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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: September 27, 1997
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or
[___] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 0-18281
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Hologic, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 04-2902449
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(State of incorporation) (I.R.S. Employer Identification No.)
590 Lincoln Street, Waltham, Massachusetts 02154
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(Address of principal executive offices) (Zip Code)
(781) 890-2300
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value Rights to
purchase Common
Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
10-K. ___
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of November 28, 1997 was $339,619,647 based
on the price of the last reported sale on the Nasdaq National Market System.
As of November 28, 1997 there were 13,125,397 shares of the registrant's Common
Stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Proxy Statement for Registrant's Annual Meeting of Stockholders to be
held on February 24, 1998 (Part III: Items 10,11,12 and 13).
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Introductory Statement
When used in this Report, the words "expects," "anticipates,"
"estimates," "should," "will," "could," "would," "may," and similar expressions
are intended to identify forward-looking statements. Such statements, which
include statements relating to the timing and availability of products under
development, the ability of the Company to market such products, once developed,
successfully, the anticipated growth or expansion of the markets for the
Company's products, and other matters are subject to risks and uncertainties
that could cause actual results to differ materially from those anticipated.
These forward-looking statements speak only as of the date of this Report. The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statement contained herein to
reflect any change in the Company's expectation with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
Part I
Item 1. Business
Hologic, Inc. ("Hologic" or the "Company") is a leading international
developer, manufacturer and marketer of X-ray bone densitometers which precisely
measure bone density for use in the diagnosis and monitoring of metabolic bone
diseases such as osteoporosis. Hologic pioneered the use of dual-energy X-ray
absorptiometry ("DXA") to measure bone density, introducing the first DXA bone
densitometer in 1987. Since this introduction, DXA systems have become the
standard for measuring bone density. In 1995, Hologic introduced its fourth
generation of DXA bone densitometers, its clinically oriented QDR(R) 4500
ACCLAIM(R) product line.
To address the growing clinical market for the early diagnosis and
monitoring of osteoporosis, Hologic is developing products that it believes will
complement its DXA product line. In December 1994, Hologic acquired the
ultrasound bone analyzer business of Walker Sonix, Inc. ("Walker Sonix"). In
July 1996, Hologic began international shipments of its internally-developed,
dry ultrasound system, the Sahara(R) Clinical Bone Sonometer ("Sahara"). On
August 18, 1997, the Company received a Food and Drug Administration ("FDA")
Advisory Panel's recommendation for approval of Sahara. The Company is
continuing to work with the FDA to receive final marketing clearance for Sahara
to begin sales in the United States. Hologic believes that ultrasound systems
will represent a relatively low cost, compact, easy-to-use, non-ionizing,
measurement technique to assist in the initial diagnosis of osteoporosis. In
September 1994, Hologic began a joint development effort with Serex, Inc.
("Serex") to develop a diagnostic strip test to detect biochemical markers that
indicate the rate of a patient's bone loss. In January 1997, Hologic expanded
its joint development agreement to include Ostex International, Inc. Under this
agreement, Ostex's Osteomark assay is being combined with Serex's strip test
technology to provide a physician with a real-time means of measuring a
patient's biochemical response to osteoporosis therapies and compliance with
those therapies, as a complement to periodic bone density measurements.
On August 29, 1996, Hologic's wholly-owned subsidiary merged with
FluoroScan Imaging Systems, Inc. ("FluoroScan" or the "Company") in an all stock
transaction accounted for as a pooling-of-interests. FluoroScan manufactures and
distributes the FluoroScan Imaging System (the "FluoroScan System"), a low
intensity, real-time mini c-arm X-ray imaging device which provides high
resolution images at radiation levels and at a cost well below those of
conventional X-ray and fluoroscopic equipment. These mini c-arm systems are used
primarily by orthopedic surgeons to perform minimally invasive surgical
procedures on a patient's extremities (i.e., hand, wrist, knee, foot, ankle,
ect.).
As used herein the term "Company" includes Hologic and all of its
subsidiaries, including FluoroScan.
The Hologic logo is a service mark of the Company. QDR, QDR-1000, ACCLAIM
and Sahara are registered trademarks of the Company. QDR-1000W, QDR 1000plus,
QDR-2000, QDR 2000plus, QDR 4500, QDR 4500A, QDR 4500SL, QDR 4500W, QDR 4500C,
FluoroScan, FluoroScan I, FluoroScan II, FluoroScan III, FluoroScan Imaging
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Systems and UBA 575+ are trademarks of the Company. The trademarks Scanora and
WalkerSonix are licensed by the Company.
Bone Assessment Product Background
Osteoporosis. Osteoporosis is a condition characterized by reduced bone
density that leads to an increased risk of fractures. Bone is a dynamic organ
that is maintained through a process referred to as remodeling in which old bone
is removed (resorption) and new bone is formed. In early adulthood, the levels
of bone resorption and bone formation are generally balanced, with the quantity
and distribution of bone throughout the body varying over time depending on
muscle mass, strength and use. When remodeling does not function properly, and
resorption exceeds formation, the result is a net loss of bone mass and density,
often causing diminished structural integrity of the skeleton (particularly of
the trabecular "spongy" bone) and an increased risk of fracture.
According to the National Osteoporosis Foundation (the "NOF"), 28 million
Americans, 80% of whom are women, and approximately 250 million people
worldwide, suffer from osteoporosis. Osteoporosis typically develops silently
over a period of years, eventually progressing to a point where a fracture can
easily occur, causing pain and disability. The post-menopausal female population
has the highest incidence of osteoporosis and the highest rate of morbidity
(loss of quality of life) and mortality due to osteoporosis. The NOF estimates
that in the United States osteoporosis contributes to more than 1.5 million
fractures annually, and the costs to the U.S. healthcare system to treat these
osteoporosis-related fractures exceed $14 billion annually. Hip fractures lead
to the most serious consequences. According to the NOF, as many as one in every
five hip fracture patients dies from complications within a year after fracture,
one in every four requires long-term care and an even higher percentage of hip
fracture patients never return to an active and independent lifestyle. According
to the Centers for Disease Control and Prevention, about 850,000 people aged 65
and older suffer from fractures every year.
Until recently, osteoporosis was thought to be an untreatable consequence
of aging. The Company believes that the recent development and introduction of
new drug therapies, the aging of the population, and an increased focus on
women's health issues and preventive medical practices has created a growing
awareness among patients and physicians that osteoporosis is treatable.
Therapies. The Company believes that over 36 clinical studies are currently
in progress to assess the safety and effectiveness of new therapies to treat
osteoporosis. However, prior to 1995, there were only two approved drug
treatments for osteoporosis in the United States, hormone replacement therapy,
using estrogen and related hormones ("HRT"), and calcitonin, with the most
widely prescribed treatment being HRT. Patient concerns regarding complications
related to prolonged use of HRT have contributed to a low compliance rate. Until
recently, calcitonin was available only in an injectable form, a delivery method
that has contributed to low patient compliance. Although HRT and calcitonin have
generally been shown in clinical trials to slow or stop the loss of bone mass,
these therapies have not been proven to restore bone mass.
In September 1995, the FDA approved Merck and Company's ("Merck") drug
Fosamax(R) for the treatment of established osteoporosis in post-menopausal
women. Fosamax is a bisphosphonate that acts by coating the bone surface and
inhibiting bone resorption. In clinical trials of Fosamax conducted in over 16
countries, Merck reported that on average, the post-menopausal patients with
established osteoporosis who were treated with Fosamax experienced an increase
in bone density of the hip and spine over a three-year period. The clinical data
also indicated that Fosamax reduced the number of new vertebral fractures in
these patients by approximately 48% when compared with patients in placebo. In
April 1997, the FDA approved an expansion of the permitted use for Fosamax to
include the prevention of osteoporosis. On December 10, 1997, Eli Lilly and
Company ("Eli Lilly") received marketing clearance from the FDA for its new
osteoporosis drug, Evista(R). Evista is among the first in a class of drugs
called selective estrogen receptor modulators ("SERMs"). SERMs are being studied
for their selective ability to act like estrogen in some tissues but not in
others. Eli Lilly reported that in clinical studies of Evista conducted in 28
countries, the drug was shown to prevent bone
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loss in the total body, lower spine and hip and to significantly increase bone
mineral density in those regions when compared with the calcium-supplement
placebo group.
Other therapies cleared by the FDA to treat osteoporosis are a one-tablet
hormone replacement therapy, which combines estrogen and progestin, developed by
Wyeth-Ayerst Laboratories, and an intra-nasal formulation of calcitonin
developed by Sandoz. In addition, the FDA approved slow-release sodium fluoride
for the treatment of post-menopausal osteoporosis. Additional therapies
undergoing clinical trials for the prevention or treatment of osteoporosis
include bisphosphonates being developed by Proctor & Gamble (Rasidronate),
Boehringer-Mannheim (Ibandronate) and Sanofi (Tiludronate), and estrogen
analogues being developed by Pfizer (Draloxifene).
In several European countries, Japan and other international markets, there
has been an earlier availability and greater acceptance of osteoporosis
therapies. Some of these therapies include estrogens, bisphosphonates,
calcitonins, vitamin D compounds and ipriflavone.
The timing of when and where new drugs will become commercially available,
if ever, is uncertain. However, the Company believes that there will be
broadened and new approvals of osteoporosis therapies for both treatment and
prevention which should positively impact the bone assessment market worldwide.
Diagnosis and Monitoring of Osteoporosis. There are a number of different
technologies that are available that can be used to assess bone mineral status.
Since the introduction of the first DXA bone densitometer by the Company in
1987, dual-energy X-ray absorptiometry has become the primary means of measuring
bone density. Prior to that introduction, the most widely used bone density
measuring technique for the hip and spine was dual photon absorptiometry
("DPA"). DPA systems were not very precise and required relatively long scanning
times and the use of an expensive radioactive source that required periodic
replacement. In contrast, DXA systems have much higher precision, require
significantly shorter scanning times and do not require a radioactive source.
DXA systems require a low patient radiation exposure. The most advanced DXA
systems can be used to measure the bone density of the whole body, or any site,
including the most important fracture sites of the hip or spine. As a result of
their precision and versatility, DXA systems have become the predominant means
of evaluating low bone density before fractures occur and monitoring changes in
a patient's bone density in response to therapies.
Other bone assessment technologies include single photon absorptiometry
("SPA"), radiographic absorptiometry ("RA"), quantitative computed tomography
("QCT"), quantitative ultrasound and biochemical markers.
Single photon absorptiometry was introduced in the 1960s and represents an
effective method of measuring bone density at a peripheral site of the skeleton
(forearm or heel), although it cannot be used to measure the most important
fracture sites of the spine or hip. SPA systems also have the added
inconvenience of requiring the patient to place the site being scanned in water
or other tissue-equivalent medium to achieve precision. SPA, however, does
represent a relatively inexpensive and valuable tool in the diagnosis of
osteoporosis with reasonable precision and low radiation exposure.
Quantitative computed tomography was introduced in the mid 1970s and can
measure bone density by using a CT scanner to determine both the patient's bone
density and bone distribution in three dimensions. QCT, however, has remained
limited in clinical use because of its relatively high radiation dose and the
high cost of CT scanner equipment.
Radiographic absorptiometry, also introduced in the 1970s, measures bone
density from two X-ray images (radiographs) of the hand placed alongside a
calibration device using a conventional X-ray machine. The radiographs are sent
to a central processing laboratory where a computer measures the density of the
bone. The precision of this technique is comparable to SPA measurements. An
advantage of this system is that it does not require any additional capital
investment, as traditional X-ray equipment can be used to obtain the
radiographs. The technique, however, cannot be used to measure and monitor the
hip or spine. Also, because the radiograph must be sent to a laboratory for
testing, it
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does not provide a real-time assessment of bone density, and, if the test is
positive, a follow-up consultation is required. The Company believes that RA
will be useful in rural areas where there may not be a sufficient concentration
of patients to justify a capital investment in DXA bone density measuring
equipment.
Ultrasound has long been used in medical testing. However, the use of
ultrasound for the detection of osteoporosis was not commercially introduced
until recently, and then only in certain foreign countries. Ultrasound
measurement has concentrated mainly on the calcaneous (the heel), which is
comprised primarily of trabecular bone, as a measuring site. Initial clinical
trials of ultrasound systems have indicated a significant association of low
ultrasonic bone measurements of the calcaneous and the risk of fracture. The
latest developments in hardware and software, resulting in enhanced precision
and ease of use, are currently making ultrasound techniques an option for the
diagnosis of osteoporosis. Major advantages of ultrasound examination are the
complete absence of radiation and the small size and low cost of the equipment.
Ultrasound devices do not use X-rays in making their measurements and therefore
do not require X-ray licensing or registered operators. However, because
ultrasound bone measurements currently are not as precise as DXA and other
measurements, they are less reliable for continued monitoring of small changes
in bone density or for assessing the response to therapies. In addition, they
are generally limited to measurements at peripheral sites, not the more
important spine or hip fracture sites. Accordingly, the Company believes that
the most likely use for ultrasound devices such as Sahara, and others, will be
for initial identification of osteoporosis and not for continued monitoring of
changes in bone density or the response to therapies.
Biochemical markers are substances that are produced within the body that
correlate directly or indirectly to disease or bodily function. A number of
biochemical markers have been discovered that can be used to measure the rate of
bone resorption or formation. These measurements, while not measuring bone
density, can provide a means to assess quickly (within approximately three
months) the effectiveness of treatment and patient compliance with therapies for
osteoporosis. A baseline and subsequent bone density tests (as frequently as
annually) must be used in conjunction with biochemical marker measurements to
assess fully the bone status of the patient. Because biochemical markers cannot
be used independently to diagnose osteoporosis or risk of fracture, or to
monitor a patient's changes in bone density as a result of therapy or otherwise,
the Company believes that biochemical marker tests, including those being
developed by the Company, will complement and not replace densitometry.
Bone Assessment Market
The Company believes that the clinical and primary care markets for
osteoporosis diagnostic and monitoring products are expanding due to the recent
development and introduction of new drug therapies to treat osteoporosis, the
more widespread and increased reimbursement for bone density examinations, the
aging of the population, and an increased focus on women's health issues and
preventive medical practices. All of these factors have led to an increased
awareness by women and primary care providers, such as gynecologists and family
physicians, that osteoporosis is a treatable disease and that measurement of
bone density is an integral component of diagnosis and monitoring of this
disease.
Upon obtaining FDA approval for Fosamax in September 1995, Merck launched
an extensive educational campaign to increase patient and physician awareness
that osteoporosis is a treatable disease. In connection with this effort, Merck
is promoting the use of DXA and other techniques to diagnose and monitor
osteoporosis and the effects of drug therapies. The Company believes that this
ongoing comprehensive Merck program has significantly contributed to the growth
of the bone densitometer and related markets. Fosamax is approved for use by
patients for both the prevention and treatment of osteoporosis. In addition, Eli
Lilly's Evista was recently approved for the prevention of osteoporosis. The
approval of therapies for both the prevention and treatment of osteoporosis
should increase the need for patient testing and monitoring at an earlier age,
before a patient is afflicted with osteoporosis.
In the United States, the Health Care Finance Administration ("HCFA"),
which establishes guidelines for the reimbursement of health care providers
treating Medicare and Medicaid patients, provided validation for DXA bone
densitometry examinations as a clinically useful procedure by recommending the
reimbursement for DXA bone
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examinations in April 1994. In October 1997, HCFA published new guidelines for
bone density measurements. Effective January 1, 1998, HCFA is recommending
reimbursement for central (hip and spine) DXA examinations, the important
fracture sites, of approximately $131 per patient examination, an increase from
the current recommended rate of $121. Reimbursement for DXA densitometry done at
peripheral sites was also increased to approximately $67 per patient
examination. The increase in the central and peripheral reimbursement rates
illustrates the increasing recognition of the benefit of early detection and
treatment of bone loss. Currently, there is not an established reimbursement
rate for ultrasound bone density examinations. The Company believes that once an
ultrasound bone densitometer, such as Sahara, is cleared for marketing in the
United States, a reimbursement rate will be established at a rate similar to
peripheral bone densitometry. However, there can be no assurance that a
reimbursement code for ultrasound bone densitometry will be established by HCFA
in a timely manner, if at all. The differential in reimbursement between central
and peripheral exams recognizes the important benefit of DXA measurements of the
critical fracture sites, the hip and spine, in assisting in the detection and
monitoring of bone disease. In part, as a result of the reimbursement policy
recommendations implemented by HCFA, DXA bone density examinations are paid for
by many private third party insurers in the United States.
