accounts receivable. Management does not believe that this
concentration of credit risk has, or will have, a significant negative impact on
the Company.
Stock-based Compensation Plans
The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plans (Note 4). Accordingly, no
accounting recognition is given to stock options granted at fair market value
until they are exercised. Upon exercise, net proceeds, including tax benefits
realized, are credited to equity.
Income Taxes
The Company and ThermoTrex entered into a tax allocation agreement under
which the Company was included in the consolidated federal income tax return
filed by ThermoTrex. The agreement provided that in years in which the Company
had taxable income and ThermoTrex owned at least 80% of the Company, it would
pay to ThermoTrex amounts comparable to the taxes the Company would have paid if
it had filed a separate tax return. Subsequent to the Company's sale of common
stock in December 1996 (Note 3), ThermoTrex's ownership of the Company was
reduced below 80% and, as a result, the Company is required to file its own
federal income tax return.
8
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
In accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," the Company recognizes deferred income taxes
based on the expected future tax consequences of differences between the
financial statement basis and the tax basis of assets and liabilities,
calculated using enacted tax rates in effect for the year in which the
differences are expected to be reflected in the tax return.
Earnings per Share
During the first quarter of fiscal 1998, the Company adopted SFAS No. 128,
"Earnings per Share." As a result, all previously reported earnings per share
have been restated. However, basic earnings per share equals the Company's
previously reported earnings per share for the fiscal 1997 and 1996 periods.
Basic earnings per share have been computed by dividing net income by the
weighted average number of shares outstanding during the period. Diluted
earnings per share have been computed assuming the conversion of the Company's
convertible note and the elimination of the related interest expense, and the
exercise of stock options, as well as their related income tax effects.
Cash and Cash Equivalents
At fiscal year-end 1998 and 1997, $34,054,000 and $34,587,000,
respectively, of the Company's cash equivalents were invested in a repurchase
agreement with Thermo Electron. Under this agreement, the Company in effect
lends excess cash to Thermo Electron, which Thermo Electron collateralizes with
investments principally consisting of corporate notes, U.S. government-agency
securities, commercial paper, money market funds, and other marketable
securities, in the amount of at least 103% of such obligation. The Company's
funds subject to the repurchase agreement are readily convertible into cash by
the Company. The repurchase agreement earns a rate based on the 90-day
Commercial Paper Composite Rate plus 25 basis points, set at the beginning of
each quarter. At October 3, 1998, the Company's cash and equivalents also
include cash held in accounts in the United States and foreign countries.
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out
basis) or market value and include materials, labor, and manufacturing overhead.
The components of inventories are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1998 1997
- ----------------------------------------------------------------------------------------- ------- --------
Raw Materials and Supplies $34,316 $ 25,691
Work in Process 18,195 12,755
Finished Goods 23,757 4,895
------- --------
$76,268 $ 43,341
======= ========
</TABLE>
9
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Property, Plant, and Equipment
The costs of additions and improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. The Company provides for
depreciation and amortization principally using the straight-line method over
the estimated useful lives of the property as follows: buildings, 29 to 31.5
years; machinery and equipment, 3 to 10 years; and leasehold improvements, the
shorter of the term of the lease or the life of the asset. Property, plant, and
equipment consists of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------- -------- ---------
Land $ 1,299 $ 1,299
Buildings 4,213 3,715
Leasehold Improvements 3,421 2,904
Machinery and Equipment 20,476 14,769
------- --------
29,409 22,687
Less: Accumulated Depreciation and Amortization 10,310 6,272
------- --------
$19,099 $ 16,415
======= ========
</TABLE>
Deferred Charges and Other Assets
Deferred charges and other assets in the accompanying balance sheet
includes the cost of specifically identifiable intangible assets. The intangible
assets are amortized using the straight-line method over their estimated useful
lives, which range from one to five years. At October 3, 1998, these assets were
$938,000, net of accumulated amortization of $277,000.
Cost in Excess of Net Assets of Acquired Companies
The excess of cost over the fair value of net assets of acquired companies
is amortized using the straight-line method over periods of 15 to 40 years.
Accumulated amortization was $8,817,000 and $5,807,000 as of October 3, 1998,
and September 27, 1997, respectively. The Company assesses the future useful
life of this asset whenever events or changes in circumstances indicate that the
current useful life has diminished. The Company considers the future
undiscounted cash flows of the acquired businesses in assessing the
recoverability of this asset. If impairment has occurred, any excess of carrying
value over fair value is recorded as a loss.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Presentation
Certain amounts in fiscal 1997 have been reclassified to conform to the
presentation in the fiscal 1998 financial statements.
10
<PAGE>
2. Acquisitions
In April 1998, the Company acquired the outstanding stock of Trophy
Radiologie S.A., a French manufacturer of dental and medical X-ray systems
specializing in digital dental technology. The purchase price consisted of
$23,979,000 in cash, the repayment of $8,707,000 of debt, and additional
consideration, not to exceed approximately $8,000,000, if Trophy achieves
certain future earnings targets through fiscal 1999.
In October 1997, the Company's XRE subsidiary acquired substantially all
of the assets of Digitec Corporation for $7,176,000 in cash, subject to certain
liabilities. Digitec is a manufacturer of physiological-monitoring equipment and
digital-image archiving and networking systems used in cardiac catheterization
procedures.
In September 1996, the Company acquired substantially all of the assets
and liabilities of Continental X-ray Corporation and affiliates, a manufacturer
of general-purpose and specialized X-ray systems, for approximately $18,400,000
in cash, net of cash acquired and including the repayment of debt.
In May 1996, the Company acquired substantially all of the assets and
liabilities of XRE Corporation, a Massachusetts-based manufacturer of X-ray
imaging systems used in the diagnosis and treatment of coronary artery disease
and other vascular conditions, for approximately $18,500,000 in cash, net of
cash acquired and including the repayment of debt.
These acquisitions have been accounted for using the purchase method of
accounting, and their results of operations have been included in the
accompanying financial statements from their respective dates of acquisition.
The aggregate cost of these acquisitions exceeded the estimated fair value of
the acquired net assets by $65,766,000, which is being amortized over periods of
15 to 40 years. Allocation of the purchase price for these acquisitions was
based on estimates of the fair value of the net assets acquired and, for
acquisitions made in fiscal 1998, is subject to adjustment upon finalization of
the purchase price allocation. To date, no information has been gathered that
would cause the Company to believe that the final allocations of the purchase
price will be materially different from the preliminary estimates.
Based on unaudited data, the following table presents selected financial
information for the Company, Trophy, Continental, and XRE on a pro forma basis,
assuming that the Company and Trophy had been combined since the beginning of
fiscal 1997 and the Company, Continental, and XRE had been combined since the
beginning of fiscal 1996. The effect of the acquisition of Digitec is not
included in the pro forma results as it was not material to the Company's
results of operations.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ----------
Revenues $ 305,078 $ 305,329 $ 191,351
Net Income 16,025 12,426 9,300
Earnings per Share:
Basic .50 .43 .29
Diluted .49 .43 .29
</TABLE>
The pro forma results are not necessarily indicative of future operations
or the actual results that would have occurred had the acquisition of Trophy
been made at the beginning of fiscal 1997, or the acquisitions of Continental
and XRE been made at the beginning of fiscal 1996.
In connection with the acquisition of Trophy, the Company has undertaken a
restructuring of the acquired business. This restructuring is expected to
primarily include costs for the termination of certain joint venture
arrangements, a reduction in staffing levels, and abandoned-facility payments.
In accordance with the requirements of Emerging Issues Task Force (EITF)
Pronouncement No. 95-3, as part of the cost of the acquisition, the Company
established a reserve of $2,156,000 for restructuring Trophy, of which the
Company expended $232,000 in fiscal 1998, primarily for severance payments.
Unresolved matters at October 3, 1998, primarily included terminating joint
ventures, completing planned severances, and the abandonment of excess
facilities. In accordance with the requirements of EITF 95-3, the Company will
finalize its restructuring plan for Trophy no later than one year from the date
of acquisition.
11
<PAGE>
2. Acquisitions (continued)
The Company also established a reserve as part of the cost of the
acquisition of Lorad for legal fees and other costs associated with a patent
infringement suit that existed prior to ThermoTrex's 1992 acquisition of Lorad.
The balance of this reserve was $1,100,000 and $2,000,000 at fiscal year-end
1998 and 1997, respectively. The Company expended $900,000 of such reserve,
primarily for legal fees in connection with the suit, during fiscal 1998. This
suit was brought by Fischer Imaging Corporation, alleging that Lorad infringes a
Fischer patent on a precision mammographic needle-biopsy system. In connection
with the organization of the Company, ThermoTrex agreed to indemnify the Company
for any and all cash damages under this lawsuit, with respect to sales occurring
prior to October 16, 1995, the date Lorad was transferred to the Company. Any
payments received under such indemnity would be treated as a contribution to
shareholders' investment. A second patent infringement lawsuit with respect to
Lorad's breast-biopsy system was filed by Fischer in April 1998. These lawsuits
have been consolidated into a single lawsuit. An unsuccessful resolution could
have a material adverse effect on the Company's future results of operations and
financial position.
