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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): OCTOBER 28, 1996
ACUSON CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 0-14953 94-2784998
________________________________ ______________________ ________________________________
(State or other Jurisdiction of Commission file number (IRS Employer Identification No.)
Incorporation)
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1220 CHARLESTON ROAD
P. O. BOX 7393 MOUNTAIN VIEW, CA 94039-7393
(Address of principal executive offices)
Registrant's telephone number, including area code, is (415) 969-9112
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ITEM 5. Other Events.
The Company's Form 10-K for the year ended December 31, 1995 (the "10-K") and
the Company's Form 8-K filed with the Securities and Exchange Commission on
April 29, 1996 (the "April 8-K") contain descriptions of certain investment
risks relating to forward looking statements made by the Company and the
Company's business in general. The introduction of the Aspen/TM/ ultrasound and
echocardiography systems on October 28, 1996 raises certain additional risk
considerations. Accordingly, in order to update the investment risks set forth
in such Forms 10-K and 8-K and, in general, in connection with the Company's
securities law disclosure obligations, the Company states as follows:
INVESTMENT RISKS
Any forward-looking statements by the Company involves risks and uncertainties.
The Company's actual results could differ materially from those discussed in
such statements and the Company assumes no duty to update any forward-looking
statement. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed below. In evaluating and understanding
Acuson's business and financial prospects and the potential success of any
Acuson product, and in evaluating any forward-looking statement contained in
this document or otherwise, prospective investors and shareholders should
carefully consider the factors set forth below.
NEW PRODUCTS. Acuson believes that a continued flow of new products is of
great importance to its success. The Company has spent an average of 16.7% of
its revenue on research and development over the last five years, and has a
number of new products under development at any time. However, the Company
cannot accurately predict when new products will be developed and available for
sale. In addition, the Company may be unable to complete new product
development in a timely manner, and some new product development programs may
not be completed at all. Further, any new product developed and introduced by
the Company may not be successful in the marketplace. In addition, the
anticipation or introduction of new products may adversely impact orders for and
shipments of existing products, as customers delay submitting new orders or
delay delivery dates of existing orders while they await or evaluate new
products. Also, when a new product is introduced, customers may potentially
cancel orders in the backlog. Finally, to the extent that the Company has
inventory and/or fixed assets for products not yet introduced, the Company may
be required to write off the value of that inventory and/or fixed assets if the
product is in fact not introduced.
The introduction of the Sequoia/TM/ and Aspen ultrasound and echocardiography
systems raises a number of additional risk considerations. Specifically, the
success in the marketplace of the Sequoia and Aspen systems depends on timely
completion of development of the systems and future product enhancements. Also,
to date the Sequoia and Aspen systems have had limited clinical experience.
While, in general, experiences have been favorable, actual and perceived levels
of product performance in a clinical environment over time will not be fully
known for some time. At this point in time, it is uncertain how the market will
accept the new products
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and their pricing. Further, production of the products has only recently started
and the Company's ability to manufacture and deliver production quantities over
an extended period of time has not been tested. Finally, competitor responses,
including the introduction of new products, lowering of pricing on existing or
new products, intellectual property allegations, and product positioning counter
strategies, may impact the success in the market of the new product. The
introduction of the Sequoia and Aspen systems may adversely impact sales of the
Company's existing product lines.
COMPETITION. Diagnostic ultrasound is a well-established field in which
there are a number of competitors. The markets for ultrasound products have
become increasingly competitive, and price is more often a factor in the
purchase decision.
The Company competes with several companies and their affiliates such as
Advanced Technology Laboratories, Inc. (ATL), Aloka Co., Ltd., Diasonics, Inc.
(a subsidiary of Elbit, Ltd.), General Electric Company, Hewlett-Packard
Company, Hitachi Corporation, Philips Ultrasound, Inc., Siemens Medical Systems,
Inc., and Toshiba Medical Systems, Inc., most of which have significantly
greater financial and other resources. In addition, most of these companies
compete in more medical imaging and other market segments and countries than the
Company. The products offered to date by these competitors in some cases
include features and capabilities not currently offered by the Company and in
some cases are substantially less expensive than the Company's products.
