<PAGE>
(a)(1) AUDITED COMBINED FINANCIAL STATEMENTS FOR THE MEDICAL IMAGING BUSINESS
OF TREX MEDICAL CORPORATION.
THE MEDICAL IMAGING BUSINESS OF TREX MEDICAL CORPORATION
Combined Financial Statements
Fiscal Years 1999, 1998 and 1997
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
the Medical Imaging Business of Trex Medical Corporation:
We have audited the accompanying combined balance sheet of the Medical Imaging
Business of Trex Medical Corporation (a Delaware corporation and 71%-owned
subsidiary of ThermoTrex Corporation) and subsidiaries as of October 2, 1999 and
October 3, 1998 and the related combined statements of operations, cash flows
and parent company investment for each of the three years in the period ended
October 2, 1999. These combined financial statements are the responsibility of
the Medical Imaging Business of Trex Medical Corporation's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Medical Imaging
Business of Trex Medical Corporation and subsidiaries as of October 2, 1999 and
October 3, 1998 and the results of their operations and their cash flows for
each of the three years in the period ended October 2, 1999 in conformity with
accounting principles generally accepted in the United States.
Boston, Massachusetts
November 6, 2000
<PAGE>
THE MEDICAL IMAGING BUSINESS OF TREX MEDICAL CORPORATION
Combined Balance Sheet
(in thousands)
<TABLE>
<CAPTION>
JULY 1, OCTOBER 2, OCTOBER 3,
2000 1999 1998
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash $ 1,749 $ 2,418 $ 4,434
Accounts receivable, less allowances of $3,556, $2,787 and $1,575 29,263 38,258 59,426
Inventories (Note 9) 23,131 46,280 64,653
Prepaid and refundable income taxes (Note 4) 5,132 19,546 6,136
Other current assets - 1,366 2,242
------- -------- --------
59,275 107,868 136,891
------- -------- --------
Property, Plant and Equipment, at cost, net (Note 8) 6,986 13,229 16,473
------- -------- --------
Cost in Excess of Net Assets of Acquired Companies (Notes 2 and 8) 30,006 83,602 86,173
------- -------- --------
$96,267 $204,699 $239,537
======= ======== ========
LIABILITIES AND PARENT COMPANY INVESTMENT
Current Liabilities:
Accounts payable $12,748 $ 10,011 $ 17,222
Current maturities of long-term obligations (Note 5) - - 19
Accrued payroll and employee benefits 2,221 4,110 4,909
Accrued warranty costs 3,825 5,482 6,108
Customer deposits 2,025 2,396 1,165
Accrued commissions 3,827 4,654 6,806
Accrued restructuring costs (Note 8) 3,300 3,327 -
Accrued income taxes, including $3,998 due to parent company in fiscal 1998 - - 4,079
(Notes 4 and 8)
Other accrued expenses (Note 2) 6,979 11,619 9,114
------- -------- --------
34,925 41,599 49,422
Deferred Income Taxes (Note 4) - 1,382 853
Commitments and Contingencies (Notes 2, 6, and 7)
Parent Company Investment 61,342 161,718 189,262
------- -------- --------
$96,267 $204,699 $239,537
======= ======== ========
</TABLE>
The accompanying notes are an integral part of
these combined financial statements.