In August 1997, President Clinton signed into law the Medicare Bone Mass
Measurement Coverage Standardization Act as a provision in the Balanced Budget
Act. The provision sets forth a national mandate that would require Medicare to
cover bone density diagnostic tests utilizing radiologic, radioisotopic, or
other procedures approved by the FDA for the purpose of identifying bone mass or
detecting bone loss deterioration. This mandate will become effective July 1,
1998.
With the established reimbursement levels in the United States, and the FDA
approval of additional osteoporosis drug therapies, the Company believes that
the United States market for bone densitometers and other methods of bone
mineral assessment will expand from the hospitals, large clinics, research
institutions and imaging and women's centers, to the larger potential market of
primary care providers, including gynecologists and family physicians. However,
there can be no assurance this expansion will take place.
In several European countries, Japan and other international markets,
there has been a greater availability or acceptance of osteoporosis therapies
and an earlier adoption of reimbursement for bone densitometry exams. Countries
in which reimbursement for the use of X-ray bone densitometers has been approved
include Belgium, Brazil, Canada, Germany, Greece, Japan, South Korea, Spain and
Switzerland. In addition, the Japanese government has been actively supporting
an educational program to promote public awareness of osteoporosis as a
treatable disease. In Latin American countries such as Argentina, Brazil and
Chile, and in Pacific Rim countries, such as Australia, The Peoples Republic of
China, South Korea and Taiwan, there has been a growing use of osteoporosis
therapies and an increased use of osteoporosis diagnostic and monitoring
equipment. Recent economic uncertainties in certain foreign countries, including
those in Asia, may adversely affect the future growth of these markets.
Bone Assessment Products
The Company's bone assessment products include a family of DXA bone
densitometers which are used for the precise measurement of bone density to
assist physicians in the diagnosis and monitoring of metabolic bone diseases
such as osteoporosis. Since commercially introducing the first DXA bone
densitometer in 1987, the Company introduced its first bone densitometer capable
of assessing the bone density of the entire body in 1989, introduced the first
bone densitometer capable of taking lateral measurements of the spine in 1991,
and, in 1995, introduced its new QDR 4500 ACCLAIM fourth generation series of
bone densitometers, which integrates the Company's most advanced X-ray
technology into a compact package that facilitates installation in a standard
examination room.
The Company believes that a significant market exists for relatively
low-cost products that assess bone mineral status, employ technologies that do
not use ionizing radiation and may be used in a doctor's office. In order to
address this market, the Company has introduced the Sahara Clinical Bone
Sonometer, a dry ultrasound device that measures bone density of the heel. The
Company is also working on the joint development of a biochemical marker strip
test to assist in the assessment of bone mineral status.
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QDR X-Ray Bone Densitometers. Since its first commercial shipment of a DXA
system in October 1987, the Company has sold more than 4,500 DXA systems. The
Company believes that its systems' performance advantages and their early
adoption by leading clinical investigators have led to their market acceptance.
The Company's DXA systems have been purchased for multiple-site studies
sponsored by the pharmaceutical companies and by the United States government
for evaluation of the incidence and treatment of osteoporosis. In addition,
pharmaceutical companies have promoted the purchase of the systems for use by
physicians to assist in the diagnosis and treatment of osteoporosis.
Advantages of the Company's DXA systems include high precision (consistency
from test to test), low patient radiation exposure equivalent to 1/10th of a
conventional chest X-ray, a relatively fast scanning time, low operating cost,
no radioactive source and the ability to measure bone density of the most
important fracture sites, the spine and hip. Studies conducted by the Company
and independent investigators have demonstrated that the systems can detect a
change in spine bone density with a precision error of less than 1%.
All the Company's DXA systems employ its patented Automatic Internal
Reference System, which continuously calibrates each patient's bone density
measurement to a known standard. This system virtually eliminates errors that
might result from manual calibration and saves operators the time-consuming task
of calibrating several times a day. The system automatically compensates for
drift in the X-ray system, detectors or other electronic components which
ensures long-term measurement stability.
Each of the Company's DXA systems contains an X-ray source mounted beneath
the patient. The X-ray source generates alternating high and low energy pulses
in a thin beam that passes through the Company's patented Automatic Internal
Reference System and then through the patient to an X-ray detector mounted above
the patient. When the X-ray beam is detected, it contains information about the
X-ray absorbing characteristics of both the patient and the calibration
materials in the Automatic Internal Reference System at each of the two levels
of radiation. The system converts this information into a digital format which
is processed and analyzed by a computer and displayed on a high-resolution color
monitor, both of which are incorporated into the system.
The Company has invested substantial resources in developing operating and
applications software for its systems. The software includes calibration
software, automated scan and analysis programs for each scan site, a patient
data base manager that archives all raw data for later retrieval and analysis
and allows the operator to review the current image with an earlier image of the
same patient.
Initial DXA systems developed by the Company employed a single narrow
pencil beam detected by one receptor. In 1991, the Company introduced the first
bone densitometer employing a high density fan shaped X-ray beam that is
detected by an array of receptors. This configuration enables the system to
obtain better quality images with improved spatial resolution, significantly
faster scanning time and higher patient throughput compared to single-beam
systems. Moreover, for standard spine and hip scans, fan beam technology can
reduce scan time by a factor of more than 25 compared to older single-beam
scanning systems.
The Company developed this fan beam technology to perform lateral
(side-to-side) scans of the lower spine, in addition to the posterior-anterior
(back-to-front) measurements performed by the Company's pencil beam systems. The
earliest and most dramatic loss of bone density in the spine occurs primarily in
the spine's soft (trabecular) bone, which is positioned directly behind the hard
(cortical) bone when taking back-to-front measurements. This results in bone
density measurements that average the density of the soft and hard bone and
tends to mask changes in the soft bone. A lateral scan permits the imaging and
measurement of the spine's soft bone with only limited interference from hard
bone. In addition, a lateral scan reduces the interference caused by abnormal
accumulation of bone and calcium deposits in and around the spine.
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In November 1994, the Company introduced the QDR 4500A ACCLAIM at the
annual meeting of the Radiological Society of North America and in January 1995
obtained FDA clearance to sell the system in the United States. See
"Regulation."
The Company's QDR 4500 ACCLAIM series of bone densitometers offers rapid
scanning and high resolution imaging using the latest available fan beam and
high density, solid-state multi-detector array technology. In addition, the QDR
4500 ACCLAIM series is built in modular configurations that allow customers to
add new features and capabilities, while protecting their investment in the
equipment and patient data. The ACCLAIM series is comprised of four modular
systems: the high-end QDR 4500A, the QDR 4500SL, the QDR 4500W and the QDR 4500C
clinical bone densitometer.
An important feature of the QDR 4500A and QDR 4500SL is their ability to
perform lateral (side-to-side) scans of the lower spine, without turning the
patient on her side, in addition to the posterior-anterior (back-to-front)
measurements. The QDR 4500A and QDR 4500SL ACCLAIM are capable of producing high
quality images of the spine, lateral spine, hip and other skeletal sites. The
ACCLAIM's scan arm allows for multiple scan views without patient repositioning.
The images produced can be combined with capabilities that enable vertebral
dimensions to be determined with a radiation dose approximately ten to 100 times
lower than that of conventional chest X-rays. Using the QDR 4500A or the QDR
4500SL, high-quality lateral images of the entire spine can now be obtained in
as little as ten seconds.
The ACCLAIM systems are designed to require less floor space than any other
bone densitometer capable of taking hip and spine measurements. The special
tabletop design and motorized scanner C-arm allow the QDR 4500C and QDR 4500SL
to be installed in a standard 8ft x 8ft examination room (the QDR 4500W and QDR
4500A require an 8ft x 10ft room). Installation requirements for any of the
ACCLAIM bone densitometers are minimal and normally do not require special
electrical, structural or lead-shielding preparation. In addition to their small
size, the QDR 4500 series offers virtually silent operation. The ACCLAIM series
has replaced the Company's QDR 1500, QDR 2000 and QDR 2000plus products.
In November 1997, the Company introduced the QDR 4000 at the annual meeting
of the Radiological Society of North America. The QDR 4000 pencil beam bone
densitometer combines the reliability and economy of Hologic's DXA bone
densitometers with a unique package of value-added applications that provide
physicians with bone density measurements of the hip, spine and forearm. The QDR
4000 will offer an update to Hologic's QDR 1000plus pencil beam system, and will
be targeted at the price sensitive segment of the market. The Company expects
sales of the QDR 4000 to begin in early calendar 1998. In fiscal 1997, the
ACCLAIM series accounted for approximately 82% of DXA sales.
Ultrasound. In December 1994, the Company acquired the ultrasound bone
analyzer business of Walker Sonix. Walker Sonix had developed an ultrasound
product line to assess bone mineral status of the heel. The location of the heel
facilitates easy coupling of the ultrasound transducers at a site with a
relatively low amount of overlying soft tissue. The heel is also made up of
predominantly trabecular bone which tends to be more metabolically active. The
Walker Sonix ultrasound devices measure two parameters, Broadbased Ultrasound
Attention ("BUA") and Speed of Sound ("SOS") through a water medium to
characterize bone mineral status. The use of water as a medium, which is a
characteristic of other ultrasound bone analyzers, requires the patient to place
her foot in water. The use of water requires cumbersome plumbing and cleaning
mechanisms to be incorporated in the system.
The Company developed internally an enhanced dry ultrasound bone analyzer,
called "Sahara" that does not require the use of water. The Company believes
that this "dry" technology offers further operator convenience by the
elimination of the water handling required between each patient. On August 18,
1997, Hologic received an FDA Advisory Panel's recommendation for approval for
its Sahara system. The Company is continuing to work with the FDA to complete
the registration process. There can be no assurance that the Company will be
able to obtain FDA approval for the Sahara on a timely basis, if at all.
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Recent studies have suggested that ultrasound provides good separation of
fracture populations from reference groups and suggests that this method is a
promising screening tool for evaluating a patient's fracture risk. However,
ultrasound does not allow for direct assessment of important hip and spine
fracture sites, has undocumented ability to follow the effects of therapy and
has less precision (reproducibility of results) compared to DXA measurements.
Accordingly, the Company believes that ultrasound systems will be used
predominantly as a low cost initial screening or diagnostic tool and not as a
patient monitoring tool.
Biochemical Markers. In September 1994, the Company entered into a joint
development agreement with Serex to develop a simple strip test for use by
physicians to monitor the levels of a patient's biochemical markers that
indicate the rate of bone resorption. Serex has developed a proprietary and
patented technology that enables complex immuno-chemistry assays to be performed
in a strip test format that the Company believes is well-suited for testing
directly in the physician's office to provide a real-time assessment of bone
resorption. In January 1997, the Company expanded this joint development
agreement to include Ostex International, Inc.'s Osteomark(R) assay. Osteomark
is a simple, inexpensive immunoassay used to assess the level of bone
resorption. Under the joint agreement, the Company, Serex and Ostex are engaged
in the development of a point-of-care Osteomark test, utilizing Serex's
strip-test technology. Although biochemical markers cannot measure bone density,
the Company believes that biochemical markers may be useful as a tool to
determine if therapy is effective. This is accomplished by comparing the
baseline level of the marker with the value obtained from a serial measurement
performed only two or three months following the start of therapy. This same
technique may be useful to evaluate patient compliance with a prescribed
therapy. There can be no assurance that the Company, Serex and Ostex will be
able to develop effective strip tests, either for physician or over-the-counter
use, on a timely basis, if at all, that once developed, any strip test will be
approved or cleared for sale in the United States or other jurisdictions, or
that once cleared or approved for sale any strip test will be commercially
successful.
Traditionally, biochemical markers of bone were performed using high
pressure liquid chromatography ("HPLC") methods conducted in a research
laboratory. HPLC procedures are complex and labor intensive requiring a highly
trained technician, relatively slow, subject to high variability and expensive.
For these reasons, biochemical markers of bone using HPLC methods have not been
used for routine clinical testing. Recently, several immunodiagnostic tests that
are antibody-based have been developed as biochemical markers of bone
remodeling. Immunodiagnostic tests may be performed in a variety of technical
formats. The format that has been introduced by several companies is the
microtitre plate system, which is used for many different types of in-vitro
diagnostic tests and is normally performed in a reference laboratory.
The Company believes that other applications for biochemical markers of
bone as well as new markers are likely to be developed in the future, and under
its agreement with Serex, the Company retains the first right of negotiation to
develop and license such tests.
Mini C-arm Imaging Products
Background and Market Overview
On August 29, 1996, Hologic's wholly-owned subsidiary merged with
FluoroScan in a pooling-of-interests transaction. FluoroScan manufactures and
distributes the FluoroScan Imaging System, a low intensity, real-time mini c-arm
X-ray imaging device which provides high resolution images at radiation levels
and at a cost well below those of conventional X-ray and fluoroscopic equipment.
These mini c-arm systems are used primarily by orthopedic surgeons to perform
minimally invasive surgical procedures on a patient's extremities (i.e., hand,
wrist, knee, foot, ankle, etc.).
The Company believes that certain trends in the healthcare industry will
broaden the use of mini c-arms from the hospitals and surgery centers to private
orthopedic and podiatric physician groups. Some of these trends include: the
emergence of technology that enables minimally invasive procedures and
therapies, the increase in the number of office-based procedures and
examinations as a result of efforts to contain healthcare costs, and the
development of new
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treatments and pharmaceuticals such as synthetic bone materials that are
facilitated by the use of a mini c-arm to perform these procedures.
FluoroScan Products
FluoroScan pioneered the mini c-arm market with the introduction of
FluoroScan I in June 1984. The basis of the FluoroScan System technology is a
second generation micro channel plate image intensifier commonly referred to as
a "night vision" intensifier. This technology permits the FluoroScan System to
produce high resolution readily viewable images by using a small amount of
radiation, converting it to visible light and amplifying it approximately 50,000
times. The same night vision intensifier, as used by the military, allows clear
views of a battlefield at night by amplifying small amounts of ambient light.
The FluoroScan System technology offers several advantages over existing
real-time conventional X-ray imaging devices (also known as C-arms, image
intensifiers or fluoroscopy equipment). These advantages include; a substantial
reduction of radiation to the patient and of scatter radiation to the surgeon
and other operating room personnel, a cost of approximately one-third of the
cost of a conventional C-arm, and mobility. It does not require lead-lined rooms
and it can often be operated without a radiology technician.
OfficeMate. The OfficeMate imaging system was introduced in fiscal 1997.
This system was designed specifically to meet the needs of the physician office.
This system has replaced the FluoroScan II system which was targeted at
physician office and veterinary markets. The OfficeMate features efficient,
user-friendly operation, high resolution real-time and freeze frame images, full
360-degree arm rotation and the choice of three or four inch field-of-view. Due
to its compact size and portability, the Company believes the OfficeMate is well
suited for the in-office extremity imaging requirements of hand and orthopedic
surgeons. The OfficeMate system is 51 inches high, 29 inches wide and 30 inches
deep. The Company believes the primary market for this system is the office
based physician. However, with minor modifications, the OfficeMate can also be
configured to address the needs of the veterinary market.
FluoroScan III. The FluoroScan III imaging system was introduced in the
first quarter of 1996. The FluoroScan III typically has a four- or five-inch
field-of-view and is targeted primarily at orthopedic surgeons, operating rooms,
emergency rooms and ambulatory surgery centers. The new system replaced
FluoroScan I (the first generation model FluoroScan System) and has a number of
technical enhancements. FluoroScan III has dual video channels that allow a
surgeon to display different views of the anatomy for side-by-side comparison.
The unit also features four image buffer memories for instant recall of previous
images. The unit also provides for permanent storage of up to 4,000 full
resolution digital images.