Other accrued expenses in the accompanying balance sheet includes
$3,162,000 and $2,506,000 at fiscal year-end 1998 and 1997, respectively, for
estimated reserves associated with acquisitions, including Trophy (described
above) and the reserve for the patent infringement suit.
3. Common Stock
Sale of Common Stock
In February 1998, the Company sold 5,175,000 shares of its common stock in
a public offering at $13.75 per share, for net proceeds of $66,944,000.
In December 1996, the Company sold 300,000 shares of its common stock at
$14.50 per share, for net proceeds of $4,119,000.
In July 1996, the Company sold 2,875,000 shares of its common stock in an
initial public offering and 871,832 shares of its common stock in a concurrent
rights offering at $14.00 per share, for net proceeds of $49,068,000.
Reserved Shares
As of October 3, 1998, the Company had reserved 3,131,205 unissued shares
of its common stock for possible issuance under stock-based compensation plans
and conversion of the Company's 4.2% subordinated convertible note, due to
parent company.
4. Employee Benefit Plans
Stock-based Compensation Plans
Stock Option Plans
The Company has stock-based compensation plans for its key employees,
directors, and others, which permit the grant of a variety of stock and
stock-based awards as determined by the human resources committee of the
Company's Board of Directors (the Board Committee), including restricted stock,
stock options, stock bonus shares, or performance-based shares. To date, only
nonqualified stock options have been awarded under these plans. The option
recipients and the terms of options granted under these plans are determined by
the Board Committee. Generally, options granted to date are exercisable
immediately, but are subject to certain transfer restrictions and the right of
the Company to repurchase shares issued upon exercise of the options at the
exercise price, upon certain events. The restrictions and repurchase rights
lapse over various periods ranging from one to ten years, depending on the term
of the option, which may range from five to twelve years. Nonqualified stock
options may be granted at any price determined by the Board Committee, although
incentive stock options must be granted at not less than the fair market value
of the Company's common stock on the date of grant. To date, all options have
been granted at fair market
12
<PAGE>
4. Employee Benefit Plans (continued)
value. The Company also has a directors' stock option plan that provides for the
grant of stock options to outside directors pursuant to a formula approved by
the Company's shareholders. Options granted under this plan have the same
general terms as options granted under the stock-based compensation plans
described above, except that the restrictions and repurchase rights generally
lapse ratably over a four-year period and the option term is five years. In
addition to the Company's stock-based compensation plans, certain officers and
key employees may also participate in the stock-based compensation plans of
Thermo Electron and ThermoTrex.
A summary of the Company's stock option information is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
------------------ ------------------ -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Price Price
Number Number Number
of of of
(Shares in thousands) Shares Shares Shares
- ---------------------------------------------- -------- ---------- -------- ---------- --------- ----------
Options Outstanding, Beginning of Year 1,760 $12.24 1,381 $11.14 - $ -
Granted 427 13.79 512 15.82 1,401 11.14
Exercised (70) 11.57 (2) 11.00 - -
Forfeited (75) 13.32 (131) 14.58 (20) 11.00
----- ----- -----
Options Outstanding, End of Year 2,042 $12.55 1,760 $12.24 1,381 $11.14
===== ====== ===== ====== ===== ======
Options Exercisable 2,042 $12.55 1,760 $12.24 - -
===== ====== ===== ====== ===== ======
Options Available for Grant 286 238 519
===== ===== =====
</TABLE>
A summary of the status of the Company's stock options at October 3, 1998,
is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Options Outstanding and Exercisable
----------------------------------------------
Range of Exercise Prices Number Weighted Weighted
of Average Average
Shares Remaining Exercise
(In thousands) Contractual Life Price
- ------------------------------------------------------------ -------------- ---------------- --------------
$10.25 - $12.04 1,223 8.6 years $ 11.12
12.05 - 13.82 388 8.5 years 13.06
13.83 - 15.61 191 7.9 years 14.80
15.62 - 17.40 240 9.9 years 17.22
-----
$10.25 - $17.40 2,042 8.7 years $ 12.55
=====
</TABLE>
Employee Stock Purchase Program
Effective November 1, 1997, substantially all of the Company's full-time
employees are eligible to participate in an employee stock purchase program
sponsored by the Company and Thermo Electron, under which employees can purchase
shares of the Company's and Thermo Electron's common stock. Prior to November 1,
1997, the program was sponsored by ThermoTrex and Thermo Electron. Under this
program, the applicable shares of common stock can be purchased at the end of a
12-month period at 95% of the fair market value at the beginning of the period,
and the shares purchased are subject to a six-month resale restriction.
Beginning November 1, 1998, the applicable shares of
13
<PAGE>
4. Employee Benefit Plans (continued)
common stock can be purchased at 85% of the lower of the fair market value at
the beginning or end of the period, and the shares purchased are subject to a
one-year resale restriction. Shares are purchased through payroll deductions of
up to 10% of each participating employee's gross wages.
Pro Forma Stock-based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-based Compensation," which sets forth a fair-value
based method of recognizing stock-based compensation expense. As permitted by
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account
for its stock-based compensation plans. Had compensation cost for awards granted
after fiscal 1995 under the Company's stock-based compensation plans been
determined based on the fair value at the grant dates consistent with the method
set forth under SFAS No. 123, the effect on the Company's net income and
earnings per share would have been as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ----------
Net Income:
As reported $18,204 $14,674 $ 9,344
Pro forma 17,200 14,071 9,102
Basic Earnings per Share:
As reported .57 .51 .40
Pro forma .53 .49 .39
Diluted Earnings per Share:
As reported .56 .50 .39
Pro forma .53 .48 .38
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to October 1, 1995, the resulting pro forma compensation
expense may not be representative of the amount to be expected in future years.
Pro forma compensation expense for options granted is reflected over the vesting
period; therefore, future pro forma compensation expense may be greater as
additional options are granted.
The weighted average fair value per share of options granted was $4.96,
$7.88, and $5.47 in fiscal 1998, 1997, and 1996, respectively. The fair value of
each option grant was estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ----------
Volatility 28% 26% 29%
Risk-free Interest Rate 5.5% 6.5% 6.4%
Expected Life of Options 5.1 years 8.5 years 7.8 years
</TABLE>
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions including expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
14
<PAGE>
4. Employee Benefit Plans (continued)
401(k) Savings Plan
The majority of the Company's full-time employees are eligible to
participate in Thermo Electron's 401(k) savings plan. Contributions to the
401(k) savings plan are made by both the employee and the Company. Company
contributions are based upon the level of employee contributions. The Company
contributed and charged to expense for this plan $1,340,000, $1,080,000, and
$701,000 in fiscal 1998, 1997, and 1996, respectively.
5. Income Taxes
The components of income before provision for income taxes are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------ -------- --------- --------
Domestic $29,873 $ 27,464 $17,512
Foreign (33) - -
------- -------- -------
$29,840 $ 27,464 $17,512
======= ======== =======
The components of the provision for income taxes are as follows:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------ -------- --------- --------
Currently Payable:
Federal $ 9,035 $ 9,913 $ 6,324
State 2,588 2,677 1,866
Foreign 132 - -
------- -------- -------
11,755 12,590 8,190
------- -------- -------
Deferred (Prepaid):
Federal (92) 172 (16)
State (27) 28 (6)
------- -------- -------
(119) 200 (22)
------- -------- -------
$11,636 $ 12,790 $ 8,168
======= ======== =======
The Company receives a tax deduction upon exercise of nonqualified stock
options by its employees for the difference between the exercise price and the
market price of the underlying common stock on the date of exercise. The
provision for income taxes that is currently payable does not reflect
$1,000,000, $982,000, and $186,000 of such benefits that have been allocated to
capital in excess of par value in fiscal 1998, 1997, and 1996, respectively.
15
<PAGE>
5. Income Taxes (continued)
The provision for income taxes in the accompanying statement of income
differs from the provision calculated by applying the statutory federal income
tax rate of 35% to income before provision for income taxes due to the
following:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------ -------- --------- --------
Provision for Income Taxes at Statutory Rate $10,444 $ 9,612 $ 6,129
Increases (Decreases) Resulting From:
State income taxes, net of federal tax 1,665 1,758 1,209
Amortization of cost in excess of net assets of acquired companies 566 541 541
Research and development tax credits (603) - -
Other, net (436) 879 289
------- -------- -------
$11,636 $ 12,790 $ 8,168
======= ======== =======
Prepaid income taxes and deferred income taxes in the accompanying balance
sheet consist of the following:
(In thousands) 1998 1997
- ------------------------------------------------------------------------------ -------- ---------
Prepaid Income Taxes:
Reserves and accruals $3,991 $ 3,919
Inventory basis difference 2,215 1,375
Net operating loss carryforward 1,684 -
Accrued compensation 273 755
Other, net - 98
------ -------
8,163 6,147
Less: Valuation allowance 1,266 -
------ -------
$6,897 $ 6,147
====== =======
Deferred Income Taxes:
Depreciation and amortization $ 853 $ 222
====== =======
</TABLE>
Included in deferred income taxes in the accompanying fiscal 1998 balance
sheet is $418,000 of long-term prepaid income taxes related to net operating
losses carryforwards, net of valuation allowance.