<PAGE>
THE MEDICAL IMAGING BUSINESS OF TREX MEDICAL CORPORATION
Combined Statement of Operations
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
JULY 1, ------------------------------------------------------
2000 OCTOBER 2, 1999 OCTOBER 3, 1998 SEPTEMBER 27, 1997
---- --------------- --------------- ------------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues (includes $1,882, $4,300, $3,650 and $11,427
to affiliated companies; Note 7) $ 87,083 $173,737 $242,195 $229,294
-------- -------- -------- --------
Costs and Operating Expenses:
Cost of revenues (includes $1,263, $2,671, $1,719 and
$7,238 for revenues to affiliated companies; Notes 7
and 8) 89,518 131,737 137,769 139,062
Selling, general, and administrative expenses (Note 7) 27,752 44,261 45,346 40,181
Research and development expenses (Note 7) 9,996 25,770 29,927 24,705
Restructuring and other unusual costs (Note 8) 56,038 9,292 - -
-------- -------- -------- --------
183,304 211,060 213,042 203,948
-------- -------- -------- --------
Operating (loss) income (96,221) (37,323) 29,153 25,346
Interest Income 304 562 2,461 1,895
Other (Expense) Income, net (38) - - 559
-------- -------- -------- --------
(Loss) income before income taxes (95,955) (36,761) 31,614 27,800
Income Tax (Provision) Benefit (Note 4) (3,897) 12,658 (12,109) (12,790)
-------- -------- -------- --------
Net (loss) income $(99,852) $(24,103) $ 19,505 $ 15,010
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these combined financial statements.
<PAGE>
THE MEDICAL IMAGING BUSINESS OF TREX MEDICAL CORPORATION
Combined Statement of Parent Company Investment
(in thounsands)
<TABLE>
<S> <C>
Balance at September 28, 1996 $159,631
Net income 15,010
Net transfers to Parent (30,783)
--------
Balance at September 27, 1997 143,858
Net income 19,505
Net transfers from Parent 25,899
--------
Balance at October 3, 1998 189,262
Net loss (24,103)
Net transfers to Parent (3,441)
--------
Balance at October 2, 1999 161,718
Net loss (unaudited) (99,852)
Net transfers to Parent (unaudited) (524)
--------
Balance at July 1, 2000 (unaudited) $ 61,342
========
</TABLE>
The accompanying notes are an integral part of
these combined financial statements.
<PAGE>
THE MEDICAL IMAGING BUSINESS OF TREX MEDICAL CORPORATION
Combined Statement of Cash Flow
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED
JULY 1, ------------------------------------------------------
2000 OCTOBER 2, 1999 OCTOBER 3, 1998 SEPTEMBER 27, 1997
---- --------------- --------------- ------------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net (loss) income $(99,852) $(24,103) $ 19,505 $ 15,010
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities-
Depreciation and amortization 4,265 6,382 6,271 4,996
Provision for losses on accounts receivable 1,328 1,425 697 170
Gain on sale of fixed assets (941) - - -
(Decrease) increase in deferred income taxes (418) 529 631 52
Noncash restructuring costs (Note 8) 76,897 2,335 - -
Other noncash items (Note 8) - 10,256 (276) (67)
Changes in current accounts, excluding the effects of
acquisitions-
Accounts receivable 7,667 19,862 (15,349) (15,840)
Inventories 3,149 7,699 (21,312) (10,331)
Other current assets 10,213 (12,088) (1,260) 470
Accounts payable 2,737 (7,211) 3,385 1,302
Other current liabilities (6,774) (1,065) (4,707) 8,480
-------- -------- -------- --------
Net cash (used in) provided by operating activities (1,729) 4,021 (12,415) 4,242
-------- -------- -------- --------
Cash Flows from Investing Activities:
Acquisitions, net of cash acquired (Note 2) - - (7,528) -
Purchases of property, plant and equipment (1,622) (2,805) (3,950) (5,461)
Proceeds from sale of property, plant and equipment 3,347 343 593 -
Other (141) (80) (48) -
-------- -------- -------- --------
Net cash provided by (used in) investing activities 1,584 (2,542) (10,933) (5,461)
-------- -------- -------- --------
Cash Flows from Financing Activities:
(Payments to) advances from Trex Medical (524) (3,441) 25,899 (30,783)
Repayment of short-term borrowings and capital lease - (19) (19) (62)
obligations
Other - (35) - -
-------- -------- -------- --------
Net cash (used in) provided by financing activities (524) (3,495) 25,880 (30,845)
-------- -------- -------- --------
(Decrease) increase in cash (669) (2,016) 2,532 (32,064)
Cash at Beginning of Period 2,418 4,434 1,902 33,966
-------- -------- -------- --------
Cash at End of Period $ 1,749 $ 2,418 $ 4,434 $ 1,902