Market success in diagnostic ultrasound is heavily dependent on the purchaser's
evaluation of the system's diagnostic value, ease of use and safety. Any
established or new ultrasound company may introduce a system or upgrades to an
existing system that is equal to or superior to the Company's products in
quality or performance and no assurance can be given that the Company's products
will remain competitive with existing or future products. If a competitor
introduces a new product, customers may delay submitting new orders to the
Company and may cancel orders in the backlog. Further, recently ATL received
premarket approval ("PMA") from the United States Food and Drug Administration
(the "FDA") for a particular claim relating to its system for use in breast
imaging. While the FDA's approval is not an indication that ATL's product is
superior for any application, the granting of the PMA means that only ATL may
promote its product for that application. The PMA may adversely impact Acuson's
sales of systems for breast imaging.
ULTRASOUND MARKET CHANGES. Ultrasound is generally among the least
expensive of modalities such as conventional X-ray, computed tomography,
magnetic resonance imaging and diagnostic ultrasound imaging. In addition, in
certain applications, ultrasound offers capabilities that make it the modality
of choice regardless of cost. However, these price and/or performance
advantages may not continue in comparison to other current or future imaging
modalities. In addition, ultrasound systems compete with other imaging
modalities for limited hospital funding.
The trends of health care provider consolidation, medical cost containment, and
intense competitive pressures are continuing in the market. These factors have
put increased
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pressures on ultrasound system pricing and have required the Company to
introduce lower priced configurations of its systems. These factors have
contributed to the decline in the Company's gross margins over the last several
years. For example, the Company's gross margins have declined from 61.3% in 1990
to 53.5% in 1995. Further, the US government is considering Medicare reforms.
The Company believes that future revenues and profitability will continue to be
impacted by these uncertainties, especially in the domestic markets. Although
some portions of the international ultrasound markets are experiencing some
economic growth, it is uncertain whether this is temporary or permanent.
PATENTS AND PROPRIETARY TECHNOLOGY. Acuson attempts to protect
technologies that it views as proprietary through a combination of trade secrets
and, where appropriate, copyrights, trademarks and patents. The Company owns or
has rights to greater than fifteen U.S. and international patents, covering
certain aspects of its systems, and it has several patent applications pending.
No assurances can be given as to the breadth or degree of protection patents,
copyrights, trademarks or trade secrets will afford the Company.
The Company's competitors also rely on patents to protect their technology, and
numerous physicians, universities and other individuals or entities in the
ultrasound field are patenting many ultrasound inventions. The Company has from
time to time received notices from such competitors and other entities or
individuals that the Company may need a license to one or more of their patents
in order to continue to sell its products. Such a competitor, individual, or
entity may have, or may be granted, a patent to which the Company must obtain a
license if it wishes to market and sell any one or more of its products. To
date, patent disputes involving the Company have ultimately been resolved
through licensing arrangements, sometimes involving the payment of royalties by
the Company. There can be no assurance that the Company will be able to obtain
a license to any patent (if so required) or that such a license will be
available on reasonable financial or other terms.
The Company also relies heavily on its unpatented proprietary know-how. No
assurance can be given that others will not be able to develop substantially
equivalent proprietary information to the Company's, or otherwise obtain access
to the Company's know-how.
REGULATION BY GOVERNMENT AGENCIES. As a manufacturer of medical devices,
Acuson is subject to various regulations of the United States Food and Drug
Administration (the "FDA") and of the California Department of Health Services,
including marketing clearance or approval of the Company's products by the FDA.