The valuation allowance in fiscal 1998 relates to federal net operating
loss carryforwards acquired as part of the acquisition of Trophy (Note 2). The
utilization of such losses is subject to various limitations. As of October 3,
1998, the Company had approximately $5,000,000 of federal loss carryforwards
which expire from 2005 through 2013. Any tax benefit resulting from the use of
the loss carryforwards will first be used to reduce cost in excess of net assets
of acquired companies.
6. Long-term Obligations
In September 1995, ThermoTrex acquired all of the outstanding capital
stock of Bennett for $42,865,000 in cash. On October 2, 1995, ThermoTrex
transferred to the Company all of the outstanding capital stock of Bennett in
exchange for a $42,000,000 principal amount 4.2% subordinated convertible note,
due 2000, convertible into shares of the Company's common stock at $11.79 per
share. In fiscal 1996, ThermoTrex converted $34,000,000 principal amount of this
note.
16
<PAGE>
6. Long-term Obligations (continued)
The Company's Trophy subsidiary has an interest-free loan of $796,000
issued by the French government for the funding of research and development
costs associated with developing the RVG(TM) Digital System, due in installments
through fiscal 2001. In addition, the Company has certain borrowings relating to
equipment financing.
The annual requirements for these long-term obligations as of October 3,
1998, are $435,000 in fiscal 1999; $8,335,000 in fiscal 2000; $112,000 in fiscal
2001; $25,000 in fiscal 2002; $27,000 in fiscal 2003; and $132,000 in fiscal
2004 and thereafter. Total requirements of long-term obligations are $9,066,000.
In connection with the acquisition of Trophy, the Company has a line of
credit, denominated in German deutsche marks, under which up to $480,000 may be
borrowed at an interest rate of 7.5%, which expires in March 2000. No borrowings
were outstanding as of October 3, 1998.
7. Commitments and Contingencies
Commitments
The Company leases portions of its office and operating facilities under
various operating lease arrangements. The accompanying statement of income
includes expenses from operating leases of $2,525,000, $1,912,000, and $960,000
in fiscal 1998, 1997, and 1996, respectively. Future minimum payments due under
noncancelable operating leases at October 3, 1998, are $2,023,000 in fiscal
1999; $1,959,000 in fiscal 2000; $1,948,000 in fiscal 2001; $1,978,000 in fiscal
2002; $1,917,000 in fiscal 2003; and $3,606,000 in fiscal 2004 and thereafter.
Total future minimum lease payments are $13,431,000. The Company also has an
operating lease arrangement with a related party as discussed in Note 8.
Contingencies
In October 1998, a former employee of the Company's Lorad division filed a
lawsuit against the Company alleging theft of trade secrets related to the
high-transmission cellular (HTC)(TM) grid, a component for some of the Company's
mammography systems.
Trophy has filed a lawsuit against Schick Technologies, Inc. alleging
infringement of a Trophy patent relating to dental X-ray apparatus. Schick has
filed a counterclaim against Trophy alleging infringement of a Schick patent
which also relates to dental X-ray apparatus. Each of the parties is seeking a
declaration that the opposing party's patent is invalid, a permanent injunction,
treble damages, and attorneys' fees and expenses.
See Note 2 for a discussion of certain other litigation.
The Company intends to vigorously defend itself against these lawsuits.
However, given the inherent uncertainties of dispute resolutions, management
cannot predict the outcome of these matters. An unfavorable outcome of one or
more of these matters could have a material adverse effect on the Company's
future results of operations and financial condition.
8. Related-party Transactions
Corporate Services Agreement
The Company and Thermo Electron have a corporate services agreement under
which Thermo Electron's corporate staff provides certain administrative
services, including certain legal advice and services, risk management, certain
employee benefit administration, tax advice and preparation of tax returns,
centralized cash management, and certain financial and other services, for which
the Company currently pays Thermo Electron annually an amount equal to 0.8% of
the Company's revenues. In calendar 1997 and 1996, the Company paid an amount
equal to 1.0% of the Company's revenues. Prior to January 1, 1996, the Company
paid an annual fee equal to 1.2% of the Company's revenues. For these services,
the Company was charged $2,264,000, $2,293,000, and $1,567,000 in fiscal 1998,
1997, and 1996, respectively. The annual fee is reviewed and adjusted annually
by mutual agreement of the parties.
17
<PAGE>
8. Related-party Transactions (continued)
Management believes that the service fee charged by Thermo Electron is
reasonable and that such fees are representative of the expenses the Company
would have incurred on a stand-alone basis. The corporate services agreement is
renewed annually but can be terminated upon 30 days' prior notice by the Company
or upon the Company's withdrawal from the Thermo Electron Corporate Charter (the
Thermo Electron Corporate Charter defines the relationship among Thermo Electron
and its majority-owned subsidiaries). For additional items such as employee
benefit plans, insurance coverage, and other identifiable costs, Thermo Electron
charges the Company based upon costs attributable to the Company.
Related-party Revenues
ThermoLase Corporation, a majority-owned subsidiary of ThermoTrex, has
engaged the Company to design and manufacture the laser used in ThermoLase's
laser-based hair-removal system. During fiscal 1998, 1997, and 1996, the Company
recorded $2,902,000, $11,390,000, and $8,549,000, respectively, of revenue under
this arrangement.
Under an arrangement with Thermedics Detection Inc., a majority-owned
subsidiary of Thermo Electron, the Company manufactures an X-ray source,
pursuant to written purchase orders, that is used as a component in a
fill-measuring device produced by Thermedics Detection. During fiscal 1998,
1997, and 1996, the Company recorded $406,000, $37,000, and $361,000,
respectively, of revenues under this arrangement.
Vendor Agreement
During 1995, the Company placed an order with Thermo Electron's wholly
owned Tecomet division for $2,500,000 for the design and production of
high-transmission cellular grids, which are expected to be received through
fiscal 1999. During fiscal 1998, 1997, and 1996, the Company purchased
high-transmission cellular grids valued at $486,000, $678,000, and $397,000,
respectively, from Tecomet under this arrangement. During fiscal 1998, the
Company purchased additional grids from Tecomet for $311,000, under other
arrangements.
Research and Development Agreement
In October 1995, the Company and ThermoTrex entered into a license
agreement under which the Company undertook to fund approximately $6.0 million
of ThermoTrex's research and development efforts related to direct-detection
digital imaging technology in certain medical imaging fields. In fiscal 1998,
1997, and 1996, the Company recorded $2,200,000, $2,000,000, and $1,800,000,
respectively, of expense under this agreement. As a result of a reevaluation of
limited resources, the Company has elected to discontinue funding these efforts.
Operating Lease
The Company leases an office and operating facility from a realty trust
controlled by an employee under a noncancelable operating lease arrangement
expiring in fiscal 2012. The accompanying statement of income includes expense
from this operating lease of $982,000, $982,000, and $286,000 in fiscal 1998,
1997, and 1996, respectively. Future minimum payments due under this
noncancelable operating lease at October 3, 1998, are $982,000 per year in
fiscal 1999 through 2003, and $8,513,000 in fiscal 2004 and thereafter. Total
future minimum lease payments are $13,423,000.
Additionally, the Company leased certain office space from ThermoTrex on a
month-to-month basis through April 1998. The accompanying statement of income
includes expense from this operating lease of $58,000, $43,000, and $7,000 in
fiscal 1998, 1997, and 1996, respectively.
Subordinated Convertible Note
The Company issued a subordinated convertible note to ThermoTrex as
discussed in Note 6.
Repurchase Agreement
The Company invests excess cash in a repurchase agreement with Thermo
Electron as discussed in Note 1.