The unit stands approximately four feet high, weighs about 240 pounds and
can be plugged into any standard outlet. It rests on a portable, wheeled base
cabinet, and all vital functions are computer controlled. Images can be viewed
on the monitor or, through the addition of options, printed on thermal paper or
stored on video tape or computer diskette.
FluoroScan Corporate Collaboration
Certain companies are developing material to assist in the healing of bone
fractures. For example, Norian Corporation ("Norian") is in clinical trials in
the U.S. and Europe for its Skeletal Repair System/TM/ ("SRS"). SRS is a
material that is injected into a fracture and has been shown to hold the bones
in position while providing the raw materials to help the body repair itself
more rapidly. Since SRS requires extensive imaging from the initial injection
through the healing process, the Company believes that FDA approval and market
acceptance of SRS could provide long-term benefits for the Company. On June 12,
1995, the Company entered into an agreement with Norian that provides for the
Company to provide imaging equipment for seminars introducing Norian's Skeletal
Repair System to orthopedic surgeons. There can be no assurance that SRS will
receive FDA approval, or if approved will gain wide market acceptance or enhance
sales of the Company's FluoroScan System.
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Other Products; Scanora
In order to take advantage of its European sales force and associated
distribution capability, the Company distributes Scanora, a specialized system
for taking X-ray images of the maxillo-facial anatomy (teeth, jaw and other
facial structures) manufactured by Soredex, S.A. ("Soredex"), a division of
Orion Corporation of Helsinki, Finland.
The Scanora system supports more than 1,000 different image modes,
including pre-surgical planning of dental implants, reconstructive surgery and
temporal mandibular joint repair. This system provides significantly improved
images of the maxillo-facial anatomy compared to other techniques available in
the market, such as panoramic X-rays or computed tomography. Dental implant
procedures have experienced significant growth in Europe over the past five
years.
The Company is the exclusive distributor of Scanora systems in Western
Europe, the Middle East and Africa, excluding South Africa and Namibia. In
addition, the Company has non-exclusive distribution rights in several Eastern
European countries. The Company is distributing Scanora under a distribution
agreement which is renewable annually.
Customers
The Company's DXA customers include many pharmaceutical companies active in
the field of bone mineral metabolism, such as Eli Lilly, Merck, Pfizer, Proctor
& Gamble, Rhone-Poulenc/Rorer, Sanofi Research and SmithKline. The Company
believes that because of their technological features, its DXA systems have been
and continue to be the most widely used bone densitometers for clinical studies
involving the emerging drug therapies for osteoporosis. The Company has a group
of 12 employees who provide data collection and quality assurance services to
such customers. Initial clinical evaluation sites for the Company's DXA systems
included leading medical and research institutions, such as the Mayo Clinic, the
Massachusetts General Hospital and the University of California at San Francisco
in the United States; the University of Lyon and Guy's Hospital in Europe; and
Kobe University in Japan. These institutions, along with many other leading
medical institutions, continue to be users of the Company's DXA systems.
The clinical demand for the Company's DXA bone densitometers has grown as a
result of the increased worldwide focus on women's health problems and the
availability of new osteoporosis therapies entering the market. The Company
expects a further shift in the market for bone densitometers to primary care
physicians, including gynecologists and family physicians, in response to the
development of new drug therapies for osteoporosis and the growing awareness of
osteoporosis as a treatable disease. However, there can be no assurance that
this expansion to the primary care market will occur in a timely fashion, if at
all.
Marketing and Sales
In the United States, the Company sells its DXA systems primarily through
its direct sales force and its FluoroScan Systems through a national network of
independent sales representatives and sales representative organizations. As of
November 30, 1997, the Company had approximately 22 employees engaged in DXA
sales in the United States. In order to penetrate the DXA market more
effectively, the Company has expanded its direct marketing activities, including
additions to its sales force, and has implemented various leasing programs,
including a program with a third party leasing company to make its QDR 1000plus
and QDR 4500C ACCLAIM system available to physicians on a fee-per-scan basis. To
meet the growing demand for its products, the Company plans to enhance further
its distribution capabilities in the United States through a combination of an
expansion of its sales force and strategic alliances with companies with
established distribution channels in the various market segments for the
Company's products.
In the second quarter of fiscal 1997, the Company entered into a
distribution agreement with Physician Sales and Service, Inc. ("PSS") of
Jacksonville, Florida. PSS is a leading distributor of medical products with
over 850 sales representatives focused on private physician practices in the
United States. Under the terms of the agreement, PSS has an exclusive right to
distribute Hologic's QDR 1000plus x-ray bone densitometer in certain markets
throughout the
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United States. The agreement also provides PSS with a non-exclusive option to
distribute the QDR 4500C ACCLAIM in certain other market segments. Upon receipt
of FDA marketing clearance, PSS will also be the exclusive U.S. distributor of
the Sahara ultrasound bone densitometer to the primary care market. There can be
no assurance the Company will receive FDA marketing clearance for Sahara in a
timely manner, if at all.
The Company sells its products in international markets through independent
distributors, as well as a direct sales force in France, the Benelux countries,
Spain and Portugal. As of November 30, 1997, the Company had 11 employees
engaged in sales in Europe.
The Company distributes its DXA and ultrasound products in Japan through
Toyo Medic, which has been the Company's exclusive distributor in Japan since
April 1988. The agreement requires Toyo Medic to purchase certain minimum
quantities and to provide technical and warranty support to its customers.
In certain other territories outside the United States, the Company sells
its systems through independent distributors, all of whom offer technical
support. The Company has increased its efforts to expand its market penetration
for its DXA systems into Latin America, including Argentina, Brazil and Chile,
and into Pacific Rim countries other than Japan, including Australia, The
Peoples Republic of China, South Korea and Taiwan, by working with local sales
representatives and distributors or entering into strategic marketing alliances
in those territories. The Company believes that with time, Eastern Europe may
present a significant opportunity for growth and also is seeking to expand its
presence in the area. Recent economic uncertainties in certain foreign
territories, including Japan, may adversely impact the growth of these markets.
In fiscal 1997 and in fiscal 1996, foreign sales accounted for
approximately 39% and 40% of the Company's product sales, respectively. The
Company's foreign sales are subject to risks generally associated with foreign
sales, including United States and foreign regulatory approval requirements,
policy changes and foreign economic changes. The relative strength of the United
States dollar in relation to foreign currencies may also adversely affect the
Company's sales to foreign countries. The Company also believes that its sales
to Europe may be seasonal, with reduced orders in the summer months reflecting
summer vacation schedules. International sales will also be affected by
government approval of new drug therapies, changes in local healthcare policies
regarding reimbursement and the strength of promotional efforts by its
distributors. Moreover, the FluoroScan System technology is governed by the
International Traffic in Arms Regulations of the United States Department of
State. As a result, the export of FluoroScan Systems to certain countries may be
limited or prohibited. See Note 12 of Notes to Consolidated Financial
Statements.
Competition
The bone assessment market is highly competitive and characterized by
continual change and improvement in technology, and multiple technologies that
have been or are under development. Some of the companies in this industry have
significantly greater manufacturing, marketing and financial resources than the
Company. See "Background."
The Company believes that competition in the field of DXA bone densitometry
is based upon price, precision, speed of measurement, patient radiation dose,
cost and ease of operation, product versatility, product reliability and quality
of service. The Company believes that it competes effectively with respect to
these criteria. The Company believes that its DXA systems will also compete with
other X-ray based modalities, including a radiographic absorptiometry product
developed by CompuMed Inc. which has been licensed to Merck. The Company's DXA
systems also compete with specially-equipped CT scanners and may compete with
used and refurbished DXA systems. See "Bone Assessment Products - Background"
for a discussion of the technical advantages and disadvantages of these other
systems.
The Company believes that competition in the field of ultrasound systems is
based on price, precision, speed of measurement, cost and ease of operation,
product versatility, product reliability and quality of service. The Company
believes that advantages of its Sahara ultrasound bone analyzer system include
the system's dry operation, simple single-button operation, and a compact and
self-contained design that does not require the use of a separate computer. No
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ultrasound bone analyzer has been approved for commercial sale in the United
States. The timing of FDA clearance or approval for ultrasound bone analyzers in
the United States, developed by the Company and others, could have a significant
impact on their respective market shares. The Company believes that ultrasound
systems will compete with DXA systems in the diagnostic market for initial
screening of patients. However, the Company believes that because ultrasound
systems can only measure peripheral skeletal sites and do not have the precision
of DXA systems, DXA systems will continue to be the predominant means of
monitoring bone density for patients being treated for or at high risk of
osteoporosis.
Three companies, including Ostex, have obtained FDA clearance to market
biochemical marker tests that evaluate bone turnover in a microtitre format
which require samples to be sent to the lab for evaluation. One or more of these
companies may develop point-of-care, over-the-counter or other real-time
biochemical marker tests that would compete with the biochemical marker strip
tests being developed by the Company, Serex, and Ostex. The Company believes
that competition in this market will be based upon price, product reliability,
diagnostic sensitivity, precision and ease-of-use. There can be no assurance
that the Company, Serex and Ostex will be able to compete effectively in this
market.
The Company believes that competition for its mini c-arm systems is based
largely on price, quality, service and production capabilities. The market for
mini c-arm systems has become increasingly more competitive due to the
introduction of new mini c-arm devices, particularly in the United States. The
Company believes that key advantages of its FluoroScan Systems include low
levels of radiation, low costs, mobility, quality and durability.
Manufacturing
The Company's manufacturing operations for its DXA and ultrasound systems
consist primarily of assembly, test, burn-in and quality control. The Company
purchases a major portion of the parts and peripheral components for its
products, and manufactures certain subsystems, such as the high-voltage X-ray
power supply, from raw materials. Parts and materials are readily available from
several supply sources.
The Company is required to purchase all of its requirements for Scanora
from Soredex. Failure of Soredex to manufacture those systems on time and in
accordance with specifications would have an adverse impact on the Company's
sales of those systems.
The Company manufactures all the FluoroScan System models and related
products at its manufacturing facility in Northbrook, Illinois. Current
manufacturing capacity permits the production of approximately 30 units per
month. Generally, units for use in the health care field are manufactured
without a prior order, while units for use in industrial applications are custom
made to the customer's specifications.
The Company performs final assembly and test of the FluoroScan System. All
of the materials and most of the purchased components used in manufacturing the
Company's products are readily available from numerous sources. Several key
components require high technology including the X-ray tube, image intensifier,
video camera and fiberoptic taper and are manufactured by only one or a small
number of suppliers. Failure of any component supplier to provide acceptable
quality and timely components at an acceptable price, or an interruption of
supplies from a supplier as a result of fire, nature calamity, strike or other
significant events could materially and adversely affect the Company's business.
Although the Company uses materials in its manufacturing process that may
be subject to federal, state and/or local environmental laws, the costs and
effects of compliance with these laws have not had a material effect on the
Company's financial condition or results of operations during any of the past
three years.
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Backlog
Backlog for the Company's systems as of November 30, 1997 and November 30,
1996 totaled approximately $8.7 million and $9.5 million, respectively. Backlog
consists of purchase orders for which a delivery schedule within the next twelve
months has been specified by the customer. Orders included in backlog may be
canceled or rescheduled by customers without significant penalty. Backlog as of
any particular date should not be relied upon as indicative of the Company's net
revenues for any future period.
Research and Development
The Company's research and development efforts are focused on enhancing its
existing products and developing new products for the bone assessment and mini
C-arm market. The Company's research and development personnel also are involved
in establishing protocols, monitoring, interpreting and submitting test data to
the FDA and other regulatory agencies to obtain the requisite clearances and
approvals for its products. At November 30, 1997, the Company had 49 persons
engaged in research and development, of whom 14 persons were engaged in software
development. The research and development group was responsible for the
introduction of the Company's fourth generation QDR ACCLAIM series of DXA bone
densitometers during 1995, the ongoing development of the Company's Sahara bone
analyzer, the QDR 4000 and the ongoing development of FluoroScan III. During
fiscal 1997, 1996 and 1995, the Company's research and product development
expenses were approximately, $8.5 million, $7.3 million and $4.5 million,
respectively.
Patents and Proprietary Rights
The Company relies upon trade secrets and patents to protect its
technology. Due to the rapid technological change that characterizes the medical
instrumentation industry, the Company believes that the improvement of existing
products, reliance upon trade secrets and unpatented proprietary know-how and
the development of new products are generally as important as patent protection
in establishing and maintaining a competitive advantage. Nevertheless, the
Company has obtained patents and will continue to make efforts to obtain
patents, when available, in connection with its product development program. The
Company has obtained 21 patents, licensed 16 patents and has pending 44 patent
applications in the United States relating to its DXA technology, and has
obtained three patents, licensed four patents and has pending 20 patent
applications in the United States relating to its ultrasound technology. The
Company has obtained or applied for corresponding patents and patent
applications for certain of these patents and patent applications in certain
foreign countries. There can be no assurance that any of the Company's patent
applications will be granted or that any patent or patent application will
provide significant protection for the Company's products and technology.
Moreover, there can be no assurance that foreign intellectual property laws will
protect the Company's intellectual property rights. In the absence of
significant patent protection, the Company may be vulnerable to competitors who
attempt to copy the Company's products, processes or technology.
In September 1994, Serex granted the Company an exclusive license to use
Serex's technology to manufacture, market, sell and distribute the biochemical
marker strip test being developed under a joint development agreement between
Serex and the Company. Serex further granted the Company the right of first
negotiation with respect to the development and distribution of new products
conceived of by Serex for application in bone metabolism. In order to maintain
its exclusive rights once the product is developed, the Company is required to
purchase a certain minimum number of tests or pay Serex amounts that would have
been paid had the Company purchased the minimum number of tests. If the Company
does not meet these minimum requirements, its rights become nonexclusive.
In June 1989, the Company granted an exclusive worldwide license of certain
of its DXA technology to Vivid Technologies, Inc., an affiliate of S. David
Ellenbogen and Jay A. Stein, the Chief Executive Officer and Senior Vice
President of the Company, for the sole purpose of developing a baggage
inspection and security system. In September 1996, the Company also granted
Vivid Technologies, Inc. a nonexclusive license to be used for the development
of X-ray based products for process control applications in the food and
beverage industry.
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The Company had been involved in extensive patent litigation with Lunar,
with each party claiming that the other was infringing certain patents held by
the other. This litigation was settled by agreement dated November 22, 1995. The
agreement provides for certain royalties to be paid by each party to the other
for future sales of products using certain defined technologies. The Company
does not believe that amounts to be paid by either party under this arrangement
will be material. The agreement also provides that neither party will engage the
other party in patent litigation for a period of ten years following the date of
the agreement, regardless of the infringement claimed and regardless of whether
the technology in question currently exists or is developed or acquired by the
other party in the future. Neither party is required to disclose to the other
any of its technology during this ten year period or otherwise. However, there
can be no assurance that Lunar will not use the Company's technology in a manner
that would materially and adversely affect the Company's business and results of
operations.
The Company has a license agreement for technology used in its mini c-arms
with the United States government as represented by NASA that is exclusive
within the United States. This agreement gives the Company exclusive rights to
manufacture and distribute NASA's high voltage isolation transformer and high
voltage power supply. This technology allows the Company's mini c-arm products
to produce low levels of radiation. This license and underlying patent
previously had an expiration date of 2002 but was extended as a result of GATT
and now expires in 2003. Pursuant to this license, the Company may be required
to grant sublicenses to the extent that NASA believes such sublicenses are
necessary for the health and safety needs of the United States and such needs
cannot be fulfilled by the Company. The Company previously had an agreement
which gave the Company exclusive rights to manufacture and distribute a
nonradioactive isotope version of NASA's low intensity X-ray and gamma ray
imaging device. This technology provided the ability to amplify X-rays that have
been converted to visible light. This license agreement terminated in July 1997
upon expiration of the underlying patent. The Company continues to use
technology underlying this patent. However, as a result of the expiration of
this patent, the Company no longer has exclusive use of this technology.