The process of obtaining such clearances or approvals can be time consuming,
lengthy, and expensive and there can be no assurance that the necessary
clearance or approval will be granted the Company or that FDA review will not
involve delays adversely affecting the Company, and in particular the marketing
and sale of the Company's products. In fact, the Company believes that the time
it takes to obtain clearance for new products has increased and the FDA has
recently been more rigorous in its 510(k) clearance process. The review of a
premarket approval ("PMA") application generally takes one to two years from the
date the PMA is accepted for filing, but may take significantly longer. It
generally takes from four to twelve months from submission to obtain 510(k)
premarket clearance, but may take longer.
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Manufacturers of medical devices marketed in the United States are required to
adhere to applicable regulations setting forth detailed Good Manufacturing
Practices ("GMP") requirements, which include testing, control and documentation
requirements. Manufacturers also must comply with Medical Device Reporting
("MDR") requirements that a firm report to FDA certain adverse events associated
with the Company's devices. The Company is subject to routine inspection by FDA
and certain state agencies for compliance with GMP requirements, MDR
requirements, and other applicable regulations. The FDA is using its statutory
authority more vigorously during inspections of companies and in other
enforcement matters. The FDA has promulgated new GMP regulations and MDR
regulations, both of which will likely increase the cost of compliance with GMP
requirements. The Company also is subject to numerous federal, state and local
laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, fire hazard control and disposal of
hazardous or potentially hazardous substances. Changes in existing requirements
or adoption of new requirements could have a material adverse effect on the
Company's business, financial condition, and results of operations. Although
Acuson believes that it is in compliance with all applicable regulations of the
FDA and the State of California, current regulations depend heavily on
administrative interpretation, and there can be no assurance that the Company
will not incur significant costs to comply with laws and regulations in the
future or that laws and regulations will not have a material adverse effect upon
the Company's business, financial condition or results of operations. In
addition, the potential effects on the Company of heightened enforcement of
federal and state regulations cannot be predicted.
Federal and state regulations also govern or influence the reimbursement to
health care providers of fees and capital equipment costs in connection with
medical examinations of certain patients. For example, Medicare reimbursement
for operating costs for ultrasound examinations performed on hospital inpatients
generally is set under the Medicare prospective payment system ("PPS")
diagnosis-related group ("DRG") regulations. Under PPS, Medicare pays hospitals
a fixed amount for services provided to an inpatient based on his or her DRG,
rather than reimbursing for the actual costs incurred by the hospital. Patients
are assigned to a DRG based on their principal and secondary diagnoses,
procedures performed during the hospital stay, age, gender and discharge status.
For capital costs for inpatient services, prior to October 1, 1991, Medicare
reimbursed hospitals an amount based on 85 percent of the actual reasonable
costs they had incurred. On October 1, 1991, Medicare began to phase in over a
ten year period a prospective payment system for capital costs which
incorporates an add-on to the DRG-based payment to cover capital costs and which
replaces the reasonable cost-based methodology.
For certain hospital outpatient services, including ultrasound examinations,
reimbursement currently is based on the lesser of the hospital's costs or
charges, or a blended amount, 42 percent of which is based on the hospital's
reasonable costs and 58 percent of which is based on the fee schedule amount
that Medicare reimburses for such services when furnished in a physician's
office. For the fiscal years 1991 through 1998 (beginning October 1, 1990),
reimbursement for the cost portion of the blend is reduced by 5.8 percent.
Capital acquisition
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costs for services furnished to hospital outpatients are currently reimbursed on
the basis of 90 percent of the reasonable costs actually incurred by the
hospital.
Until January 1, 1992, Medicare generally reimbursed physicians on the basis of
their reasonable charges or, for certain physicians, including radiologists, on
the basis of a "charge-based" fee schedule. On January 1, 1992, Medicare began
to phase in over a five-year period a new system that reimburses all physicians
based on the lower of their actual charges or a fee schedule amount based on a
"resource-based relative value scale".