18
<PAGE>
9. Geographical Data, Export Revenues, and Significant Customer
The Company is engaged in one business segment: designing, manufacturing,
and marketing mammography equipment and minimally invasive digital breast-biopsy
systems; general purpose and specialized medical X-ray equipment; and dental
X-ray systems. Sales to one customer accounted for 14%, 17%, and 11% of the
Company's total revenues in fiscal 1998, 1997, and 1996, respectively. This
customer was acquired by another corporation in September 1998 and, in the
fourth quarter of fiscal 1998, agreed to pay the Company a one-time fee of
$4,700,000 in lieu of purchasing products for which it was contractually
obligated, which was recorded as revenue in the accompanying fiscal 1998
statement of income. As a result of the acquisition of this customer, the
Company does not expect there will be any future sales to this customer. The
following table shows data for the Company by geographical area:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Revenues:
United States $ 244,790 $ 229,294 $150,195
France 19,163 - -
Other 3,011 - -
--------- --------- --------
$ 266,964 $ 229,294 $150,195
========= ========= ========
Income Before Provision for Income Taxes:
United States (a) $ 27,566 $ 25,346 $ 17,535
France 416 - -
Other (411) - -
--------- --------- --------
Total operating income 27,571 25,346 17,535
Interest and other income (expense), net 2,269 2,118 (23)
--------- --------- --------
$ 29,840 $ 27,464 $ 17,512
========= ========= ========
Identifiable Assets:
United States $ 242,801 $ 194,975 $169,707
France 54,346 - -
Other 10,995 - -
Corporate and eliminations (b) 34,379 34,462 34,354
--------- --------- --------
$ 342,521 $ 229,437 $204,061
========= ========= ========
Export Revenues Included in United States Revenues Above (c): $ 46,168 $ 39,035 $ 33,088
========= ========= ========
</TABLE>
- ------------
(a) Includes corporate general and administrative expenses.
(b) Primarily cash and cash equivalents.
(c) In general, export revenues are denominated in U.S. dollars.
19
<PAGE>
10. Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, current maturities of
long-term obligations, due to affiliated companies, and its 4.2% subordinated
convertible note. The carrying amounts of these financial instruments, excluding
its 4.2% subordinated convertible note, approximate fair value due to their
short-term nature. The fair value of the Company's $8,000,000 principal amount
4.2% subordinated convertible note (Note 6), determined based on quoted market
prices, was $9,290,000 and $11,605,000 at fiscal year-end 1998 and 1997,
respectively, and exceeded the carrying amount primarily due to the market price
of the Company's common stock exceeding the conversion price of the convertible
note at year end.
11. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------ -------- --------- --------
Basic
Net Income $18,204 $14,674 $9,344
------- ------- -------
Weighted Average Shares 32,213 28,826 23,365
------- ------- -------
Basic Earnings per Share $ .57 $ .51 $ .40
======= ======= ======
Diluted
Net Income $18,204 $14,674 $9,344
Effect of Convertible Note 202 202 828
------- ------- -------
Income Available to Common Shareholders, as Adjusted $18,406 $14,876 $10,172
------- ------- -------
Weighted Average Shares 32,213 28,826 23,365
Effect of:
Convertible note 679 679 2,787
Stock options 240 180 100
------- ------- -------
Weighted Average Shares, as Adjusted 33,132 29,685 26,252
------- ------- -------
Diluted Earnings per Share $ .56 $ .50 $ .39
======= ======= =======
</TABLE>
The computation of diluted earnings per share for each period excludes the
effect of assuming the exercise of certain outstanding stock options because the
effect would be antidilutive. As of October 3, 1998, there were 335,000 of such
options outstanding, with exercise prices ranging from $15.33 to $17.40 per
share.
20
<PAGE>
12. Unaudited Quarterly Information
<TABLE>
<CAPTION>
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
1998 First (a) Second Third (b) Fourth
- ---------------------------------------------------------------- ---------- ---------- ---------- ----------
Revenues $64,121 $67,347 $72,100 $63,396
Gross Profit 27,011 27,883 30,939 29,161
Net Income 4,361 5,225 5,628 2,990
Earnings per Share:
Basic .15 .16 .17 .09
Diluted .15 .16 .16 .09
1997 First Second Third Fourth
- ---------------------------------------------------------------- ---------- ---------- ---------- ----------
Revenues $54,915 $58,642 $58,103 $57,634
Gross Profit 21,465 21,738 23,285 23,744
Net Income 3,286 3,366 3,660 4,362
Earnings per Share:
Basic .11 .12 .13 .15
Diluted .11 .11 .13 .15
(a) Reflects the October 1997 acquisition of Digitec.
(b) Reflects the April 1998 acquisition of Trophy.
</TABLE>
13. Subsequent Event
In November 1998, the Company's employees, excluding its officers and
directors, were offered the opportunity to exchange previously granted options
to purchase shares of Company common stock for an amount of options equal to
half of the number of options previously held, exercisable at a price equal to
the fair market value at the time of the exchange offer. Holders of options to
acquire 206,000 shares at a weighted average exercise price of $16.96 elected to
participate in this exchange and, as a result, received options to purchase
103,000 shares of Company common stock at $10.98 per share. The other terms of
the new options are the same as the exchanged options except that the holders
may not sell shares purchased pursuant to such new options for six months from
the exchange date.
21
<PAGE>
Trex Medical Corporation 1998 Financial Statements
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Trex Medical Corporation:
We have audited the accompanying consolidated balance sheet of Trex
Medical Corporation (a Delaware corporation and 67%-owned subsidiary of
ThermoTrex Corporation) and subsidiaries as of October 3, 1998, and September
27, 1997, and the related consolidated statements of income, shareholders'
investment, and cash flows for each of the three years in the period ended
October 3, 1998. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Trex Medical
Corporation and subsidiaries as of October 3, 1998, and September 27, 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended October 3, 1998, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
December 21, 1998
22
<PAGE>
Trex Medical Corporation 1998 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed immediately after this Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the heading "Forward-looking Statements."
Overview
The Company designs, manufactures, and markets mammography equipment and
minimally invasive digital breast-biopsy systems; general-purpose and
specialized medical X-ray equipment, including imaging systems used during
interventional cardiac procedures such as balloon angioplasty; and dental X-ray
systems. The Company sells its systems worldwide principally through a network
of independent dealers. In addition, the Company manufactures breast-biopsy and
X-ray systems as an original equipment manufacturer (OEM) for other medical
equipment companies such as the General Electric Company (GE). The Company has
five operating units: Lorad Corporation, a manufacturer of mammography and
digital breast-biopsy systems; Bennett X-ray Corporation, a manufacturer of
general-purpose X-ray, mammography, and breast-biopsy equipment; XRE
Corporation, a manufacturer of X-ray imaging systems used in the diagnosis and
treatment of coronary artery disease and other vascular conditions and which
includes the operations of Digitec Corporation, a manufacturer of
physiological-monitoring equipment and digital-image archiving and networking
systems used in cardiac catherization procedures, acquired in October 1997;
Continental X-ray Corporation, a manufacturer of general-purpose and specialized
X-ray systems; and Trophy Radiologie S.A., a French manufacturer of dental and
medical X-ray systems specializing in digital dental technology, acquired in
April 1998.
The Company conducts all of its manufacturing operations (other than those
of Trophy) in the United States, and sells its products worldwide. The Company
anticipates that an increasing amount of its revenues will be from sales to
customers outside the United States. Although the Company seeks to charge its
customers in the same currency as its operating costs, the Company's financial
performance and competitive position can be affected by currency exchange rate
fluctuations affecting the relationship between the U.S. dollar and foreign
currencies. The Company may use forward contacts to reduce its exposure to
currency fluctuations.
Results of Operations
Fiscal 1998 Compared With Fiscal 1997
Revenues increased 16% to $267.0 million in fiscal 1998 from $229.3
million in fiscal 1997, due to increased sales at a majority of the Company's
divisions. Revenues increased $28.3 million due to the acquisitions of Trophy in
April 1998 and Digitec in October 1997 (Note 2). Excluding the impact of
revenues from acquisitions, revenues increased 4% in fiscal 1998. Revenues
increased at XRE due to a $9.0 million shipment to a customer in Russia and, to
a lesser extent, an increase in direct and dealer sales of cardiac
catheterization laboratories due to higher demand. These increases were offset
in part by a decrease in international sales of cardiac catherization
laboratories to OEM customers due to XRE shifting from OEM to direct and dealer
sales. Revenues at Lorad increased as a result of higher demand for mammography
systems and mammography system upgrade components and, to a lesser extent,
increased sales of mobile X-ray systems. These increases at Lorad were offset in
part by a decline in sales of its laser systems and components to ThermoLase, a
majority-owned subsidiary of ThermoTrex (Note 8). Revenues at Bennett increased
primarily due to higher demand for mammography systems. These increases at
Bennett were offset in part
23
<PAGE>
Fiscal 1998 Compared With Fiscal 1997 (continued)
by a decline in sales of general-purpose X-ray systems to international
customers, due in part to the strengthening of the U.S. dollar relative to
foreign currencies in countries in which the Company operates and the economic
crisis in the Far East. The increase in revenues at each of the Company's
divisions discussed above, was offset in part by a decrease in revenues at
Continental, primarily due to a decrease in sales of electrophysiology
equipment. Revenue growth is expected to significantly decrease in the first
half of fiscal 1999 primarily as a result of a slowing of sales of breast-biopsy
systems and the effect in fiscal 1998 of the large Russian sale. As discussed in
Note 9 to the Consolidated Financial Statements, the Company does not expect
that there will be any future sales to a major customer.