Third Party Reimbursement
In the United States, the Health Care Finance Administration, which
establishes guidelines for the reimbursement of health care providers treating
Medicare and Medicaid patients, provided validation for DXA bone densitometry
examinations as a clinically useful procedure by recommending the reimbursement
for DXA bone examinations in April 1994. In October 1997, HCFA published new
guidelines for bone density measurements. Effective January 1, 1998, HCFA is
recommending reimbursement for central (hip and spine) DXA examinations, the
important fracture sites, of approximately $131 per patient examination, an
increase from the current recommended rate of $121. Reimbursement for DXA
densitometry done at peripheral sites was also increased to approximately $67
per patient examination. The increase in the central and peripheral
reimbursement rates illustrates the increasing recognition of the benefit of
early detection and treatment of bone loss. Currently, there is not an
established reimbursement rate for ultrasound bone density examinations. The
Company believes that once an ultrasound bone densitometer, such as Sahara, is
cleared for marketing in the United States, a reimbursement rate will be
established at a rate similar to peripheral bone densitometry. However, there
can be no assurance that a reimbursement code for ultrasound bone densitometry
will be established by HCFA in a timely manner, if at all. The differential in
reimbursement between central and peripheral exams recognizes the important
benefit of DXA measurements of the critical fracture sites, the hip and spine,
in assisting in the detection and monitoring of bone disease. In part, as a
result of the reimbursement policy recommendations implemented by HCFA, DXA bone
density examinations are paid for by many private third party insurers in the
United States.
In August 1997, President Clinton signed into law the Medicare Bone Mass
Measurement Coverage Standardization Act as a provision in the Balanced Budget
Act. The provision sets forth a national mandate that would require Medicare to
cover bone density diagnostic tests utilizing radiologic, radioisotopic, or
other procedures approved by the FDA for the purpose of identifying bone mass or
detecting bone loss deterioration. This mandate will become effective July 1,
1998.
In several European countries, Japan and other international markets, there
has generally been an earlier adoption of reimbursement for bone densitometry
exams. Countries in which reimbursement for the use of X-ray bone densitometers
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has been approved include Belgium, Brazil, Canada, Germany, Greece, Japan, South
Korea, Spain and Switzerland. In addition, in Japan, where there is a general
aversion to ionizing devices, the government has initiated a program to
subsidize purchases of ultrasound bone densitometers. As a result, there is much
greater use of ultrasound bone densitometers in Japan than in any other country.
Regulation
The medical devices manufactured and marketed by the Company are subject to
regulation by the FDA and, in many instances, by foreign governments. Under the
Federal Food, Drug and Cosmetic Act (the "FDA Act"), manufacturers of medical
devices must comply with certain regulations governing the testing,
manufacturing, packaging and marketing of medical devices. The Company's
products are also subject to the Radiation Control for Health and Safety Act,
administered by the FDA, which imposes performance standards and record keeping,
reporting, product testing and product labeling requirements for devices using
radiation, such as X-rays.
The FDA generally must approve the commercial sale of new medical devices.
Commercial sales of the Company's medical devices within the United States must
be preceded by either a premarket notification filing pursuant to Section 510(k)
of the FDA Act or the granting of a premarket approval. The 510(k) notification
filing must contain information that establishes that the device is
substantially equivalent to an existing device that has been continuously
marketed since May 28, 1976. The Company received FDA market clearance under
510(k) for its DXA bone densitometers and expects to be eligible to seek 510(k)
clearance for its biochemical marker strip test for use by physicians, once
developed.
The premarket approval procedure involves a more complex and lengthy
testing and review process by the FDA than the 510(k) premarket notification
procedure and often requires at least several years to obtain. The Company must
first obtain an investigational device exemption ("IDE") for the product to
conduct extensive clinical testing of the device to obtain the necessary
clinical data for submission to the FDA. The FDA will thereafter only grant
premarket approval if, after evaluating this clinical data, it finds that the
safety and efficacy of the product has been sufficiently demonstrated. This
approval may restrict the number of devices distributed or require additional
patient follow-up for an indefinite period of time. On August 18, 1997, Hologic
received a FDA Advisory Panel's recommendation for approval of its premarket
application for the Sahara ultrasound system. The Company is continuing to work
with the FDA to complete the registration process. There can be no assurance
that the Company will be able to obtain FDA approval for the Sahara on a timely
basis, if at all.
The Company's systems are also subject to approval by certain foreign
regulatory and safety agencies. The FluoroScan System technology is governed by
the International Traffic in Arms Regulations of the United States Department of
State. As a result, the export of FluoroScan Systems to certain countries may be
limited or prohibited.
No assurance can be given that the FDA or foreign regulatory agencies will
give the requisite approvals or clearances for any of the Company's medical
devices under development on a timely basis, if at all. Moreover, after
clearance is given, these agencies can later withdraw the clearance or require
the Company to change the device or its manufacturing process or labeling, to
supply additional proof of its safety and effectiveness, or to recall, repair,
replace or refund the cost of the medical device, if it is shown to be hazardous
or defective. The process of obtaining clearance to market products is costly
and time-consuming and can delay the marketing and sale of the Company's
products.
As a manufacturer of medical devices, the Company is subject to certain
other FDA regulations and the Company's manufacturing processes and facilities
are subject to continuing review by the FDA. Most states and certain other
foreign countries monitor and require licensing of X-ray devices. Federal, state
and foreign regulations regarding the manufacture and sale of medical devices
are subject to future change. The Company cannot predict what impact, if any,
such changes might have on its business.
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Employees
As of November 30, 1997, the Company had 339 full-time employees, including
92 in manufacturing operations, 49 in research and development, 131 in
marketing, sales and support services, 55 in finance and administration and 12
in medical data management. None of the Company's employees are represented by a
union. The Company considers its employee relations to be good.
Item 2. Properties
The Company leases a 83,500 square foot building located in Waltham,
Massachusetts under a lease which expires in 2002 for its corporate headquarters
and manufacturing facility for its bone assessment products. The Company also
utilizes approximately 25,500 square feet of space in Northbrook, Illinois
pursuant to a lease that expires in February 2001 for operations of its
wholly-owned subsidiary, FluoroScan. The Company believes that its facilities
will be adequate for its needs for the foreseeable future. The Company also
maintains sales and service offices in France, Belgium and Spain. The Company
believes that it has adequate space for its anticipated needs and that suitable
additional space will be available at commercially reasonable prices as needed.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 4. Submission of Matter to a Vote of Security Holders.
None.
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Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Market Information. The Company's Common Stock is traded on the Nasdaq
National Market under the symbol "HOLX." The following table sets forth, for the
periods indicated, the high and low sales prices per share of Common Stock, as
reported by the Nasdaq National Market. All stock prices have been retroactively
restated to reflect a 2-for-1 stock split that occurred on March 25, 1996.
<TABLE>
<CAPTION>
Fiscal Year Ended September 28, 1996 High Low
<S> <C> <C>
First Quarter $ 22 3/4 $ 10 3/8
Second Quarter $ 26 3/4 $ 17 1/4
Third Quarter $ 49 1/2 $ 21
Fourth Quarter $ 45 $ 26
- --------------------------------------------------------------------------------
Fiscal Year Ended September 27, 1997 High Low
First Quarter $ 29 $ 18
Second Quarter $ 31 3/4 $ 23 1/8
Third Quarter $ 28 3/8 $ 17 7/8
Fourth Quarter $ 29 3/4 $ 18 1/2
- --------------------------------------------------------------------------------
</TABLE>
Number of Holders. As of December 17, 1997, there were approximately 386
holders of record of the Company's Common Stock.
Dividend Policy. The Company has never declared or paid cash dividends on
its capital stock and does not plan to pay any cash dividends in the foreseeable
future. The Company's current policy is to retain all of its earnings to finance
future growth.
18
<PAGE>
Item 6. Selected Financial Data.
The historical selected financial data of the Company has been
retroactively restated to reflect the acquisition of FluoroScan in a
pooling-of-interests transaction. See Note 3 of the accompanying Notes to the
Consolidated Financial Statements.
<TABLE>
<CAPTION>
Fiscal Years Ended
September 25, September 24, September 30, September 28, September 27,
1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data (In thousands, except per share data)
Revenues:
Product sales $ 31,068 $ 46,227 $ 54,276 $ 88,201 $ 102,781
Other revenue 708 1,427 2,270 3,390 3,908
--- --------- --------- --------- ---------
31,776 47,654 56,546 91,591 106,689
--------- --------- --------- --------- ---------
Costs and Expenses:
Cost of product sales 16,462 24,522 27,549 41,253 47,492
Research and development 3,400 3,668 4,499 7,283 8,527
Selling and marketing 7,328 7,781 11,052 16,504 19,448
General and administrative 5,066 5,795 6,879 9,081 8,827
Restructuring costs (2) 900 --- --- --- ---
Litigation expenses (3) --- --- 2,533 798 ---
Acquisition expenses --- --- --- 1,949 ---
--------- --------- --------- --------- ---------
33,156 41,766 52,512 76,868 84,294
--------- --------- --------- --------- ---------
Income (loss) from operations (1,380) 5,888 4,034 14,723 22,395
Interest income 314 437 883 2,583 5,346
Other income (expense) (36) 70 (56) (249) (172)
---- -- ---- ---- ----
Income (loss) before income taxes (1,102) 6,395 4,861 17,057 27,569
Provision (benefit) for income taxes (785) 1,627 1,513 5,700 9,840
----- ----- ----- ----- -----
Net income (loss) $(317) $4,768 $3,348 $11,357 $17,729
===== ====== ====== ======= =======
Net income (loss) per common and
common equivalent share:
Primary $(.04) $.51 $.34 $.91 $1.30
===== ==== ==== ==== =====
Fully diluted $.49 $.33
==== ====
Weighted average number of common and common
equivalent shares outstanding:
Primary 8,726 9,355 9,831 12,524 13,672
===== ===== ===== ====== ======
Fully diluted 9,649 10,230
===== ======
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet Data
Working capital $ 15,336 $ 23,967 $ 27,189 $ 97,199 $ 112,868
Total liabilities 7,681 9,426 12,551 15,835 17,901
Total assets 25,652 36,670 44,083 123,107 144,667
Stockholders' equity 17,971 27,244 31,532 107,272 126,767
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) All share and per share data has been restated to reflect the 2-for-1 stock
split that occurred on March 25, 1996.
(2) The fiscal 1993 restructuring charge of $900,000, or $.10 per share, relates
to the reorganization of the Company's European operations.
(3) The fiscal 1995 litigation expenses of $2.5 million before income taxes
($1.8 million after tax, or $.18 per share) relate primarily to certain patent
litigation. A definitive agreement was reached by the Company and the other
party to this litigation in November 1995, settling all outstanding disputes.
See "Patents and Proprietary Rights".
19
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion and analysis should be read in conjunction
with the "Selected Consolidated Financial Data" and the Consolidated Financial
Statements included elsewhere in this Report.
Overview
Since inception, the Company has experienced generally increasing
annual sales as interest in bone diseases, such as osteoporosis, has grown, as
new drug therapies have become available in the United States and other
countries to treat these diseases and as the use of DXA systems to measure bone
density has become more widespread. In fiscal 1997, sales of the Company's x-ray
bone densitometers reached record levels, especially in the United States as the
clinical use of bone densitometers continued to expand.
The Company introduced the first dual energy x-ray absorptiometry (DXA)
bone densitometer in 1987 and continued with a string of new product
advancements including the introduction of the fourth-generation
clinically-oriented ACCLAIM series of bone densitometers in fiscal 1995. In
fiscal 1997 and 1996, ACCLAIM sales represented approximately 82% and 86%,
respectively, of the Company's total DXA sales. The Company has achieved a
slightly higher gross margin on this product line because of higher selling
prices and lower overall manufacturing costs than the older DXA line. In July
1996, the Company began international shipments of Sahara, a completely dry
ultrasound bone sonometer system that does not require water as a coupling
medium like the other competitive devices.
On August 29, 1996, the Company acquired all of the common stock of
FluoroScan Imaging Systems, Inc. (FluoroScan), an industry leader in the field
of mini c-arm imaging systems. All results have been restated to reflect the
acquisition of FluoroScan in a pooling-of-interests transaction. All share and
per share data have also been retroactively restated to reflect a 2-for-1 stock
split that occurred on March 25, 1996.
The Company believes that future growth will be in part conditional
upon the success of sales of Sahara, especially in the United States to the
primary care market subject to completion of the FDA approval process. In August
1997, the Company received a unanimous recommendation of approval for Sahara by
the FDA's Radiology Advisory Panel.
The availability of reimbursement to healthcare providers for bone
density measurements of patients continues as an important factor in the
attractiveness of the Company's bone densitometers. Effective January 1, 1998,
the Health Care Finance Administration, the agency which administers Medicare,
increased the recommended reimbursement rates for central DXA tests to a
national average of $131, from $121, and for peripheral densitometry to $67,
from $38.
20
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, the
percentage of revenues represented by items as shown in the Company's
consolidated statements of operations.
<TABLE>
<CAPTION>
Fiscal Years Ended
----------------------------------------
September 30, September 28, September 27,
1995 1996 1997
---- ---- ----
============================================================================================
<S> <C> <C> <C>
Revenues:
Product sales 96.0% 96.3% 96.3%
Other revenue 4.0 3.7 3.7
- --------------------------------------------------------------------------------------------
100.0 100.0 100.0
- --------------------------------------------------------------------------------------------
Cost and expenses:
Cost of product sales 48.7 45.0 44.5
Research and development 8.0 8.0 8.0
Selling and marketing 19.5 18.0 18.2
General and administrative 12.2 9.9 8.3
Litigation expenses 4.5 .9 --
Acquisition expenses -- 2.1 --
- --------------------------------------------------------------------------------------------
92.9 83.9 79.0
- --------------------------------------------------------------------------------------------
Income from operations 7.1 16.1 21.0
Interest income 1.6 2.8 5.0
Other income (expense) (0.1) (0.3) (0.2)
- --------------------------------------------------------------------------------------------
Income before income taxes 8.6 18.6 25.8
Provision for income taxes 2.7 6.2 9.2
- --------------------------------------------------------------------------------------------
Net income 5.9% 12.4% 16.6%
============================================================================================
</TABLE>
Fiscal Years Ended September 27, 1997, September 28, 1996 and September 30, 1995
Revenues. Total revenues were $106.7 million in fiscal 1997, $91.6
million in fiscal 1996 and $56.5 million in fiscal 1995. In fiscal 1997, total
revenues increased 16% compared to fiscal 1996 primarily due to an increase in
the total number of DXA product shipments in the United States, Europe and Latin
America. The current year increase in DXA product revenues of 23% in these
markets were partially offset by fewer sales in Asia and, to a lesser extent, by
decreased sales of mini c-arm imaging systems. Total revenues in fiscal 1996
increased 62% when compared to fiscal 1995 as a result of the increasing demand
for the Company's x-ray bone densitometers in both the domestic and
international markets, but especially in the United States where DXA sales
increased more than 300% in fiscal 1996 over fiscal 1995. In addition, to a
lesser extent, the increase in total revenues in fiscal 1996 compared to fiscal
1995 was attributable to increased sales of mini c-arm systems. There has also
been a shift in product sales mix beginning in 1995 to the Company's new line of
bone densitometers, the ACCLAIM series, which the Company began shipping in
January 1995. The new ACCLAIM products have higher average selling prices than
the comparable DXA bone densitometers which they replace. The ACCLAIM product
line accounted for over 73%, 78% and 42% of product sales in fiscal 1997, 1996
and 1995, respectively.
Other revenues consist primarily of royalty revenues from the Company's
licensing of its technology to a related party, revenue relating to medical data
management services provided to pharmaceutical companies to assist in the
collection and monitoring of clinical trial data and revenues generated from the
21
<PAGE>
Company's Strategic Alliance Program on a fee-per-scan basis. In fiscal 1997,
other revenues increased 15% to $3.9 million from $3.4 million in fiscal 1996
primarily due to additional fee-per-scan revenues and from an increase in
royalty revenues. In fiscal 1996, other revenue increased 49% to $3.4 million
from $2.3 million in fiscal 1995 primarily due to an increase in revenue
relating to medical data management services.