======== ======== ======== ========
Cash (Refunded) Paid for:
Income taxes $ (7,217) $ 5,615 $ 17,634 $ 8,304
======== ======== ======== ========
Noncash Activities:
Fair value of assets of acquired companies $ - $ - $ 8,235 $ -
Cash paid for acquired companies - - (7,174) -
-------- -------- -------- --------
Liabilities assumed of acquired companies $ - $ - $ 1,061 $ -
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these combined financial statements
<PAGE>
THE MEDICAL IMAGING BUSINESS OF TREX MEDICAL CORPORATION
Notes to Combined Financial Statements
(1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Trex Medical Corporation (Trex Medical) operates in two segments: medical
imaging and dental imaging. The medical imaging segment (the Company) designs,
manufactures and markets mammography equipment, minimally invasive digital
breast-biopsy systems and general-purpose and specialized medical X-ray
equipment. The dental imaging segment designs, manufactures and markets dental
X-ray systems.
On September 15, 2000, Trex Medical sold substantially all of the assets and
liabilities of its medical imaging businesses (the Medical Imaging Business),
which include all of Trex Medical's domestic operations related to its Medical
Imaging business, to Hologic, Inc. (the Buyer) for $55,000,000, subject to
adjustment as described below. The purchase price consists of $30,000,000 in
cash and $25,000,000 in a three-year secured note. The purchase price of the
assets was determined by the parties in arm's-length negotiations. The Asset
Purchase and Sale Agreement provides that within 45 days of the closing date of
the sale, Trex Medical will provide an unaudited statement of net working
capital for the Medical Imaging Business as of the closing date. If the net
working capital, as defined, is more than $23,537,000, the purchase price will
be increased in an amount equal to the excess. Alternatively, if the net
working capital is less than $23,537,000, the purchase price will be reduced by
an amount equal to the deficit.
These combined financial statements reflect the financial position and results
of operations and cash flows of Trex Medical's Medical Imaging Business.
RELATIONSHIP WITH THERMOTREX CORPORATION AND THERMO ELECTRON CORPORATION
Trex Medical was incorporated in September 1995 as a wholly-owned subsidiary of
ThermoTrex Corporation (ThermoTrex). As of October 2, 1999, ThermoTrex owned
22,879,568 shares of Trex Medical common stock, representing 71% of such stock
outstanding. As of that date, ThermoTrex was an 80%-owned subsidiary of Thermo
Electron Corporation (Thermo Electron). As of October 2, 1999, Thermo Electron
owned 2,242,121 shares of Trex Medical common stock, representing 7% of such
stock outstanding.
PRINCIPLES OF CONSOLIDATION
The accompanying combined financial statements include the accounts of Trex
Medical's medical imaging segment and its wholly-owned subsidiaries. All
material intercompany accounts and transactions have been eliminated. The
dental imaging segment is excluded from these combined results.
FISCAL YEAR
The Company has adopted a fiscal year ending the Saturday nearest September 30.
References to fiscal 1999, 1998 and 1997 are for the years ended October 2,
1999, October 3, 1998 and September 27, 1997, respectively. Fiscal 1999 and
1997 each included 52 weeks and 1998 included 53 weeks.
<PAGE>
THE MEDICAL IMAGING BUSINESS OF TREX MEDICAL CORPORATION
Notes to Combined Financial Statements
REVENUE RECOGNITION
The Company recognizes revenues upon shipment of its products. The Company
provides a reserve for its estimate of warranty costs at the time of shipment.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) 101, Revenue Recognition in Financial Statements. SAB 101
includes requirements for when shipments may be recorded as revenue when the
terms of the sale include customer acceptance provisions or an obligation of the
seller to install the product. In such instances, SAB 101 generally requires
that revenue recognition occur at completion of installation and/or upon
customer acceptance. SAB 101 requires that the Company conform its revenue
recognition practices to the requirements therein in the first quarter of fiscal
2001 through recording a cumulative net of tax effect of the change in
accounting. The Company has not yet completed the analysis to determine the
effect that SAB 101 will have on its financial statements.