The gross profit margin increased to 43% in fiscal 1998 from 39% in fiscal
1997, primarily due to increased sales of higher-margin products at a majority
of the Company's operations as well as the effect on gross profit of $4.7
million due from an OEM customer in lieu of purchasing products for which it had
been contractually obligated (Note 9). To a lesser extent, the gross profit
margin increased due to manufacturing efficiencies, primarily at Bennett.
Selling, general, and administrative expenses as a percentage of revenues
increased to 21% in fiscal 1998 from 18% in fiscal 1997, primarily due to the
inclusion of expenses of Trophy, which has higher costs as a percentage of
revenues. Research and development expenses increased to $32.4 million in fiscal
1998 from $24.7 million in fiscal 1997, primarily due to increased spending at
XRE and Lorad, as a result of the Company's continuing efforts to develop and
commercialize new products, including the full-field digital mammography system
and direct-detection X-ray sensor, as well as enhancing existing systems. To a
lesser extent, research and development expenses increased due to the inclusion
of expenses of acquired businesses.
Interest income increased to $2.6 million in fiscal 1998 from $1.9 million
in fiscal 1997, primarily due to interest income earned on the invested proceeds
from the Company's sale of common stock in February 1998 (Note 3). Interest
expense, related party, was $0.3 million in both periods.
The effective tax rates were 39% and 47% in fiscal 1998 and 1997,
respectively. The effective tax rate decreased in fiscal 1998 primarily due to
research and development tax credits and the resolution of certain tax
contingencies. The effective tax rates exceeded the statutory federal income tax
rate primarily due to the impact of state income taxes and nondeductible
amortization of cost in excess of net assets of acquired companies.
The Company is a defendant in two patent infringement lawsuits (Note 2)
and a lawsuit alleging the Company misappropriated certain other technology
owned by a third party (Note 7). An unsuccessful resolution of one or more of
these matters could have a material adverse effect on the Company's future
results of operations and financial position.
Fiscal 1997 Compared With Fiscal 1996
Revenues increased 53% to $229.3 million in fiscal 1997 from $150.2
million in fiscal 1996. Revenues increased $56.2 million due to the acquisitions
of XRE in May 1996 and Continental in September 1996 (Note 2). Revenues at Lorad
increased 20% in fiscal 1997 from fiscal 1996 as a result of increased sales of
higher-priced mammography systems, increased demand for biopsy systems, and
increased sales of lasers to ThermoLase (Note 8), offset in part by a decline in
demand for nondestructive testing systems.
The gross profit margin declined to 39% in fiscal 1997 from 42% in fiscal
1996, primarily due to sales of certain recently introduced products that
incurred high start-up production costs, the inclusion of lower-margin revenues
at Continental, and the mix of products sold at Bennett.
Selling, general, and administrative expenses as a percentage of revenues
was 18% in both periods. Research and development expenses increased $5.8
million to $24.7 million in fiscal 1997 from $18.9 million in fiscal 1996.
Research and development expenses increased $5.6 million due to the acquisitions
of XRE and Continental and the Company's continued efforts to develop and
commercialize new products including the full-field digital mammography system
and direct-detection X-ray sensor, as well as enhancements of existing systems.
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Fiscal 1997 Compared With Fiscal 1996 (continued)
Interest income increased to $1.9 million in fiscal 1997 from $1.3 million
in fiscal 1996, primarily due to interest income earned on the invested proceeds
from the Company's initial public offering in July 1996 (Note 3), net of cash
paid for the September 1996 acquisition of Continental. Interest expense,
related party, decreased to $0.3 million in fiscal 1997 from $1.4 million in
fiscal 1996 as a result of the conversion by ThermoTrex of $34.0 million
principal amount of the Company's 4.2% subordinated convertible note, primarily
in the fourth quarter of fiscal 1996 (Note 6).
The effective tax rate was 47% in fiscal 1997 and fiscal 1996. The
effective tax rates exceeded the statutory federal income tax rate primarily due
to the impact of state income taxes and nondeductible amortization of cost in
excess of net assets of acquired companies.
Liquidity and Capital Resources
Consolidated working capital was $125.9 million at October 3, 1998,
compared with $79.6 million at September 27, 1997. Included in working capital
are cash and cash equivalents of $42.7 million at October 3, 1998, compared with
$36.5 million at September 27, 1997. Net cash used in operating activities was
$19.2 million in fiscal 1998. The Company funded a $21.0 million increase in
inventories due to lower than expected sales in the fourth quarter of fiscal
1998 and, to a lesser extent, higher inventories in anticipation of new product
releases. The Company funded a $12.8 million increase in accounts receivable in
fiscal 1998, due to slower customer payment patterns as a result of increased
export and direct sales at the majority of the Company's operations and trends
in the healthcare industry, extended payment terms to a significant customer
(Note 9), and a shift from OEM sales to direct and dealer sales at XRE. The
Company used $9.0 million of cash during fiscal 1998 to reduce other current
liabilities, primarily due to the timing of payments.
The Company's investing activities used $41.3 million in cash during
fiscal 1998 including $37.4 million, net of cash acquired, for the acquisition
of Trophy and Digitec (Note 2). The Company expended $4.5 million on purchases
of property, plant, and equipment during fiscal 1998 and expects to make capital
expenditures of approximately $7.0 million during fiscal 1999.
The Company's financing activities provided $67.4 million of cash in
fiscal 1998. The Company's sale of common stock in February 1998 provided net
proceeds of $66.9 million (Note 3).
Subsequent to year end, the Company's Board of Directors authorized the
repurchase by the Company, through December 22, 1999, of up to $25.0 million of
its common stock in the open market, or in negotiated transactions. Through
December 22, 1998, the Company had repurchased $15.0 million of its common
stock, which was funded from working capital.
Although the Company generally expects to have positive cash flow from its
existing operations, the Company may require significant amounts of cash for any
acquisition of a business or technology. The Company expects that it will
finance any such acquisitions through a combination of internal funds and/or
short-term borrowings from ThermoTrex or Thermo Electron Corporation, although
it has no agreement with these companies to ensure that funds will be available
on acceptable terms or at all. The Company believes its existing resources are
sufficient to meet the capital requirements of its existing operations for the
foreseeable future.
Market Risk
The Company is exposed to market risk from changes in equity prices,
interest rates, and foreign currency exchange rates, which could affect its
future results of operations and financial condition. The Company manages its
exposure to these risks through its regular operating and financing activities.
25
<PAGE>
Market Risk (continued)
Equity Prices
The Company's convertible obligation is sensitive to fluctuations in the
price of the Company's common stock into which the obligation is convertible.
Changes in equity prices would result in changes in the fair value of the
Company's convertible obligation due to the difference between the current
market price and the market price at the date of issuance of the financial
instrument. A 10% increase in the fiscal year-end 1998 market equity prices
would result in a negative impact of $0.5 million on the net fair value of the
Company's price-sensitive equity financial instruments.
Interest Rates
The Company's long-term obligations are sensitive to changes in interest
rates. Interest rate changes would result in a change in the fair value of these
financial instruments due to the difference between the market interest rate and
the rate at the date of issuance of the financial instrument. A 10% decrease in
fiscal year-end 1998 market interest rates would result in a negative impact of
$0.1 million on the net fair value of the Company's interest-sensitive financial
instruments.
Foreign Currency Exchange Rates
The Company views its investment in its foreign subsidiaries as long-term.
The Company's investment in its foreign subsidiaries is sensitive to
fluctuations in foreign currency exchange rates. The functional currencies of
the Company's foreign subsidiaries are principally denominated in French francs.
The effect of a change in foreign exchange rates on the Company's net investment
in its foreign subsidiaries is recorded as a separate component of shareholders'
investment. A 10% depreciation in fiscal year-end 1998 functional currencies,
relative to the U.S. dollar, would result in a $0.6 million reduction of the
Company's shareholders' investment.
Year 2000
The Company continues to assess the potential impact of the year 2000 on
the Company's internal business systems, products, and operations. The Company's
year 2000 initiatives include (i) testing and upgrading internal business
systems and facilities; (ii) testing and developing necessary upgrades for the
Company's current products and certain discontinued products; (iii) contacting
key suppliers, vendors, and customers to determine their year 2000 compliance
status; and (iv) developing contingency plans.
The Company's State of Readiness
The Company has tested and evaluated its critical information-technology
systems for year 2000 compliance, including its significant computer systems,
software applications, and related equipment. The Company is currently in the
process of upgrading or replacing its noncompliant systems. The Company expects
that all of its material information-technology systems will be year 2000
compliant by the end of 1999. The Company is also evaluating the potential year
2000 impact on its facilities, including its buildings and utility systems. Any
problems that are identified will be prioritized and remediated based on their
assigned priority. The Company will continue periodic testing of its critical
internal business systems and facilities in an effort to minimize operating
disruptions due to year 2000 issues. The Company believes that all of the
material products that it currently sells are year 2000 compliant. However, as
many of the Company's products are complex, interact with third-party products,
and operate on computer systems that are not under the Company's control, there
can be no assurance that the Company has identified all of the year 2000
problems with its current products. The Company believes that certain of its
older products, which it no longer manufactures or sells, may not be year 2000
compliant. The Company is continuing to test and evaluate such products and may
offer upgrades or alternative products where reasonably practicable.