In fiscal 1997, approximately 61% of product sales were generated in
the United States, 20% in Europe, 10% in Asia and 9% in other international
markets. In fiscal 1996, approximately 60% of product sales were generated in
the United States, 17% in Asia, 17% in Europe and 6% in other international
markets. In fiscal 1995, approximately 42% of product sales were generated in
the United States, 28% in Europe, 22% in Asia and 8% in other international
markets.
The Company expects that foreign sales in the current fiscal year will
continue to account for a substantial portion of product sales. Continued
economic and currency related uncertainty in a number of foreign countries,
especially in Asia and Latin America, could reduce the Company's future sales to
these markets. In particular, the demand for bone densitometry systems has
slowed considerably in Japan due to an increasing level of maturity in this
market and, to a lesser extent, the uncertain economic conditions that currently
exist in that country.
Costs and Expenses. The cost of product sales decreased as a percentage
of product sales to 46% in fiscal 1997 from 47% in fiscal 1996 and from 51% in
fiscal 1995. These costs decreased as a percentage of product sales primarily
due to (i) increased shipments of the latest family of DXA bone densitometers,
the ACCLAIM series, which earns a better gross margin than the Company's older
DXA systems, (ii) a volume increase in the number of DXA systems sold resulting
in certain manufacturing efficiencies and (iii) an increase in sales by the
Company's direct sales force (primarily in the United States) which results in
higher average selling prices. Partially offsetting these decreases were
increased costs and lower sales relating to mini c-arm systems. In fiscal 1996,
the Company realized lower margins on the newly introduced FluoroScan III model,
which is slightly more expensive to produce than the FluoroScan I model which it
replaced, and due to an increase in international sales through distributors
which result in lower selling prices.
Research and development expenses increased 17% to $8.5 million (8% of
total revenues) in fiscal 1997 from $7.3 million (8% of total revenues) in
fiscal 1996 and $4.5 million (8% of total revenues) in fiscal 1995. These
increases were primarily due to the addition of engineering personnel working on
the development of new products, product enhancements and the funding of Serex
to develop a biochemical marker strip test.
Selling and marketing expenses increased 18% to $19.4 million (19% of
product sales) in fiscal 1997 from $16.5 million (19% of product sales) in
fiscal 1996 and $11.1 million (20% of product sales) in fiscal 1995 primarily
due to an increase in sales personnel and related expenses, marketing and
promotional costs incurred in connection with the ACCLAIM series and increased
sales commissions based on the higher sales volume. In addition, the Company
incurred additional costs in connection with its strategic alliances for the
introduction and planned introduction of new products and the distribution of
products through new sales channels.
General and administrative expenses decreased slightly to $8.8 million
(8% of total revenues) in fiscal 1997 from $9.1 million (10% of total revenues)
in fiscal 1996. These expenses increased 32% in fiscal 1996 from $6.9 million
(12% of total revenues) in fiscal 1995. The 3% decrease in fiscal 1997 when
compared to fiscal 1996 was primarily due to certain efficiencies achieved in
connection with the integration of FluoroScan. The increase in fiscal 1996 when
compared to fiscal 1995 was primarily due to increased headcount and other
compensation-related expenditures, and an increase in accounts receivable
reserves, as a result of the increase in accounts receivable.
22
<PAGE>
Litigation expenses incurred in fiscal 1996 and in fiscal 1995 were in
connection with the Company's disputes with Lunar Corporation (Lunar) and B.V.
Optische Industrie de Oude Delf ("Oldelft"). Legal expenses in connection with
the patent litigation with Lunar began in October 1994 and represent a
substantial portion of the total litigation expenses. In November 1995, a
definitive agreement that provides for the cross-licensing of certain patent
rights and a non-assertion agreement for all patents involving DXA and
ultrasound technologies for a period of ten years was reached by the Company and
Lunar. The complaint brought by Oldelft against the Company was settled in May
1996.
Acquisition expenses incurred in fiscal 1996 were direct transaction
costs related to the Company's merger with FluoroScan Imaging Systems, Inc.
These costs were expensed in the period incurred in accordance with the
pooling-of-interests accounting for business combinations.
Interest Income. Interest income increased to $5.3 million in fiscal
1997 from $2.6 million in fiscal 1996 and $900,000 in fiscal 1995. In fiscal
1997, the Company earned a slightly higher rate of return on a higher investment
base than in the prior year. In January 1996, the Company received proceeds of
approximately $49.2 million from a public sale of Common Stock which increased
the investment base. The Company also received approximately $8.0 million from
the exercise of FluoroScan warrants in July 1996. The Company has invested these
proceeds in investment grade corporate and government securities. In fiscal 1997
and 1996, the Company also increased the number of long-term receivables to
Latin American customers resulting in additional interest income.
Other Expense. In fiscal 1997, 1996 and 1995, the Company incurred
other expenses of approximately $172,000, $250,000 and $60,000, respectively.
These expenses were primarily attributable to the interest costs on a bank line
of credit used by the Company's European subsidiaries to borrow funds in their
local currencies to pay for all intercompany sales, thereby reducing the foreign
currency exposure on those transactions. To the extent that foreign currency
exchange rates fluctuate in the future, the Company may be exposed to continued
financial risk. Although the Company has established a borrowing line
denominated in the two foreign currencies (the French franc and the Belgian
franc) in which the subsidiaries currently conduct business to minimize this
risk, there can be no assurance that the Company will be successful or can fully
hedge its outstanding exposure.
Provision for Income Taxes. The Company's effective tax rate was 35.7%
in fiscal 1997, 33.4% in fiscal 1996 and 31.1% in fiscal 1995. The Company's
effective tax rate is lower than the statutory tax rates due primarily to the
tax benefits associated with the Company's foreign sales corporation and the
utilization of net operating losses in foreign jurisdictions and tax credits.
The increase in the effective tax rate is primarily due to the significant
increase in U.S. income as a percentage of total income. See Note 5 of Notes to
the Consolidated Financial Statements.
Liquidity and Capital Resources
At September 27, 1997, working capital was $112.9 million and cash,
cash equivalents and short-term investments totaled $84.3 million. The cash,
cash equivalents and short-term investments balance increased approximately $8.6
million from September 28, 1996 primarily due to operating activities which
included net income of $17.7 million and an increase in the Company's accrued
expenses, which were partially offset by an increase in accounts receivable. The
increase in accrued expenses and accounts receivable reflects the Company's
increase in sales activity. The Company finances certain sales to Latin America
over a two-to-three year-time frame. At September 27, 1997, the Company had
long-term accounts receivable outstanding of approximately $3.5 million relating
to these sales, which were included in other assets. As of September 27, 1997,
the Company has not experienced any significant change in these receivables,
however, the economic and currency related uncertainties in these countries may
increase the likelihood of non-payment. In fiscal 1997, the Company purchased
approximately $2.1 million of property and equipment, primarily computers and
other equipment associated with the hiring of additional personnel.
23
<PAGE>
The Company does not currently have any significant capital commitments
and believes that existing sources of liquidity and funds expected to be
generated from operations will provide adequate cash to fund the Company's
anticipated working capital and other cash needs for the foreseeable future.
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hologic, Inc.:
We have audited the accompanying consolidated balance sheets of Hologic, Inc. (a
Delaware corporation) and subsidiaries as of September 28, 1996 and September
27, 1997, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended September
27, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
FluoroScan Imaging Systems, Inc., a company acquired during 1996 in a
transaction accounted for as a pooling-of-interests, as discussed in Note 3.
Such statements are included in the consolidated financial statements of
Hologic, Inc. and comprise 23% of total consolidated revenues for 1995. The
statements of FluroScan Imaging Systems, Inc. for 1995 were audited by other
auditors whose report thereon have been furnished to us. Our opinion expressed
herein, insofar as it relates to amounts included for FluoroScan Imaging
Systems, Inc., is based solely upon the report of the other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Hologic, Inc. and subsidiaries as of September 28,
1996 and September 27, 1997, and the results of their operations and their cash
flows for each of the three years in the period ended September 27, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
November 6, 1997
24
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Board of Directors of FluoroScan Imaging Systems, Inc.:
We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows of FluoroScan Imaging Systems, Inc. and
subsidiary for the year ended December 31, 1995 (not presented herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted accounting
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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the operations and cash flows of FluoroScan
Imaging Systems, Inc., and subsidiary for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
BDO Seidman, LLP
Chicago, Illinois
February 23, 1996
25
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 28, September 27,
1996 1997
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 28,754,023 $ 28,091,933
Short-term investments 46,907,728 56,173,247
Accounts receivable, less reserves of $1,360,000 and $1,460,000 in 1996 and 21,735,613 29,231,105
1997, respectively
Inventories 11,122,988 13,204,528
Prepaid expenses and other current assets 4,513,375 4,067,715
------------- -------------
Total current assets 113,033,727 130,768,528
------------- -------------
PROPERTY AND EQUIPMENT, AT COST:
Equipment 4,813,647 6,397,509
Furniture and fixtures 1,349,659 1,655,557
Leasehold improvements 1,494,936 1,687,523
------------- -------------
7,658,242 9,740,589
Less--Accumulated depreciation and amortization 3,973,723 5,036,017
------------- -------------
3,684,519 4,704,572
OTHER ASSETS, NET 6,389,210 9,194,142
------------- -------------
Total assets $ 123,107,456 $ 144,667,242
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 2,534,740 $ 82,764
Accounts payable 4,025,790 5,232,270
Accrued expenses 7,515,365 9,297,552
Deferred revenue 1,758,871 3,287,924
------------- -------------
Total current liabilities 15,834,766 17,900,510
------------- -------------
COMMITMENTS (NOTE 9)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value-
Authorized--1,622,685
Issued and outstanding--none - -
Common stock, $.01 par value-
Authorized--30,000,000 shares
Issued and outstanding--12,871,274 shares and 13,111,442 shares in 1996 and 128,713 131,114
1997, respectively
Capital in excess of par value 89,253,570 91,668,270
Retained earnings 18,069,697 35,798,846
Cumulative translation adjustment (179,290) (831,498)
------------- -------------
Total stockholders' equity 107,272,690 126,766,732
------------- -------------
Total liabilities and stockholders' equity $ 123,107,456 $ 144,667,242
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
--------------------Years Ended-----------------
September 30, September 28, September 27,
1995 1996 1997
REVENUES:
<S> <C> <C> <C>
Product sales $ 54,276,761 $ 88,200,646 $ 102,781,165
Other revenue 2,270,068 3,389,979 3,908,266
--------------- --------------- ---------------
56,546,829 91,590,625 106,689,431
--------------- --------------- ---------------
COSTS AND EXPENSES:
Cost of product sales 27,548,992 41,252,990 47,491,712
Research and development 4,498,857 7,283,430 8,527,073
Selling and marketing 11,052,233 16,504,076 19,448,024
General and administrative 6,878,759 9,080,580 8,827,354
Litigation expenses 2,533,493 797,819 -
Acquisition expenses - 1,948,889 -
--------------- --------------- ---------------
52,512,334 76,867,784 84,294,163
--------------- --------------- ---------------
Income from operations 4,034,495 14,722,841 22,395,268
INTEREST INCOME 883,245 2,583,404 5,345,985
OTHER EXPENSE (56,484) (249,379) (172,104)
--------------- --------------- ---------------
Income before provision for income taxes 4,861,256 17,056,866 27,569,149
PROVISION FOR INCOME TAXES 1,513,000 5,700,000 9,840,000
--------------- --------------- ---------------
Net income $ 3,348,256 $ 11,356,866 $ 17,729,149
=============== =============== ===============
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE:
Primary $ .34 $ .91 $ 1.30
======= ======= =======
Fully diluted $ .33 $ - $ -
======= ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING:
Primary 9,830,637 12,523,983 13,671,894
============== ============== ==============
Fully diluted 10,229,729 - -
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Capital
Number of $.01 in Excess of Retained
Shares Par Value Par Value Earnings
<S> <C> <C> <C> <C>
BALANCE, SEPTEMBER 24, 1994 9,088,742 $ 90,888 $ 23,563,283 $ 3,767,727
Exercise of common stock warrants 39,297 393 (393) -
Amortization of deferred compensation - - - -
Exercise of stock options 129,436 1,294 241,965 -
Issuance of common stock under employee
stock purchase plan 9,560 96 59,057 -
Stock issuance in conjunction with
collaboration agreement 56,042 560 323,528 -
Tax benefit from stock options exercised - - 280,000 -
Net income - - - 3,348,256
Translation adjustments - - - -
------------- ------------- ------------- -------------
BALANCE, SEPTEMBER 30, 1995 9,323,077 93,231 24,467,440 7,115,983
Exercise of common stock warrants 357,037 3,570 8,040,811 -
Issuance of common stock, net of issuance
costs of $390,774 2,492,000 24,920 49,168,876 -
Compensation expense related to issuance of
stock options - - 109,780 -
Adjustment for FluoroScan Imaging Systems, - - - (403,152)
Inc. pooling of interests from year-end
change (Note 3)
Exercise of stock options 684,310 6,843 2,374,909 -
Issuance of common stock under employee
stock purchase plan 14,850 149 161,754 -
Tax benefit from stock options exercised - - 4,930,000 -
Net income - - - 11,356,866
Translation adjustments - - - -
------------- ------------- ------------- -------------
BALANCE, SEPTEMBER 28, 1996 12,871,274 128,713 89,253,570 18,069,697
Exercise of stock options 212,214 2,122 1,345,429 -
Stock issued for employee compensation 7,000 70 137,055 -
Issuance of common stock under employee
stock purchase plan 10,766 107 225,979 -
Issuance of common stock under 401(k) plan 10,188 102 215,120 -
Compensation for grants of stock options to
nonemployees - - 21,117 -
Tax benefit from stock options exercised - - 470,000 -
Net income - - - 17,729,149
Translation adjustments - - - -
------------- ------------- ------------- -------------
BALANCE, SEPTEMBER 27, 1997 13,111,442 $ 131,114 $ 91,668,270 $ 35,798,846
============= ============= ============= =============
<CAPTION>
Cumulative Total
Deferred Translation Stockholders'
Compensation Adjustment Equity
<S> <C> <C> <C>
BALANCE, SEPTEMBER 24, 1994 $ (9,305) $ (169,033) $ 27,243,560
Exercise of common stock warrants - - -
Amortization of deferred compensation 9,305 - 9,305
Exercise of stock options - - 243,259
Issuance of common stock under employee
stock purchase plan - - 59,153
Stock issuance in conjunction with - - 324,088
collaboration agreement
Tax benefit from stock options exercised - - 280,000
Net income - - 3,348,256
Translation adjustments - 24,024 24,024
------------- ------------- -------------
BALANCE, SEPTEMBER 30, 1995 - (145,009) 31,531,645
Exercise of common stock warrants - - 8,044,381
Issuance of common stock, net of issuance
costs of $390,774 - - 49,193,796
Compensation expense related to issuance of - - 109,780
stock options
Adjustment for FluoroScan Imaging Systems,
Inc. pooling of interests from year-end
change (Note 3) - - (403,152)
Exercise of stock options - - 2,381,752
Issuance of common stock under employee
stock purchase plan - - 161,903
Tax benefit from stock options exercised - - 4,930,000
Net income - - 11,356,866
Translation adjustments - (34,281) (34,281)
------------- ------------- -------------
BALANCE, SEPTEMBER 28, 1996 - (179,290) 107,272,690
Exercise of stock options - - 1,347,551
Stock issued for employee compensation - - 137,125
Issuance of common stock under employee - - 226,086
stock purchase plan
Issuance of common stock under 401(k) plan - - 215,222
Compensation for grants of stock options to
nonemployees - - 21,117
Tax benefit from stock options exercised - - 470,000
Net income - - 17,729,149
Translation adjustments - (652,208) (652,208)
------------- ------------- -------------
BALANCE, SEPTEMBER 27, 1997 $ - $ (831,498) $ 126,766,732
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
--------------------Years Ended-----------------
September 30, September 28, September 27,
1995 1996 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 3,348,256 $ 11,356,866 $ 17,729,149
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 704,471 889,550 1,251,189
Adjustment for FluoroScan Imaging Systems, Inc. pooling - (403,152) -
of interests from year-end change (Note 3)
Compensation expense related to issuance of common stock - 109,780 271,373
and stock options
Changes in assets and liabilities-
Accounts receivable (1,413,830) (8,853,238) (9,693,779)
Inventories (2,979,382) (2,666,599) (2,081,541)
Prepaid expenses and other current assets (247,043) (2,268,108) 399,658
Accounts payable 2,094,602 (403,566) 1,375,163
Accrued expenses 771,440 2,936,322 1,781,571
Deferred revenue 505,765 384,142 1,529,052
--------------- --------------- ---------------
Net cash provided by operating activities 2,784,279 1,081,997 12,561,835
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of held-to-maturity investments - (3,830,832) (10,624,271)
Sales of held-to-maturity investments - - 3,119,842
Purchases of available-for-sale investments (4,367,946) (75,561,809) (71,832,205)
Sales of available-for-sale investments 5,394,790 31,146,752 69,374,586
Purchase of property and equipment, net (1,042,792) (2,382,639) (2,082,350)
(Increase) decrease in other assets (365,011) 71,161 (103,325)
--------------- --------------- ---------------
Net cash used in investing activities (380,959) (50,557,367) (12,147,723)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Settlement) borrowings under line of credit (536,200) 604,654 (2,451,976)
Net proceeds from exercise of common stock warrants - 8,044,381 -
Net proceeds from sale of common stock 302,412 51,737,451 1,573,637
Tax benefit from stock options exercised 280,000 4,930,000 470,000
--------------- --------------- ---------------
Net cash provided by (used in) financing activities 46,212 65,316,486 (408,339)
--------------- --------------- ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (15,082) 26,494 (667,863)
--------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,434,450 15,867,610 (662,090)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 10,451,963 12,886,413 28,754,023
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 12,886,413 $ 28,754,023 $ 28,091,933
=============== =============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ 860,309 $ 2,959,167 $ 7,380,026
=============== =============== ===============
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS:
Preferred stock investment acquired in exchange
for common stock $ 324,088 $ - $ -
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS
Hologic, Inc. (the Company) is engaged in the development, manufacture
and distribution of proprietary X-ray and other medical systems. On
August 29, 1996, the Company completed a merger with FluoroScan Imaging
Systems, Inc. (FluoroScan), a manufacturer of low-intensity, real-time
X-ray imaging devices (see Note 3).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the
application of certain accounting policies as described in this note and
elsewhere in the accompanying consolidated financial statements.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and all of its wholly owned subsidiaries.