Reimbursement for services rendered to Medicaid beneficiaries is determined
pursuant to each state's Medicaid plan which is established by state law and
regulations, subject to requirements of Federal law and regulations. The
Clinton Administration and Congress currently are considering significant
revisions to the Medicaid program that would allow states more control over
coverage and payment issues. At this time whether such changes will be enacted
into law and, if so, what the impact would be on Medicaid payment for diagnostic
services is uncertain.
As part of the Omnibus Budget Reconciliation Act of 1993, Congress enacted
provisions, effective January 1, 1995, which prohibit physicians from referring
Medicare or Medicaid patients to any entity in which the physician or a family
member has an ownership or compensation relationship if the referral is for any
of a list of "designated health services", which includes ultrasound services.
Regulations implementing these statutory provisions have not been published.
These prohibitions, and similar prohibitions in some state laws, may result in
lower utilization of certain procedures, including ultrasound.
Changes in current policies could impact reimbursement for the purchase and/or
operation of the Company's equipment by such providers and thereby adversely
affect future sales of the Company's products. In particular, as noted above,
the Clinton Administration and the Congress are debating and considering various
Medicare and other health care reform proposals that could significantly affect
both private and public reimbursement for health care services. Some of these
proposals, if enacted into law, could reduce reimbursement for or the incentive
to use diagnostic devices and procedures and thus could adversely affect the
demand for diagnostic devices, including the Company's products.
In addition to the Federal laws described above, there are state laws and
regulations regarding the manufacture and sale of health care products and
diagnostic devices, and reimbursement for such products and their use. These
laws and regulations also are subject to future changes whose impact cannot be
projected.
EMPLOYEES. Acuson believes that its continued success and future growth
will depend on, among other factors, its ability to continue to attract and
retain skilled employees. The loss of a significant number of employees could
adversely affect its business, most significantly by delaying the development of
new products. The job market in the Silicon Valley area is very competitive,
especially for skilled electrical and software engineers. There can be no
assurance that the Company will be able to retain or hire key employees.
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MANUFACTURING. Component parts and microprocessors for the Company's
products and some specialty transducers are purchased from outside vendors. A
number of such items currently have limited or single sources of supply, and
disruption or termination of those sources could have a temporary adverse effect
on shipments and the financial results of the Company. The Company believes
that it could ultimately develop alternate sources for all such items, but that
sales could be lost or deferred as a result of doing so.
SERVICE. Approximately 24.6% of the Company's 1995 revenues were derived
from the Company's service activities, including the sales of service contracts
and time and material services. Increasing cost containment pressures in the
market have adversely impacted the number of customers purchasing service
contracts, but this impact has been offset by the Company's increased installed
base and an increase in time and material services. The Company believes that
the trend away from service contracts will continue and there can be no
assurance that the Company will be able to continue to maintain its current
levels of service contract revenue. In addition, the introduction of new
products by the Company could reduce the sale of service contracts and options
to the installed base.
INTERNATIONAL OPERATIONS AND INTERNATIONAL RECEIVABLES. As the Company's
international business has grown, the Company has an increasing percentage of
its receivables in other countries. In Italy and in Brazil the amount of
receivables exceeds $8,000,000 each and in China the amount of receivables is
approximately $4,000,000. Political instability or other issues may impact the
ability of the Company to collect receivables in foreign countries. The Company
enters into foreign currency exchange contracts as described in Note 2 to its
Consolidated Financial Statements for the year ended December 31, 1995 and does
not believe it has significant risk from changes in exchange rates.
EARTHQUAKE. The Company's research and development and manufacturing
activities, its corporate headquarters, and other critical business operations
are located near major earthquake faults. In the event of a major earthquake,
the ultimate impact on the Company, significant suppliers, and the general
infrastructure is unknown, but operating results could be materially affected.
The Company is not insured for losses and interruptions caused by earthquakes.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ACUSON CORPORATION
October 28, 1996 By /s/ Robert J. Gallagher
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Robert J. Gallagher
President and Chief Operating Officer
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