26
<PAGE>
Year 2000 (continued)
The Company is in the process of identifying and contacting suppliers,
vendors, and customers that are believed to be significant to the Company's
business operations in order to assess their year 2000 readiness. As part of
this effort, the Company has developed and is distributing questionnaires
relating to year 2000 compliance to its significant suppliers, vendors, and
customers. The Company intends to follow-up and monitor the year 2000 compliance
progress of significant suppliers, vendors, and customers that indicate that
they are not year 2000 compliant or that do not respond to the Company's
questionnaires.
Contingency Plans
The Company intends to develop a contingency plan that will allow its
primary business operations to continue despite disruptions due to year 2000
issues. These plans may include identifying and securing other suppliers,
increasing inventories, and modifying production facilities and schedules. As
the Company continues to evaluate the year 2000 readiness of its business
systems and facilities, products, and significant suppliers, vendors, and
customers, it will modify and adjust its contingency plan as may be required.
Estimated Costs to Address the Company's Year 2000 Issues
To date, costs incurred in connection with the year 2000 issue have not
been material. The Company does not expect total year 2000 remediation costs to
be material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance. The Company does
not track internal costs incurred for its year 2000 compliance project. Such
costs are principally for related payroll costs for its information systems
employees.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
issues will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate using,
third-party software or hardware. In addition, certain of the Company's older
products, which it no longer manufactures or sells, may not be year 2000
compliant, which may expose the Company to claims. If any of the Company's
significant suppliers, vendors, or customers experience business disruptions due
to year 2000 issues, the Company might also be materially adversely affected.
The Company's research and development, production, distribution, financial,
administrative, and communications operations might be disrupted. There is
expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. Any unexpected costs or delays arising
from the year 2000 issue could have a significant adverse impact on the
Company's business, operations, and financial condition.
27
<PAGE>
Trex Medical Corporation 1998 Financial Statements
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause its actual
results in fiscal 1999 and beyond to differ materially from those expressed in
any forward-looking statements made by, or on behalf of, the Company.
President and Chief Executive Officer Vacancy. The president and chief
executive officer of the Company resigned in December 1998. His position is
being filled on an interim basis by Gary S. Weinstein and John T. Keiser, who
will serve as co-chief executive officers. The Company's future success depends
in part on whether the Company can attract and retain a highly qualified
permanent replacement. The Company faces significant competition for the
services of such a person. There can be no assurance that the Company will be
able to find a new president and chief executive officer with the background and
expertise necessary to support the development of the Company's businesses. The
failure to find such a replacement could have a material adverse affect on the
financial position and results of operations of the Company.
Dependence on Capital Spending Policies. The Company's customers include
large institutions such as hospitals and medical research centers. The capital
spending policies of these customers can have a significant effect on the demand
for the Company's products and the timing of the Company's sales. Such policies
are based on a wide variety of factors, including the resources available to
make such purchases, the spending priorities assigned to various types of
medical equipment or techniques, and policies regarding capital expenditures.
Any decrease in capital spending by these customers could have a material
adverse effect on the Company's business and results of operations. In addition,
sales are dependent in part on completion of construction and upgrade projects
undertaken at healthcare facilities in preparation for delivery of the Company's
products. A delay in construction could cause a delay in delivery and the timing
of sales, which can lead to volatility in the Company's earnings.
Technological Change and New Products. The market for the Company's
products is characterized by rapid and significant technological change,
evolving industry standards, and newer product introductions. Many of the
Company's products are technologically innovative, and require significant
planning, design, development, and testing at the technological, product, and
manufacturing process levels. These activities require significant capital
commitments and investments by the Company. The high cost of technological
innovation is matched by: the rapid and significant change in the technologies
used in competitive products, by industry standards that may change on short
notice, and the introduction of new products and technologies such as magnetic
resonance imaging and ultrasound, which may cause existing products and
technologies to become uncompetitive or obsolete. There can be no assurance that
the Company's products or proprietary technologies will not become uncompetitive
or obsolete.
Risks Associated with Acquisition Strategy. The Company's strategy
includes the acquisition of businesses and technologies that complement or
augment the Company's existing product lines. For example, in October 1995, the
Company acquired its Bennett subsidiary, a manufacturer of general-purpose X-ray
and mammography equipment; in May 1996, the Company acquired substantially all
of the assets and liabilities of XRE, a manufacturer of X-ray imaging systems
used in the diagnosis and treatment of coronary artery disease and other
vascular conditions; in September 1996, the Company acquired substantially all
of the assets and liabilities of Continental, a manufacturer of general-purpose
and specialized X-ray systems; in October 1997, the Company acquired
substantially all of the assets, subject to certain liabilities, of Digitec, a
manufacturer of physiological-monitoring equipment and digital-image archiving
and networking systems used in cardiac catheterization procedures; and, in April
1998, the Company acquired the outstanding stock of Trophy, a French
manufacturer of dental and medical X-ray systems, specializing in digital dental
technology. Promising acquisitions are difficult to identify and complete for a
number of reasons, including competition among prospective buyers and the need
for regulatory approvals, including antitrust approvals. There can be no
assurance that the Company will be able to complete future acquisitions or that
the Company will be able to successfully integrate any acquired businesses. In
order to finance such acquisitions, it may be necessary for
28
<PAGE>
the Company to raise additional funds through public or private financings. Any
equity or debt financing, if available at all, may be on terms that are not
acceptable to the Company and, in the case of equity financing, may result in
dilution to the Company's shareholders.
Intense Competition. The Company encounters and expects to continue to
encounter intense competition. The Company believes that its products compete on
the basis of product features, product performance and reputation, price, and
service. The Company's competitors include large multinational corporations and
their operating units, including GE Medical Systems, the Philips Medical Systems
subsidiary of Philips N.V., Siemens AG, Toshiba, Shimadzu Corporation, Picker
International, Inc., and United States Surgical Corporation. These companies and
certain of the Company's other competitors have substantially greater financial,
marketing, and other resources than the Company. As a result, they may be able
to adapt more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the promotion and sale of their
products than the Company. Moreover, a portion of the Company's sales are
through original equipment manufacturer (OEM) arrangements. The products sold by
such OEM customers compete with products offered by the Company directly and
through its independent dealers. Competition could increase if new companies
enter the market or if existing competitors expand their product lines or
intensify efforts within existing product lines. There can be no assurance that
the Company's current products, products under development, or ability to
discover new technologies, will be sufficient to enable it to compete
effectively with its competitors.
Risks Associated With Patent and Other Litigation. In April 1992, Fischer
Imaging Corporation commenced a lawsuit in the United States District Court,
District of Colorado, against the Company's Lorad division, alleging that
Lorad's prone breast-biopsy system infringes a Fischer patent on a precision
mammographic needle-biopsy system. In April 1998, Fischer filed a second lawsuit
in the same court against Lorad, alleging that its manufacture of breast-imaging
equipment and breast-biopsy systems incorporating a digital-imaging system,
which includes Lorad's prone breast-biopsy system, infringes a second Fischer
patent on a motorized mammographic biopsy apparatus, which was issued April 7,
1998. Each of these suits requests a permanent injunction, treble damages, and
attorneys' fees and expenses. These two lawsuits have been consolidated into a
single lawsuit. If the Company is unsuccessful in defending this lawsuit, it may
be enjoined from manufacturing and selling its Trex Universal Breast Biopsy
System (formerly called the StereoGuide) without a license from Fischer. No
assurance can be given that the Company will be able to obtain such a license,
if required, on commercially reasonable terms, if at all. In addition, the
Company may be subject to damages for past infringement. No assurance can be
given as to whether the Company will be subject to such damages or the amount of
damages that the Company may be required to pay.
In connection with the organization of the Company, ThermoTrex
Corporation, the Company's parent, agreed to indemnify the Company for any and
all cash damages in connection with the April 1992 Fischer lawsuit with respect
to sales of the Company's products occurring prior to October 16, 1995, when
Lorad was transferred to the Company. As of October 3, 1998, the Company had
recognized aggregate revenues of approximately $145.7 million from sales of such
systems, of which $34.4 million represents sales prior to October 16, 1995.
Notwithstanding this indemnification, the Company would be required to report as
an expense the full amount, including any reimbursable amount, of any damages,
with any indemnification payment it receives from ThermoTrex being treated as a
contribution to shareholders' investment.
On October 20, 1998, a former employee of the Company's Lorad division
filed a lawsuit in Danbury, Connecticut, Superior Court against the Company
alleging theft of trade secrets related to the high-transmission cellular
(HTC)(TM) grid, a component for some of the Company's mammography systems.