All material intercompany accounts and transactions have been
eliminated in consolidation.
(b) Fiscal Year
The Company's fiscal year ends on the last Saturday in September.
Fiscal 1995, 1996 and 1997 ended on September 30, 1995, September
28, 1996 and September 27, 1997, respectively. Operations for
fiscal 1995 includes 53 weeks and 1996 and 1997 include 52 weeks.
(c) Stock Split
On March 25, 1996, the Company affected a two-for-one stock
split. The stock split has been retroactively reflected in the
accompanying consolidated financial statements and notes for all
periods presented.
(d) Management Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
e) Cash and Cash Equivalents and Investments
The Company considers all highly liquid investments with
maturities of three months or less at the time of acquisition to
be cash equivalents. Included in cash equivalents at September 28,
1996 and September 27, 1997 are approximately $8,735,000 and
$8,310,000, respectively, of securities purchased under agreements
to resell. The securities purchased under agreements to resell are
collateralized by U.S. government securities. Short-term
investments have maturities of greater than three months and
consist of securities issued by the U.S. Government and its
agencies. Investments
30
<PAGE>
with maturities of greater than one year have been classified as
long-term. The Company had long-term investments of approximately
$3,831,000 and $4,527,000, with an average maturity period of 25
months and 23 months, as of September 28, 1996 and September 27,
1997, respectively, which are included in other assets in the
accompanying consolidated balance sheets.
The Company accounts for investments in accordance with Statement
of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities. In accordance
with SFAS No. 115, investments that the Company has the positive
intent and ability to hold to maturity are reported at amortized
cost, which approximates fair market value, and are classified as
held-to-maturity. The investments that the Company has deemed
held-to-maturity include cash equivalents and securities issued
by U.S. government agencies, which total approximately $20,473,000
and $85,368,000 at September 28, 1996 and September 27, 1997,
respectively. Investments purchased to be held for indefinite
periods of time and not intended at the time of purchase to be
held until maturity are classified as available-for-sale; the
investments that the Company has deemed available for sale total
approximately $54,396,000 at September 28, 1996 and none at
September 27, 1997. These investments consist of securities issued
by the U.S. government and are carried at cost, which approximates
fair market value.
(f) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information about Financial
Instruments with Off-Balance-Sheet Risk and Financial Instruments
with Concentrations of Credit Risk, requires disclosure of any
significant off-balance-sheet and credit risk concentrations.
Financial instruments that subject the Company to credit risk
consists primarily of trade accounts receivable and long-term
receivables. The Company has not experienced any material losses
related to receivables from individual customers or groups of
customers in the X-ray and medical devices industry.
The Company utilizes distributors in certain countries with
various credit terms, depending on the individual circumstances.
One distributor had amounts due to the Company of approximately
$2,633,000 and $1,668,000 as of September 28, 1996 and September
27, 1997, respectively. This distributor accounted for 15%, 10%
and 5% of product sales for fiscal 1995, 1996 and 1997,
respectively.
The Company finances certain sales to Latin America over a two-to-
three year time frame. At September 28, 1996 and September 27,
1997, the Company had long-term accounts receivable outstanding of
approximately $1,293,000 and $3,486,000, respectively, relating to
these sales, which are included in other assets.
The Company sells its systems to a leasing company, which in turn
leases the systems to third parties. The leasing company accounted
for 13% of product sales for fiscal 1997.
(g) Disclosure of Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and
cash equivalents, short-term investments, accounts receivable,
line of credit and accounts payable. The carrying amounts of the
Company's cash and cash equivalents, short-term investments,
accounts receivable, line of credit and accounts payable
approximate fair value due to the short-term nature of these
instruments.
31
<PAGE>
(h) Inventories
Inventories are stated at the lower of cost (first-in, first-out)
or market and consist of the following:
<TABLE>
<CAPTION>
September 28, September 27,
1996 1997
<S> <C> <C>
Raw materials and work-in-process $ 8,291,870 $ 9,967,707
Finished goods 2,831,118 3,236,821
---------------- --------------
$ 11,122,988 $ 13,204,528
================ ==============
</TABLE>
Work-in-process and finished goods inventories consist of
materials, labor and manufacturing overhead.
(i) Depreciation and Amortization
The Company provides for depreciation and amortization by charges
to operations, using the straight-line and declining-balance
methods, which allocate the cost of property and equipment over
the following estimated useful lives:
<TABLE>
<CAPTION>
Estimated
Asset Classification Useful Life
<S> <C>
Equipment 5 years
Furniture and fixtures 5-7 years
Leasehold improvements Life of lease
</TABLE>
(j) Long-Lived Assets
The Company assesses the realizability of its long-lived assets,
including intangible assets, in accordance with SFAS No. 121,
Accounting for Impairment of Long-lived Assets and for Long-lived
Assets To Be Disposed Of. To date, the Company has not identified
any impairments requiring adjustment.
(k) Foreign Currency Translation
The Company translates the financial statements of its foreign
subsidiaries in accordance with SFAS No. 52, Foreign Currency
Translation. In translating the accounts of the foreign
subsidiaries into U.S. dollars, assets and liabilities are
translated at the rate of exchange in effect at year-end, while
stockholders' equity is translated at historical rates. Revenue
and expense accounts are translated using the weighted average
exchange rate in effect during the year. Gains and losses from
foreign currency translation are credited or charged to cumulative
translation adjustment, included in stockholders' equity in the
accompanying consolidated balance sheets.
Transaction gains and losses in fiscal 1995, 1996 and 1997 were
not significant.
(l) Revenue Recognition
The Company recognizes product revenue upon shipment. A provision
is made at that time for estimated warranty costs to be incurred.
Other revenues are recorded at the time the product is shipped or
the service is rendered.
32
<PAGE>
Maintenance revenues are recognized over the term of the contract.
Cash received in excess of revenues recognized is recorded as
deferred revenue in the accompanying consolidated balance sheets.
(m) Research and Development and Software Development Costs
Research and development costs have been charged to operations as
incurred. SFAS No. 86, Accounting for the Costs of Computer
Software To Be Sold, Leased or Otherwise Marketed, requires the
capitalization of certain computer software development costs
incurred after technological feasibility is established. The
Company believes that once technological feasibility of a software
product has been established, the additional development costs
incurred to bring the product to a commercially acceptable level
are not significant.
(n) Net Income per Common and Common Equivalent Share
Net income per share data is computed using the weighted average
number of shares of common stock outstanding during each period.
Common equivalent shares from stock options and warrants have been
included in the computation using the treasury stock method only
when their effect would be dilutive. Fully diluted net income per
share has been separately presented only when the difference from
primary net income per share is significant.
In March 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 128, Earnings Per Share, which established new
standards for calculating and presenting earnings per share. The
Company will adopt this new standard in its fiscal 1998 financial
statements, which will require the reporting of diluted earnings
per share and basic earnings per share, as defined. SFAS No. 128
is effective for periods ending after December 15, 1997, and early
adoption is not permitted. When adopted, the statement will
require restatement of prior years' earnings per share. For the
years ended September 30, 1995, September 28, 1996 and September
27, 1997, dilutive earnings per share would have been $.34, $.91,
and $1.30, respectively. Basic earnings per share would have been
$.36, $.97 and $1.37, respectively, for the same periods.
(o) Derivative Financial Instruments
At September 28, 1996 and September 27, 1997, the Company had no
instruments requiring disclosure under SFAS No. 119, Disclosure
About Derivative Financial Instruments and Fair Value of Financial
Instruments.
(p) Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, Reporting
Comprehensive Income and SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information. Both SFAS No. 130 and
SFAS No. 131 are effective for fiscal years beginning after
December 15, 1997. The Company believes that the adoption of these
new accounting standards will not have a material impact on the
Company's financial statements.
(3) ACQUISITION OF FLUOROSCAN IMAGING SYSTEMS, INC.
On August 29, 1996, the Company acquired all the common stock of
FluoroScan in exchange for 1,454,901 shares of the Company's common
stock. Under the terms of the agreement, FluoroScan shareholders received
.31069 of a share of the Company's common stock in exchange for each
share of FluoroScan common stock. Additionally, all outstanding options
and warrants to acquire FluoroScan common stock
33
<PAGE>
were converted to options and warrants to acquire 297,517 shares of the
Company's common stock. FluoroScan is a manufacturer and distributor of
low-intensity, real-time X-ray imaging devices.
The merger qualifies as a tax-free reorganization and was accounted for
as a pooling of interests. Accordingly, the Company's financial
statements have been restated to include the results of FluoroScan for
all periods presented. FluoroScan's fiscal year-end has been changed from
December 31 to the last Saturday in September to conform to the Company's
fiscal year-end. Fiscal 1995 represents the results of Hologic and
FluoroScan as of and for the year ended September 30, 1995 and December
31, 1995, respectively. Fiscal 1996 and 1997 represents the results of
Hologic and FluoroScan as of and for the twelve months ended September
28, 1996 and September 27, 1997, respectively. Based on the difference in
fiscal year-ends, results of operations for the three months ended
December 31, 1995 for FluoroScan have been included in the accompanying
consolidated statements of income for both fiscal 1995 and 1996. For the
three months ended December 31, 1995, FluoroScan recorded total revenues
of $3,877,968 and net income of $403,152. Accordingly, the retained
earnings and net income in the accompanying consolidated statements of
stockholders' equity and cash flows, respectively, have been adjusted in
fiscal 1996 to reflect the net income of FluoroScan for the three months
ended December 31, 1995.
Separate and combined results of Hologic and FluoroScan during the
periods preceding the merger were as follows:
<TABLE>
<CAPTION>
Hologic FluoroScan Combined
<S> <C> <C> <C>
Nine Months Ended June 29, 1996 (Unaudited)-
Net revenues $ 56,349,729 $ 10,870,000 $ 67,219,729
Net income 8,271,037 972,557 9,243,594
Fiscal Year Ended September 30, 1995-
Net revenues $ 43,399,850 $ 13,146,979 $ 56,546,829
Net income 1,869,519 1,478,737 3,348,256
</TABLE>
(4) LINE OF CREDIT
The Company maintains a line of credit with a bank for the equivalent of
$3,000,000, which bears interest at the Paris Interbank Offered Rate
(3.19% at September 27, 1997) plus 1.50%. The borrowings under this line
are primarily used by the Company's European subsidiaries to settle
intercompany sales and are denominated in the respective local currencies
of its European subsidiaries. The line of credit may be canceled by the
bank with a 30-day notice. The average outstanding balance during fiscal
1997 was approximately $993,000, and the weighted average interest rate
for fiscal 1997 was 6.64%. Interest expense on this line of credit of
approximately $204,000, $154,000 and $66,000 has been included in other
expenses in the accompanying consolidated statements of income for 1995,
1996 and 1997, respectively.
(5) INCOME TAXES
The Company provides for income taxes under the liability method in
accordance with SFAS No. 109, Accounting for Income Taxes.
34
<PAGE>
The provision for income taxes in the accompanying consolidated statements
of income consists of the following:
<TABLE>
<CAPTION>
--------------------Years Ended--------------------
September 30, September 28, September 27,
1995 1996 1997
<S> <C> <C> <C>
Federal-
Current $ 1,073,100 $ 5,942,000 $ 8,852,000
Deferred 198,900 (569,000) 142,000
---------------- ---------------- ----------------
1,272,000 5,373,000 8,994,000
State-
Current 231,000 315,000 795,000
Deferred - - 40,000
---------------- ---------------- ----------------
231,000 315,000 835,000
Foreign-
Current 10,000 12,000 11,000
---------------- ---------------- ----------------
$ 1,513,000 $ 5,700,000 $ 9,840,000
================ ================ ================
</TABLE>
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
<TABLE>
<CAPTION>
--------------------Years Ended------------------
September 30, September 28, September 27,
1995 1996 1997
<S> <C> <C> <C>
Income tax provision at federal statutory rate 34.0% 34.0% 35.0%
Increase (decrease) in tax resulting from-
Net effect of (income) losses of foreign
subsidiaries not provided (3.5) 0.1 (0.6)
State tax provision, net of federal benefit 4.1 1.1 2.3
Research and development tax credit (1.0) (2.0) (0.9)
Effect of not providing U.S. taxes on exempt
FSC income (2.8) (1.0) (1.4)
Nondeductible pooling of interest expenses - 2.9 -
Other 0.3 (1.7) 1.3
------- -------- --------
31.1% 33.4% 35.7%
======== ======== ========
</TABLE>
The components of domestic and foreign income (loss) before the provision
for income taxes are as follows:
<TABLE>
<CAPTION>
---------------------Years Ended--------------------
September 30, September 28, September 27,
1995 1996 1997
<S> <C> <C> <C>
Domestic $ 4,330,083 $ 17,481,453 $ 27,063,201
Foreign 531,173 (424,587) 505,948
--------------- --------------- ---------------
$ 4,861,256 $ 17,056,866 $ 27,569,149
=============== =============== ===============
</TABLE>
During fiscal 1995, 1996 and 1997, the Company realized tax benefits of
approximately $280,000, $4,930,000 and $470,000, respectively, relating to
the exercise of certain stock options. These benefits are reflected as a
component of capital in excess of par value.
35
<PAGE>
The components of the net deferred tax asset recognized as other current
assets in the accompanying consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
September 28, September 27,
1996 1997
<S> <C> <C>
Deferred tax assets $ 2,437,000 $ 2,136,000
Valuation allowance (658,000) (539,000)
---------------- ----------------
$ 1,779,000 $ 1,597,000
================ ================
</TABLE>
The approximate income tax effect of each type of temporary difference and
carryforward before allocation of the valuation allowance is approximately
as follows:
<TABLE>
<CAPTION>
September 28, September 27,
1996 1997
<S> <C> <C>
Net foreign operating loss carryforwards $ 523,000 $ 330,000
Nondeductible accruals 864,000 283,000
Nondeductible reserves 1,005,000 1,493,000
Other temporary differences 45,000 30,000
-------------- --------------
$ 2,437,000 $ 2,136,000
============== ==============
</TABLE>
The Company has recorded a valuation allowance against a portion of its
deferred tax assets. The valuation allowance relates primarily to certain
deferred tax assets in foreign jurisdictions, for which realization is
uncertain.