The Company's newly acquired Trophy division is party to a lawsuit in the
United States District Court for the Eastern District of New York against Schick
Technologies, Inc., alleging infringement of a Trophy patent relating to dental
X-ray apparatus. Schick has filed a counterclaim against Trophy alleging
infringement of a Schick patent that also relates to dental X-ray apparatus.
Each of the parties is seeking a declaration that the opposing party's patent is
invalid, a permanent injunction, treble damages, and attorneys' fees and
expenses.
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The unfavorable outcome of any one or more of the above described matters
could have a material adverse effect on the Company's business, results of
operations, and financial position. The Company's competitors and other parties
hold other various patents and patent applications in the fields in which the
Company operates. There can be no assurance that the Company will not be found
to have infringed third-party patents and, in the event of such infringement,
the Company may be required to alter its products or processes, pay licensing
fees, or cease making and selling any infringing products and pay damages for
past infringement.
No Assurance of Development and Commercialization of Products Under
Development. Several products are currently under development, including
full-field digital mammography systems. There are a number of technological
challenges that the Company must successfully address to complete any of its
development efforts. Product development involves a high degree of risk, and
returns to investors are dependent upon successful development and
commercialization of such products. Proposed products based on the Company's
technologies will require significant additional research and development. There
can be no assurance that any of the products currently being developed by the
Company, or those that may be developed in the future by the Company, will be
technologically feasible, accepted by the marketplace, or that any such
development will be completed timely.
Government Regulation, No Assurance of Regulatory Approval. The Company's
products are subject to regulation by the United States Food and Drug
Administration (the FDA) regulations governing the use and marketing of medical
devices and equivalent regulations in foreign countries. Failure to comply with
applicable regulatory requirements can result in, among other things, civil and
criminal fines, suspensions of approvals, recalls or seizures of products,
injunctions, and criminal prosecutions. Obtaining regulatory approvals is a
lengthy, expensive, and uncertain process. There can be no assurance that
foreign regulatory agencies will grant the necessary clearances or that the
process to obtain such clearances will not be excessively expensive or lengthy.
Most of the Company's products have been classified by the FDA as Class II
medical devices and have been eligible for FDA marketing clearance pursuant to
the FDA's 510(k) premarket notification process, which is generally shorter than
the more involved premarket approval (PMA) process. The 510(k) premarket
notification process analyzes whether a product is substantially equivalent to
(or as safe and effective as) a device marketed before May 28, 1976, the
enactment date of the Medical Device Amendments that govern the marketing of
medical devices. The Company believes that most of its currently anticipated
future products and substantial modifications to existing products will be
eligible for the 510(k) premarket notification process. However, the FDA has not
yet classified full-field digital mammography systems such as the one being
developed by the Company. In December 1997, the Company submitted a 510(k)
application with clinical data for its full-field digital mammography system. In
December 1998, the Company received a letter from the FDA notifying the Company
that based on the data provided, the FDA was unable to determine substantial
equivalence with analog, or "film screen," mammography. As a result, the FDA
considers the Company's 510(k) application seeking clearance to market a
full-field digital mammography system to be withdrawn. In its letter, the FDA
outlines additional data analysis that will be required for clearance. There can
be no assurance that the Company will be able to provide the FDA with the data
it is seeking or that such data will be sufficient to permit the FDA to conclude
the Company's full-field digital mammography system is substantially equivalent
to analog, or "film screen," mammography.
In addition, although current indications are that full-field digital
mammography systems will be classified as Class II medical devices, there can be
no assurance that full-field digital mammography systems will not in the future
be classified by the FDA as Class III medical devices subject to the PMA
process. If such systems are classified as Class III devices, the Company would
be required to file for FDA marketing approval for its full-field digital
mammography system under the PMA process or the Product Development Protocol
(PDP), which would likely require substantial additional clinical trials before
being accepted by the FDA, if at all. Regardless of whether a 510(k), a PMA, or
a PDP is finally accepted by the FDA, there can be no assurance that the product
will receive FDA marketing clearance or approval. Further, there can be no
assurance that the necessary regulatory clearances for any of the Company's
other products currently under development or developed in the future will be
obtained on a timely basis, if at all.
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In addition, full-field digital mammography systems will be subject to
alternative quality assurance standards under the Mammography Quality Standards
Act. These alternate standards will be submitted by the Company to the FDA for
review. The Company can make no prediction as to when the FDA will approve such
standards, if at all.
FDA regulations also require manufacturers of medical devices to adhere to
current good manufacturing practices as set forth in the Quality System
Regulation (QSR). These include testing, quality control, and documentation
procedures. No assurances can be given that the FDA will not in the future find
the Company to be in violation of the QSR's or that equivalent agencies in
foreign countries will not in the future find the Company to be in violation of
such equivalent regulations.
The Company's manufacturing facilities are subject to periodic inspection
by the FDA. The FDA also imposes various requirements on manufacturers and
sellers of products under its jurisdiction, such as labeling, manufacturing
practices, record keeping, and reporting. The FDA may also require post-market
testing and surveillance programs of drugs or devices to monitor a product's
effects. Failure to comply with applicable regulatory requirements can result
in, among other things, civil and criminal fines, suspensions of approvals,
recalls of products, seizures, injunctions, and/or criminal prosecutions.
Healthcare Reform, Uncertainty of Patient Reimbursement. The Federal
government has in the past, and may in the future, consider, and certain state
and local as well as a number of foreign governments are considering or have
adopted, healthcare policies intended to curb rising healthcare costs. Such
policies include rationing of government-funded reimbursement for healthcare
services and imposing price controls upon providers of medical products and
services. The Company cannot predict what healthcare reform legislation or
regulation, if any, will be enacted in the United States or elsewhere.
Significant changes in the healthcare systems in the U.S. or elsewhere are
likely to have a significant impact over time on the manner in which the Company
conducts its business. In addition, the federal government regulates
reimbursement of fees for certain diagnostic examinations and capital equipment
acquisition costs connected with services to Medicare beneficiaries.
Cost-containment policies may have the effect of reducing reimbursement for
certain procedures, and as a result may inhibit or reduce demand by healthcare
providers for products in the markets in which the Company competes. While the
Company cannot predict what effect the policies of government entities and other
third-party payors will have on future sales of the Company's products, there
can be no assurance that such policies would not have an adverse impact on the
operations of the Company.
Dependence on Patents and Proprietary Rights. The Company places
considerable importance on obtaining patent and trade secret protection for
significant new technologies, products, and processes because of the length of
time and expense associated with bringing new products through the development
and regulatory approval process and to the marketplace. The Company's success
depends in part on whether it can develop patentable products and obtain and
enforce patent protection for its products both in the United States and in
other countries. The Company has filed, and intends to file, applications as
appropriate for patents covering both its products and manufacturing processes.
No assurance can be given that patents will issue from any pending or future
patent applications owned by, or licensed to, the Company, or that the claims
allowed under any issued patents will be sufficiently broad to protect the
Company's technology. In addition, no assurance can be given that any issued
patents owned by, or licensed to, the Company will not be challenged,
invalidated, or circumvented, or that the rights granted thereunder will provide
competitive advantages to the Company. The Company could incur substantial costs
in defending itself in suits brought against it or in suits in which the Company
may assert its patent rights against others. If the outcome of any such
litigation is unfavorable to the Company, the Company's business and results of
operations could be materially adversely affected.
The Company relies on trade secrets and proprietary know-how that it seeks
to protect, in part, by confidentiality agreements with its collaborators,
employees, and consultants. There can be no assurance that these agreements will
not be breached, that the Company would have adequate remedies for any breach,
or that the Company's trade secrets will not otherwise become known or be
independently developed by competitors.
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Dependence Upon OEM Relationships. A portion of the Company's sales are
through OEM arrangements. The Company's sales depend, in part, on the
continuation of these OEM arrangements and the level of end-user sales by such
OEMs. There can be no assurance that the Company will be able to maintain its
existing, or establish new, OEM relationships. During fiscal 1998, United States
Surgical Corporation (U.S. Surgical), a significant OEM customer, was acquired
by Tyco International, Ltd. As a result of this acquisition, the Company does
not expect there will be any future sales to U.S. Surgical.
Potential Product Liability. The Company's business exposes it to
potential product liability claims, which are inherent in the manufacturing,
marketing, and sale of medical devices, and as such the Company may face
substantial liability to patients for damages resulting from the faulty design
or manufacture of products. The Company currently maintains product liability
insurance, but there can be no assurance that this insurance will provide
sufficient coverage in the event of a claim, that the Company will be able to
maintain such coverage on acceptable terms, if at all, or that a
product-liability claim would not materially adversely affect the business or
financial condition of the Company.
Risks Associated With International Operations. International sales
accounted for 26%, 17%, and 22% of the Company's revenues in fiscal 1998, 1997,
and 1996, respectively. The Company intends to continue to expand its presence
in international markets. International revenues are subject to a number of
risks, including the following: agreements may be difficult to enforce and
receivables difficult to collect; foreign customers may have longer payment
cycles; foreign countries may impose additional withholding taxes or otherwise
tax the Company's foreign income, impose tariffs or adopt other restrictions on
foreign trade; U.S. export licenses may be difficult to obtain; and foreign
intellectual property laws offer varying levels of protection against
competition, and those intellectual property rights that do exist may be more
difficult to enforce.
Potential Impact of Year 2000 on Processing of Date-sensitive Information.
While the Company is attempting to minimize any negative consequences arising
from the year 2000 issue, there can be no assurance that year 2000 issues will
not have a material adverse impact on the Company's business, operations, or
financial condition. While the Company expects that upgrades to its internal
business systems will be completed in a timely fashion, there can be no
assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate, using
third-party software or hardware. In addition, certain of the Company's older
products, which it no longer manufactures or sells, may not be year 2000
compliant, which may expose the Company to claims. If any of the Company's
material suppliers, vendors, or customers experience business disruptions due to
year 2000 issues, the Company might also be materially adversely affected. The
Company's research and development, production, distribution, financial,
administrative, and communications operations might be disrupted. There is
expected to be a significant amount of litigation relating to the year 2000
issue, and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. Any unexpected costs or delays arising
from the year 2000 issue could have a significant adverse impact on the
Company's business, operations, and financial condition.
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<TABLE>
<CAPTION>
Trex Medical Corporation 1998 Financial Statements
Selected Financial Information
<S> <C> <C> <C> <C> <C> <C>
Nine
Months Year
Year Ended Ended (a) Ended
------------------------------------------ --------------------
(In thousands except per share amounts) Oct. 3, Sept. 27,Sept. 28, Sept. 30, Sept. 30, Dec. 31,
1998 (b) 1997 (c) 1996 (d) 1995 1995 (e) 1994
- ------------------------------------------- ---------- --------- ---------- ---------- ---------- ----------
(Unaudited)
Statement of Income Data
Revenues $266,964 $229,294 $150,195 $ 70,505 $ 55,291 $ 54,410
Net Income 18,204 14,674 9,344 3,592 3,483 1,194
Earnings per Share:
Basic .57 .51 .40 .18 .17 .06
Diluted .56 .50 .39 .18 .17 .06
Balance Sheet Data
Working Capital $125,940 $79,649 $ 59,834 $ 13,171 $ 8,584
Total Assets 342,521 229,437 204,061 102,374 48,000
Long-term Obligations 8,631 8,047 8,109 - -
Shareholders' Investment 258,046 169,094 149,297 80,010 37,033
(a) In September 1995, the Company changed its fiscal year end from the Saturday
nearest December 31 to the Saturday nearest September 30. Accordingly, the
Company's 39-week transition period ended September 30, 1995, is presented.
(b) Reflects the October 1997 and April 1998 acquisitions of Digitec and Trophy,
respectively, and the Company's sale of its common stock in February 1998
for net proceeds of $66.9 million.
(c) Reflects the Company's sale of its common stock in December 1996 for net
proceeds of $4.1 million.
(d) Reflects the May 1996 and September 1996 acquisitions of XRE and Continental,
respectively, and the Company's private placements of common stock in November
1995 and January 1996 and initial public offering of common stock in July 1996,
for aggregate net proceeds of $67.7 million.
(e) Includes the results of Bennett since its acquisition by ThermoTrex in September 1995.
</TABLE>
33
<PAGE>
Trex Medical Corporation 1998 Financial Statements
Common Stock Market Information
The Company's common stock is traded on the American Stock Exchange under
the symbol TXM. The following table sets forth the high and low sale prices of
the Company's common stock for 1998 and 1997, as reported in the consolidated
transaction reporting system.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Fiscal 1998 Fiscal 1997
------------------- -----------------
Quarter High Low High Low
- --------------------------------------------------------------- ---------- ---------- ---------- ----------
First $15 7/16 $12 1/16 $20 1/4 $12 1/2
Second 19 1/8 13 1/4 17 11 1/8
Third 19 11/16 16 14 9/16 11
Fourth 18 1/4 11 3/4 16 1/16 11 1/2
</TABLE>
As of October 30, 1998, the Company had 518 holders of record of its
common stock. This does not include holdings in street or nominee names. The
closing market price on the American Stock Exchange for the Company's common
stock on October 30, 1998, was $12 1/4 per share.
Stock Transfer Agent
American Stock Transfer & Trust Company is the stock transfer agent and
maintains shareholder activity records. The agent will respond to questions on
issuance of stock certificates, change of ownership, lost stock certificates,
and change of address. For these and similar matters, please direct inquiries
to:
American Stock Transfer & Trust Company
Shareholder Services Department
40 Wall Street, 46th Floor
New York, New York 10005
(718) 921-8200
Shareholder Services
Shareholders of Trex Medical Corporation who desire information about the
Company are invited to contact the Investor Relations Department, Trex Medical
Corporation, 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046,
(781) 622-1111. A mailing list is maintained to enable shareholders whose stock
is held in street name, and other interested individuals, to receive quarterly
reports, annual reports, and press releases as quickly as possible. Distribution
of printed quarterly reports is limited to the second quarter only. All material
is available from Thermo Electron's Internet site
(http://www.thermo.com/subsid/txm1.html).
Dividend Policy
The Company has never paid cash dividends and does not expect to pay cash
dividends in the foreseeable future because its policy has been to use earnings
to finance expansion and growth. Payment of dividends will rest within the
discretion of the Board of Directors and will depend upon, among other factors,
the Company's earnings, capital requirements, and financial condition.
Form 10-K Report
A copy of the Annual Report on Form 10-K for the fiscal year ended October
3, 1998, as filed with the Securities and Exchange Commission, may be obtained
at no charge by writing to the Investor Relations Department, Trex Medical
Corporation, 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046.
Annual Meeting
The annual meeting of shareholders will be held on Thursday, March 11,
1999, at 10 a.m. at The Westin Hotel, 70 Third Avenue, Waltham, Massachusetts.
Exhibit 21
TREX MEDICAL CORPORATION SUBSIDIARIES
As of November 19, 1998, the Registrant owned the following subsidiaries:
<TABLE>
<CAPTION>
<S> <C> <C>
STATE OR
JURISDICTION PERCENT OF
NAME OF OWNERSHIP
INCORPORATION
Trex Medical Corporation Delaware 67**
Bennett X-Ray Corporation New York 100
Bennett International Corporation U.S. Virgin 100
Islands
Eagle X-Ray, Inc. New York 100
Island X-Ray Incorporated New York 100
Continental X-Ray Corporation Delaware 100
Trex Medical France S.A. France 100
Societe Financiere Trophy S.A. France 100
Trophy Radiologie S.A. France 100
Stephan'X S.A. France 100
Trophy Benelux S.A. Belgium 100
Trophy Radiologie Italia S.R.L. Italy 100
Trophy Radiologie Japan Kabushiki Kaisha Japan 100
Trophy Radiologie GmbH (FRG) Germany 100
P.T. Trophy Rajawali Indonesia Indonesia 100
Trophy Radiologia Espana SL Spain 100
Trophy Ronlgen Sanayi Anonim Sirketi Turkey 100
Trophy Radiologie U.K. Ltd. United Kingdom 100
Trophy Radiology, Inc. Virginia 100
Ardet Italia S.R.L. Italy 100
SCI Boucher Debard Baudry Guillot France 100
XRE Corporation Delaware 100
</TABLE>
** As of 10/03/98
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated December 21, 1998, included in or incorporated by
reference into Trex Medical Corporation's Annual Report on Form 10-K for the
year ended October 3, 1998, into the Company's previously filed Registration
Statements as follows: Registration Statement No. 333-18781 on Form S-3 and
Registration Statement No.
333-22351 on Form S-8.
Arthur Andersen LLP
Boston, Massachusetts
December 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TREX MEDICAL
CORPORATION'S REPORT ON FORM 10-K FOR THE YEAR ENDED OCTOBER 3, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-END> OCT-03-1998
<CASH> 42,709
<SECURITIES> 0
<RECEIVABLES> 75,289
<ALLOWANCES> 2,667
<INVENTORY> 76,268
<CURRENT-ASSETS> 201,232
<PP&E> 29,409
<DEPRECIATION> 10,310
<TOTAL-ASSETS> 342,521
<CURRENT-LIABILITIES> 75,292
<BONDS> 631
0
0
<COMMON> 341
<OTHER-SE> 257,705
<TOTAL-LIABILITY-AND-EQUITY> 342,521
<SALES> 266,964
<TOTAL-REVENUES> 266,964
<CGS> 151,970
<TOTAL-COSTS> 151,970
<OTHER-EXPENSES> 32,417
<LOSS-PROVISION> 697
<INTEREST-EXPENSE> 336
<INCOME-PRETAX> 29,840
<INCOME-TAX> 11,636
<INCOME-CONTINUING> 18,204
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,204
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.56
</TABLE>