(6) COMMON STOCK
(a) Stock Option Plans
The Company's 1986 Combination Stock Option Plan (the 1986 Plan)
is administered by the Board of Directors. Under the terms of the
1986 Plan, the Company granted employees either incentive stock
options or nonqualified stock options to purchase shares of the
Company's common stock at a price not less than fair market value
at the date of grant. In addition, the Company may grant
nonqualified options to other participants. During fiscal 1996,
the 1986 Plan was terminated. Options granted under the 1986 Plan
vest over a five-year period and are exercisable at varying dates.
The Company's 1994 Stock Option Plan (the 1994 Plan) and the 1995
Stock Option Plan (the 1995 Plan), both of which were originally
adopted by FluoroScan, are administered by the Board of Directors
and the Company has issued options to purchase 289,252 shares of
the Company's common stock, as of September 27, 1997. Under the
terms of the 1994 Plan and the 1995 Plan, the Company may grant
employees either incentive stock options, nonqualified stock
options, stock appreciation rights, restricted stock and deferred
stock awards at a price not less than the fair market value on the
date of grant. The Company does not intend to grant any
additional options under these plans.
In June 1995, the Board of Directors adopted the 1995 Combination
Stock Option Plan (the 1995 Combination Plan), pursuant to which
the Company is authorized to issue 1,100,000 options to purchase
shares. Under the terms of the 1995 Combination Plan, the Company
may grant employees
36
<PAGE>
either incentive stock options or nonqualified stock options to
purchase shares of the Company's common stock at a price not less
than the fair market value at the date of grant. In addition, the
Company may grant nonqualified options to other participants. As
of September 27, 1997, the Company had 241,022 shares available
for grant under this plan.
The Company's 1990 Nonemployee Director Stock Option Plan (the
Directors' Plan) allows for eligible directors to receive options
to purchase 10,000 shares of common stock upon election as a
director. The options vest ratably over a five-year period. In
addition, eligible directors are entitled to annual option grants
to purchase 8,000 shares of common stock, which vest after six
months. Option grants under the Directors' Plan are at not less
than fair market value on the date of grant. The Company has
reserved 200,000 shares of common stock for issuance under the
Directors' Plan. As of September 27, 1997, the Company had 64,000
shares available for grant.
The Company's 1994 Directors' Stock Option Plan (the 1994
Directors' Plan), originally adopted by FluoroScan, allows for
eligible directors to receive options to purchase an aggregate of
9,321 shares of common stock. Option grants under the 1994
Directors' Plan are at not less than the fair market value on the
date of grant. As of September 27, 1997 all options available
under the 1994 Directors' Plan had either expired or been
exercised.
In May 1997, the Board of Directors adopted the 1997 Employee
Equity Incentive Plan (the 1997 Plan), pursuant to which the
Company is authorized to issue 500,000 shares of common stock.
Under the terms of the 1997 Plan, the Company may grant employees
either nonqualified stock options, stock appreciation rights,
performance shares, restricted stock, or stock units. As of
September 27, 1997 the Company had 378,850 shares available for
grant under this plan.
The following table summarizes all stock option activity under all
of the plans for the three years ended September 27, 1997.
<TABLE>
<CAPTION>
Number Exercise Price Weighted Average
of Shares per Share Exercise Price
<S> <C> <C> <C>
Outstanding, September 24, 1994 1,248,492 $ .05- $ 21.69 $ 2.68
Granted 892,624 6.19- 32.59 10.55
Terminated (15,821) 1.94- 19.92 3.87
Exercised (129,436) .05- 7.07 1.87
----------- ---------------------- --------
Outstanding, September 30, 1995 1,995,859 .05- 32.59 6.45
Granted 312,072 11.50- 49.00 23.61
Terminated (36,374) 1.94- 30.58 3.54
Exercised (667,372) .05- 20.72 6.99
----------- ---------------------- --------
Outstanding, September 28, 1996 1,604,185 .50- 49.00 11.24
Granted 324,750 19.25- 29.13 21.60
Terminated (224,524) 1.94- 37.75 21.46
Exercised (212,214) 1.88- 30.98 10.36
----------- ---------------------- --------
Outstanding, September 27, 1997 1,492,197 $ .50- $ 49.00 $ 12.08
=========== ====================== ========
Exercisable, September 27, 1997 582,076 $ .50- $ 49.00 $ 8.78
=========== ====================== ========
</TABLE>
37
<PAGE>
The range of exercise prices for options outstanding and options
exercisable at September 27, 1997 are as follows:
<TABLE>
<CAPTION>
-------------------------Options Outstanding--------------------------- -----Options Exercisable---------
Weighted
Average
Range of Exercise Options Remaining Weighted Average Options Weighted Average
Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
<S> <C> <C> <C> <C> <C>
$ .50- $3.69 339,166 5.77 $ 2.66 199,306 $ 2.71
3.94- 7.06 154,200 6.94 5.98 73,920 5.75
7.75- 8.25 427,990 7.75 8.25 195,858 8.25
8.31- 23.34 318,775 9.05 18.00 48,628 17.25
23.38- 49.00 252,066 8.95 27.56 64,364 26.30
--------------- ---- ------------- --------------- -------------
1,492,197 7.69 $ 12.08 582,076 $ 8.78
=============== ==== ============= =============== =============
</TABLE>
The weighted average grant date fair value under the Black-Scholes
option pricing model of options granted during the years ended
September 28, 1996 and September 27, 1997 under the various plans
is $16.25 and $14.62 per share, respectively. As of September 28,
1996 and September 27, 1997, the weighted average remaining
contractual life of outstanding options under these plans is 8.24
years and 7.69 years, respectively.
The Company accounts for its stock-based compensation plans under
Accounting Principle Board Opinion No. 25, Accounting for Stock
Issued to Employees. In October 1995 the FASB issued SFAS No. 123,
Accounting for Stock-Based Compensation, which established a
fair-value-based method of accounting for stock-based compensation
plans. The Company has adopted the disclosure-only alternative
under SFAS No. 123 that requires disclosure of the pro forma
effects on net income and earnings per share as if SFAS No. 123
had been adopted, as well as certain other information.
The Company has computed the pro forma disclosures required under
SFAS No. 123 for all stock options, stock issuances under the
employee stock purchase plan and warrants granted to employees of
the Company in fiscal years ending September 28, 1996 and
September 27, 1997 using the Black-Scholes option pricing model
prescribed by SFAS No. 123. The assumptions used to calculate the
SFAS No. 123 pro forma disclosure and the weighted average
information for the fiscal years ending September 28, 1996 and
September 27, 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Risk-free interest rate 6.00% 6.00%
Expected dividend yield - -
Expected lives 6 years 6 years
Expected volatility 70% 70%
</TABLE>
38
<PAGE>
The pro forma effect of applying SFAS No. 123 for all options
granted, stock issuances under the employee stock purchase plan
and warrants granted to employees of the Company in fiscal years
ending September 28, 1996 and September 27, 1997 would be as
follows:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Net income as reported $ 11,356,866 $ 17,729,149
Pro forma net income $ 10,210,274 $ 16,731,101
Net income per common and common equivalent $ .91 $ 1.30
share, as reported
Pro forma net income per common and common $ .82 $ 1.22
equivalent share
</TABLE>
(b) Employee Stock Purchase Plan
In December 1994, the Company adopted the 1995 Employee Stock
Purchase Plan (the ESP Plan) in compliance with Section 423 of the
Internal Revenue Code. Employees who have completed 12 consecutive
months or two years, whether or not consecutive, of employment
with the Company are eligible to participate in the ESP Plan. The
ESP Plan allows participants to purchase common stock of the
Company at 85% of the fair market value, as defined. The Company
may issue up to 200,000 shares under the ESP Plan. During fiscal
1996 and 1997, the Company issued 14,850 and 10,766 shares,
respectively, under the ESP Plan. At September 27, 1997, the
Company has 164,824 shares available for purchase under the ESP
Plan.
(c) Rights Agreement
In December 1992, the Company adopted a shareholder rights plan.
The plan is intended to protect shareholders from unfair or
coercive takeover practices. In accordance with the plan, the
Board of Directors declared a dividend distribution of one common
stock purchase right for each share of common stock outstanding
until the rights become detachable. Each right entitles the
registered holder to purchase from the Company one share of common
stock for $90, adjusted for certain events. In the event that the
Company is acquired in a merger or other business combination
transaction or more than 50% of its assets or earning power is
sold, each holder shall thereafter have the right to receive, upon
exercise of each right, that number of shares of common stock of
the acquiring company that, at the time of such transaction, would
have a market value of two times the $90 per share exercise price.
The rights will not be detachable or exercisable until certain
events occur. The Board of Directors may elect to terminate the
rights under certain circumstances.
(d) Secondary Public Offering
On January 26, 1996, the Company completed a secondary public
offering of 2,492,000 shares of its common stock. The proceeds to
the Company, net of underwriting discounts, commissions and
offering expenses, were approximately $49,194,000.
39
<PAGE>
(e) Initial Public Offering
In July 1994, prior to becoming a wholly owned subsidiary of the
Company through the merger discussed in Note 3, FluoroScan
completed an initial public offering of 222,210 shares of common
stock. The proceeds to the Company, net of underwriting discounts,
commissions and offering expenses, were approximately $4,000,000.
(f) Warrants
In conjunction with FluoroScan's initial public offering, the
Company issued 357,294 warrants to purchase common stock at an
exercise price of $22.53 per share. In July 1996, the Company
redeemed 357,037 warrants resulting in proceeds to the Company of
approximately $8,000,000. Of the warrants issued to underwriters,
which were not subject to redemption, 257 remained outstanding at
September 27, 1997. The underwriters' warrants expire in July
1999.
(g) Underwriter's Option
In conjunction with FluoroScan's initial public offering, the
Company sold to the underwriter an option to purchase up to 31,069
shares of common stock at an exercise price of $33.80. As of
September 27, 1997, there were 14,131 options outstanding. The
options expire in July 1999.
(7) PROFIT-SHARING 401(k) PLAN
The Company has a qualified profit-sharing plan covering substantially all
of its employees. Contributions to the plan are at the discretion of the
Company's Board of Directors. The Company has recorded approximately
$135,000, $309,000 and $235,000 as a provision for the profit-sharing
contribution for fiscal 1995, 1996 and 1997, respectively.
(8) RELATED-PARTY TRANSACTIONS
(a) Management Services Agreement
The Company has an agreement with Vivid Technologies, Inc.
(Vivid), an affiliated company, whereby the Company provides
management, administrative and support services. In addition, the
Company leased a portion of its facilities to Vivid through
February 1996 for approximately $15,000 per month. Vivid paid the
Company for all direct costs incurred, as well as a portion of the
Company's overhead costs, as defined, representing the pro rata
portion of costs attributable to Vivid. The Company charged Vivid
approximately $530,000, $325,000 and $130,000 under the agreement
during fiscal 1995, 1996 and 1997, respectively, which have been
offset against operating expenses of the Company. Vivid also
purchased approximately $210,000 of inventory and spare parts from
the Company in fiscal 1995. Vivid did not make any purchases from
the Company in fiscal 1996 and 1997. Of these amounts,
approximately $34,000 and $15,000 were unpaid as of September 28,
1996 and September 27, 1997, respectively.
(b) License and Technology Agreement
The Company has an agreement with Vivid whereby Vivid obtained a
perpetual, exclusive worldwide license to utilize certain of the
Company's technology and patents for the sole purpose of
developing baggage and inspection security systems (the Exclusive
License). In September 1996, this license was amended to grant
Vivid a nonexclusive license to utilize these patents and
technology for certain new product development for other
applications (the Nonexclusive License). Royalty payments to the
40
<PAGE>
Company under the Exclusive License are 5% of product revenue on
Vivid's first $50 million in sales; thereafter, payments are 3% of
Vivid's sales up to $200 million. Royalty payments under the
Nonexclusive License are 3% on sales up to $200 million. No
royalty payments will be made on aggregate revenues in excess of
$200 million for either the Exclusive License or the Nonexclusive
License. The agreement terminates by mutual agreement of the two
parties or under certain other circumstances, as defined. The
Company recognized approximately $719,000, $775,000 and $950,000
of royalty revenue under the Exclusive License for fiscal 1995,
1996 and 1997, respectively. Approximately $624,000 and $710,000
were outstanding at September 28, 1996 and September 27, 1997,
respectively. The Company has not recognized any royalty revenue
under the Nonexclusive License.
(9) COMMITMENTS
(a) Operating Leases
The Company and its subsidiaries lease certain equipment and
conduct their operations in leased facilities under operating
lease agreements that expire through fiscal 2002. In addition, the
facility lease requires the Company to pay a percentage of real
estate taxes and certain operating costs of the property. Future
minimum lease payments under the operating leases are
approximately as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending Amount
<S> <C>
September 26, 1998 $ 1,077,000
September 25, 1999 1,015,000
September 24, 2000 998,000
September 30, 2001 868,000
September 29, 2002 412,000
---------------
$ 4,370,000
===============
</TABLE>
Rental expense, net of subrentals from Vivid, was approximately
$736,000, $796,000 and $1,107,000 for fiscal 1995, 1996 and 1997,
respectively.
(b) Patent Acquisition
In fiscal 1992, the Company acquired certain patents pertaining to
technology incorporated into certain of the Company's products.
The Company paid approximately $245,000 for these patents and
related expenses upon entering into the agreement. In May 1993,
this agreement was amended such that the Company paid
approximately $344,000 for additional patent rights and related
expenses, of which $50,000 was paid through the issuance of 21,334
shares of common stock. The Company may be required to make
additional payments of common stock (up to a maximum of 64,000
shares) for certain additional patent rights, if and when
available. The cost of these patents is being amortized over their
expected life of 10 years.
(c) Royalty Agreements
The Company, through its FluoroScan subsidiary, has two license
agreements covering three patents. Under the agreements, the
Company is required to pay royalties ranging from 3.5% to 4.5% of
sales, as defined. Royalty expense under these agreements was
approximately $19,000, $8,000 and $3,700 in 1995, 1996 and 1997,
respectively. The Company has also entered into a sublicense
agreement on
41
<PAGE>
one of the patents. Royalties earned under this sublicense
agreement were approximately $204,000, $35,000 and $140,000 in
1995, 1996 and 1997, respectively.
(10) COLLABORATION AGREEMENT
In June 1995, the Company acquired a 5% minority interest in a
collaborating company. To acquire this minority interest, the Company
issued 56,042 shares of common stock and paid $75,912 in cash in return
for all of the outstanding convertible preferred stock of the
collaborating company. The Company also entered into a development
agreement with the collaborating company related to a certain product. As
part of the development agreement, the Company will reimburse the
collaborating company for expenses incurred in the development of this
product. In order to maintain its exclusive rights in the collaborating
company's technology, the Company must meet required sales volumes, as
defined, in the five years commencing 90 days after approval of the
product by the Food and Drug Administration. The Company is also required
to pay royalties to the collaborating company based on net sales of the
product, as defined. No royalties were due under the agreement as of
September 27, 1997.
(11) FEE PER SCAN PROGRAM
The Company has entered into a strategic fee per scan program with a
leasing company whereby the Company sells its systems to the leasing
company, which, in turn, leases the systems to third parties. Under the
terms of the agreement, the Company is contingently liable for a certain
amount per system, up to a maximum of the greater of (i) the sale price
of four systems or (ii) 10% of the aggregate value of systems sold under
the program.
(12) GEOGRAPHIC INFORMATION
Revenues, net income (loss) and identifiable assets for the Company's
U.S. and European operations are summarized as follows:
<TABLE>
<CAPTION>
-------------------------------1995---------------------------------
United European
States Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C>
Revenues from unaffiliated customers $ 44,396,343 $ 12,150,486 $ - $ 56,546,829
Transfers between geographic areas 4,105,914 2,085,185 (6,191,099) -
--------------- -------------- -------------- ---------------
Total revenues $ 48,502,257 $ 14,235,671 $ (6,191,099) $ 56,546,829
=============== ============== ============== ===============
Net income $ 2,843,413 $ 519,941 $ (15,098) $ 3,348,256
=============== ============== ============== ===============
Identifiable assets $ 39,213,833 $ 6,353,095 $ (1,484,170) $ 44,082,758
=============== ============== ============== ===============
<CAPTION>
----------------------------------1996------------------------------
<S> <C> <C> <C> <C>
Revenues from unaffiliated customers $ 79,688,198 $ 11,902,427 $ - $ 91,590,625
Transfers between geographic areas 6,038,947 1,187,355 (7,226,302) -
--------------- -------------- --------------- ---------------
Total revenues $ 85,727,145 $ 13,089,782 $ (7,226,302) $ 91,590,625
=============== ============== ============== ===============
Net income (loss) $ 11,702,269 $ (436,053) $ 90,650 $ 11,356,866
=============== ============== =============== ===============
Identifiable assets $ 120,749,056 $ 6,549,660 $ (4,191,260) $ 123,107,456
=============== ============== ============== ===============
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
----------------------------------1997------------------------------
<S> <C> <C> <C> <C>
Revenues from unaffiliated customers $ 91,635,085 $ 15,054,346 $ - $ 106,689,431
Transfers between geographic areas 8,735,778 1,099,980 (9,835,758) -
--------------- -------------- -------------- ---------------
Total revenues $ 100,370,863 $ 16,154,326 $ (9,835,758) $ 106,689,431
=============== ============== ============== ===============
Net income $ 17,345,813 $ 494,660 $ (111,324) $ 17,729,149
=============== ============== ============== ===============
Identifiable assets $ 144,833,729 $ 4,304,023 $ (4,470,510) $ 144,667,242
=============== ============== ============== ===============
</TABLE>
Export sales from the United States to unaffiliated customers primarily
in Europe, Asia and Latin America during fiscal 1995, 1996 and 1997
totaled approximately $16,620,000, $21,468,000 and $24,751,000,
respectively.
Transfers between the Company and its European subsidiaries are generally
recorded at amounts similar to the prices paid by unaffiliated foreign
dealers. All intercompany profit is eliminated in consolidation.
Export product sales as a percentage of total product sales are as
follows:
<TABLE>
<CAPTION>
------------------- Years Ended------------------
September 30, September 28, September 27,
1995 1996 1997
<S> <C> <C> <C>
Europe 28% 17% 20%
Asia 22 17 10
All others 8 6 9
--- --- ---
58% 40% 39%
=== === ===
</TABLE>
(13) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
September 28, September 27,
1996 1997
<S> <C> <C>
Accrued payroll and employee benefits $ 2,993,389 $ 1,996,803
Accrued commissions 2,355,126 3,821,360
Accrued legal 458,447 430,216
Other accrued expenses 1,708,403 3,049,173
------------ -------------
$ 7,515,365 $ 9,297,552
============ =============
</TABLE>
(14) LITIGATION
(a) Lunar Corporation
On September 7, 1994, Lunar Corporation (Lunar) filed a complaint
in the United States District Court against the Company, alleging,
among other things, that two of the Company's patents are not
valid and infringe on three of Lunar's patents. The Company filed
a counterclaim against Lunar with
43
<PAGE>
respect to the infringement of two of the Company's patents and a
declaration that certain of Lunar's patents are invalid and
unenforceable.
On November 22, 1995, the Company and Lunar executed a definitive
agreement settling all disputes between the parties. The agreement
provides for the cross-licensing of certain patent rights and
continuing payments between the parties related to future sales.
The Company and Lunar have agreed not to engage each other in
patent litigation in the area of X-ray densitometry and ultrasound
for a 10-year period. Management believes that the financial terms
of this agreement will not have a material adverse effect on the
Company's financial position or results of operations.
(b) B.V. Optische Industrie de Oude Delft
On January 24, 1995, B.V. Optische Industrie de Oude Delft
(Oldelft) filed suit in the United States District Court against
the Company seeking unspecified treble damages, attorneys' fees
and costs relating to a prior patent dispute between the Company
and Oldelft relating to equalization radiography. On December 14,
1995, the litigation was dismissed by the United States District
Court. In April 1996, a motion for reconsideration filed by
Oldelft was dismissed and, in May 1996, the Company and Oldelft
settled the matter.
(c) Other
In the ordinary course of business, the Company is party to
various types of litigation. The Company believes it has
meritorious defenses to all claims, and, in its opinion, all
litigation currently pending or threatened will not have a
material effect on the Company's financial position or results of
operations.
(15) QUARTERLY INCOME STATEMENT INFORMATION (UNAUDITED)
The following table presents a summary of quarterly results of operations
for 1996 and 1997:
<TABLE>
<CAPTION>
---------------------------------1996-------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Total revenue $ 18,692,144 $ 22,294,277 $ 26,233,308 $ 24,370,896
Net income 1,717,869 3,419,901 4,105,824 2,113,272
Primary net income per common
and common equivalent share .16 .28 .31 .15
<CAPTION>
---------------------------------1997-------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Total revenue $ 27,109,743 $ 27,999,888 $ 26,947,937 $ 24,631,863
Net income 4,408,294 4,650,900 4,746,303 3,923,652
Primary net income per common and
common equivalent share .32 .34 .35 .29
</TABLE>
44
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item is incorporated by reference to
the sections entitled "Election of Directors" and "Executive Officers" in the
Registrant's Proxy Statement.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference to
the sections entitled "Executive Compensation" in the Registrant's Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to
the section entitled "Share Ownership of Directors, Officers and Certain
Beneficial Owners" in the Registrant's Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to
the section entitled "Certain Transactions" in the Registrant's Proxy Statement.
45
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements
Report of Independent Public Accountants
Consolidated Balance Sheets as of September 27, 1997
and September 28, 1996
Consolidated Statements of Operations for the years ended September
27, 1997, September 28, 1996 and September 30, 1995
Consolidated Statements of Stockholders' Equity for the years ended
September 27, 1997, September 28, 1996 and September 30, 1995
Consolidated Statements of Cash Flows for the years ended September
27, 1997, September 28, 1996 and September 30, 1995
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
The following financial statement schedules are filed as part of
this report and should be read in conjunction with the consolidated
financial statements:
Schedule
--------
Report of Independent Public Accountants on Schedule
II Valuation and Qualifying Accounts
All other schedules have been omitted because they are not required or
because the required information is given in the Consolidated Financial
Statements or Notes thereto.
(3) Listing of Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Reference
- ------ ---------
<C> <S> <C>
2.01 Merger Agreement between the Company and
its Massachusetts predecessor.............................. A
2.02 Agreement and Plan of Merger between the Company,
Fenway Acquisition Corp., and FluoroScan Imaging
Systems, Inc............................................... I-2.01
3.01 Certificate of Incorporation of the Company................ A
3.02 By-laws of the Company..................................... A
4.01 Specimen certificate for shares of the
Company's Common Stock..................................... A
4.02 Description of capital stock (contained in the Certificate
</TABLE>
46
<PAGE>
<TABLE>
<S> <C> <C>
of Incorporation of the Company filed, as Exhibit 3.01)... A
4.03 Rights Agreement dated December 22, 1992.................. C
4.04 Amendment No. 1 to Rights Agreement ...................... G
10.07 1986 Combination Stock Option Plan, as amended............ F*
10.08 Amended and Restated 1990 Non-Employee
Director Stock Option Plan................................ H
10.09 Employee Stock Purchase Plan of the Company............... F
10.10 1995 Combination Stock Option Plan........................ H*
10.12 Form of Indemnification Agreement for directors and
certain officers of the Company........................... A*
10.17 Management Agreement between the Company and
Vivid Technologies, Inc................................... A*
10.18 License Agreement between the Company and
Vivid Technologies, Inc.,.................................. A
10.19 Distribution Agreement between the Company, Toyo Medic
Company Limited and Yokogawa Medical Systems, Ltd......... B*
10.20 Facility lease between the Company and
Lincoln Street Trust...................................... B
10.21 Orion Corporation Soredex
Distribution Agreement for Scanora........................ D**
10.22 Employment Agreement with an officer
of the Company............................................ E
10.23 Form of Selling Stockholders Agreement.................... G
10.25 Amendment No.1 to the License Agreement between
the Company and Vivid Technologies, Inc.................... K
10.26 Facility Lease between the Company and
Mangen Management Company.................................. K
10.32 First Amendment to the facility lease between the Company
and Lincoln Street Trust................................... I
11.01 Statement re: Computation of Per Share Earnings.......... Filed herewith
21.01 Subsidiaries of the Company............................... Filed herewith
23.01 Consent of Arthur Andersen LLP............................ Filed herewith
23.02 Consent of BDO Seidman, LLP............................... Filed herewith
</TABLE>
- -----------------------
* Management compensation plan or arrangement
** Confidentiality requested as to certain provisions
A. The above exhibits were previously filed as an exhibit of the same number to
the Company's Registration Statement on Form S-1 (Registration No. 33-33128)
filed on January 24, 1990 and are incorporated herein by reference.
B. The above exhibits were previously filed as an exhibit of the same number to
the Company's 1990 Annual Report on Form 10-K and are incorporated herein by
reference.
C. The above exhibit was previously filed as an exhibit of the same number to
the Company's 1992 Annual Report on Form 10-K and is incorporated herein by
reference.
D. The above exhibit was previously filed as an exhibit of the same number to
the Company's 1993 Third Quarter Report on Form 10-Q and is incorporated
herein by reference.
47
<PAGE>
E. The above exhibit was previously filed as an exhibit of the same number to
the Company's 1993 Annual Report on Form 10-K and is incorporated herein by
reference.
F. The above exhibits were previously filed as an exhibit of the same number to
the Company's 1994 Annual Report on Form 10-K and is incorporated herein by
reference.
G. The above exhibit was previously filed as an exhibit of the above referenced
number of the Company's Registration Statement on Form S-3 (Registration No.
33-65019) filed on December 14, 1995 and is incorporated herein by
reference.
H The above exhibits were previously filed as an exhibit of the same number
to the Company's 1995 Annual Report on Form 10-K and is incorporated herein
by reference.
I. The above exhibit was previously filed as an exhibit of the above referenced
number of the Company's Proxy Statement and Prospectus on Form S-4 filed
(Registration No. 333-08977) on August 6, 1996 and is incorporated herein by
reference.
J. The above exhibit was previously filed as an exhibit of the same number of
the Company's Registration Statement on Form S-8 (Registration No. 333-
11853) filed on September 12, 1996 and is incorporated herein by reference.
K. The above exhibits were previously filed as an exhibit of the same number to
the Company's 1996 Annual Report on Form 10-K and is incorporated herein by
reference.
(d) Financial Statement Schedules:
The financial statement schedules required are included as part of Item
(2) above.
48
<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 on
its behalf by the undersigned, thereunto duly authorized.
HOLOGIC, INC.
By: /s/ S. DAVID ELLENBOGEN
-------------------------------
S. DAVID ELLENBOGEN
Chief Executive Officer
Dated: December 23, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ S. DAVID ELLENBOGEN Director
- ----------------------------------- and Chief Executive Officer December 23, 1997
S. DAVID ELLENBOGEN
Vice President, Finance and
/s/ GLENN P. MUIR Principal Financial and
- ----------------------------------- Accounting Officer December 23, 1997
GLENN P. MUIR
/s/ JAY A. STEIN Director and
- ----------------------------------- Senior Vice President December 23, 1997
JAY A. STEIN
/s/ IRWIN JACOBS Director December 23, 1997
- -----------------------------------
IRWIN JACOBS
/s/ WILLIAM A. PECK Director December 23, 1997
- -----------------------------------
WILLIAM A. PECK
/s/ GERALD SEGEL Director December 23, 1997
- -----------------------------------
GERALD SEGEL
/s/ ELAINE ULLIAN Director December 23, 1997
- -----------------------------------
ELAINE ULLIAN
</TABLE>
49
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Hologic, Inc.
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Hologic, Inc. and subsidiaries included
in this Form 10-K and have issued our report thereon dated November 6, 1997. Our
audits were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in Item 14 is the
responsibility of the Company's management and is presented for the purposes of
complying with the Securities Exchange Commission's rules and is not part of the
basic financial statements. The schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Boston, Massachusetts
November 6, 1997
50
<PAGE>
SCHEDULE II
HOLOGIC, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
(in Thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning Costs and at End of
of Period Expenses Period
---------- ---------- ---------
<S> <C> <C> <C>
Allowance for Uncollectible Amounts
Year Ended:
September 30, 1995 $ 850 $--- $ 850
September 28, 1996 $ 850 $510 $1,360
September 27, 1997 $1,360 $100 $1,460
</TABLE>
51
<PAGE>
Exhibit 11.01
Hologic, Inc. and Subsidiaries
Statement RE: Computation of Earnings Per Share
<TABLE>
<CAPTION>
Fiscal years ended
PRIMARY: September 30, September 28, September 27
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net income $ 3,348,256 $11,356,866 $17,729,149
=========== =========== ===========
Weighted average number of
common shares outstanding 9,201,947 11,698,371 12,985,948
Common stock equivalents
outstanding pursuant to
treasury stock method 628,690 825,612 685,946
----------- ----------- -----------
Weighted average number of common
and common equivalent shares
outstanding 9,830,637 12,523,983 13,671,894
=========== =========== ===========
Per share amount $ 0.34 $ 0.91 $ 1.30
=========== =========== ===========
FULLY DILUTED:
Net income $ 3,348,256 -- --
----------- ----------- -----------
Weighted average number of
common shares outstanding 9,201,947 -- --
Common stock equivalents
outstanding pursuant to
treasury stock method 1,027,782 -- --
----------- ----------- -----------
Weighted average number of common
and common equivalent shares
outstanding 10,229,729 -- --
=========== =========== ===========
Per share amount $ 0.33 -- --
=========== =========== ===========
</TABLE>
<PAGE>
Exhibit 21.01
Hologic Subsidiaries
Hologic Europe N.V.
Horizon Park
Leuvensesteenweg 510, Bus 31
1930 Zaventem
Belgium
Hologic France S.A.
Parc du Moulin de Massy
35 rue du Saule Trapu
F-91882 Massy Cedex
France
FluoroScan Imaging Systems, Inc.
650B Anthony Trail
Northbrook, IL 60062
<PAGE>
EXHIBIT 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our Firm included in or made a part of this Form 10K,
into the Company's previously filed Registration Statement File Nos.
33-35191, 33-47830, 33-87792, 333-11853, 333-11849, and 333-34003.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
December 19, 1997
<PAGE>
Exhibit 23.02
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in Hologic, Inc.'s
previously filed Registration Statements (file nos. 33-35191, 33-47830,
33-87792, 333-11853, 333-11849 and 333-34003) of our report dated February 23,
1996 relating to the consolidated financial statements of FluoroScan Imaging
Systems, Inc. for the year ended December 31, 1995.
Chicago, Illinois BDO Seidman, LLP
December 22, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements included in the Company's Annual Report on Form 10K for the
year ended September 27, 1997 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-START> SEP-29-1996
<PERIOD-END> SEP-27-1997
<CASH> 28,091,933
<SECURITIES> 56,173,247
<RECEIVABLES> 29,231,105
<ALLOWANCES> 1,460,000
<INVENTORY> 13,204,528
<CURRENT-ASSETS> 130,768,528
<PP&E> 9,740,589
<DEPRECIATION> 5,036,017
<TOTAL-ASSETS> 144,667,242
<CURRENT-LIABILITIES> 17,900,510
<BONDS> 0
0
0
<COMMON> 131,114
<OTHER-SE> 126,635,618
<TOTAL-LIABILITY-AND-EQUITY> 144,667,242
<SALES> 102,781,165
<TOTAL-REVENUES> 106,689,431
<CGS> 47,491,712
<TOTAL-COSTS> 84,294,163
<OTHER-EXPENSES> 172,104
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 27,569,149
<INCOME-TAX> 9,840,000
<INCOME-CONTINUING> 17,729,149
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,729,149
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 0
</TABLE>