CONCENTRATION OF CREDIT RISK
The Company sells its products primarily to customers in the healthcare
industry. The Company does not normally require collateral or other security to
support its accounts receivable. Management does not believe that this
concentration of credit risk has, or will have, a significant negative impact on
the Company.
STOCK-BASED COMPENSATION PLANS
The Company applies Accounting Principles Board Opinion (APB) No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for its
stock-based compensation plans (see Note 3). Accordingly, no accounting
recognition is given to stock options granted at fair market value until they
are exercised.
INCOME TAXES
In accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes, the Company recognizes deferred income taxes based
on the expected future tax consequences of differences between the financial
statement basis and the tax basis of assets and liabilities, calculated using
enacted tax rates in effect for the year in which the differences are expected
to be reflected in the tax return.
CASH
The historical financial statements presented include only cash balances on hand
at each division that comprises the Medical Imaging Business.
INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out basis) or
market value and include materials, labor and manufacturing overhead. The
components of inventories are as follows (in thousands):
<PAGE>
THE MEDICAL IMAGING BUSINESS OF TREX MEDICAL CORPORATION
Notes to Combined Financial Statements
<TABLE>
<CAPTION>
JULY 1, OCTOBER 2, OCTOBER 3,
2000 1999 1998
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Raw materials and supplies $13,322 $20,404 $28,676
Work in process 4,238 13,774 16,889
Finished goods 5,571 12,102 19,088
------- ------- -------
$23,131 $46,280 $64,653
======= ======= =======
</TABLE>
The Company periodically reviews the quantities of inventories on hand and
compares these amounts to expected usage of each particular product or product
line. The Company records as a charge to cost of revenues any amounts required
to reduce the carrying value of inventories to net realizable value.
PROPERTY, PLANT AND EQUIPMENT
The costs of additions and improvements are capitalized, while maintenance and
repairs are charged to expense as incurred. The Company provides for
depreciation and amortization principally using the straight-line method over
the estimated useful lives of the property as follows: buildings, 31.5 years;
machinery and equipment, three to eight years; and leasehold improvements, the
shorter of the term of the lease or the life of the asset. Property, plant and
equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
JULY 1, OCTOBER 2, OCTOBER 3,
2000 1999 1998
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Land $ 1,000 $ 1,299 $ 1,299
Buildings 2,728 4,631 4,213
Leasehold improvements 2,114 1,630 3,421
Machinery and equipment 14,001 17,976 17,295
------- ------- -------
19,843 25,536 26,228
Less--Accumulated depreciation
and amortization 12,857 12,307 9,755
------- ------- -------
$ 6,986 $13,229 $16,473
======= ======= =======
</TABLE>
<PAGE>
THE MEDICAL IMAGING BUSINESS OF TREX MEDICAL CORPORATION
Notes to Combined Financial Statements
Cost in Excess of Net Assets of Acquired Companies
The excess of cost over the fair value of net assets of acquired companies is
amortized using the straight-line method over periods of 15 to 40 years.
Accumulated amortization was $11,141,000 and $8,466,000 at fiscal year-end 1999
and 1998, respectively. The Company assesses the future useful life of this
asset whenever events or changes in circumstances indicate that the current
useful life has diminished. The Company considers the future undiscounted cash
flows of the acquired businesses in assessing the recoverability of this asset.
If impairment has occurred, any excess of carrying value over fair value is
recorded as a loss.
In September 2000, in connection with the plan to sell the Company, the Company
recorded a charge of $50,000,000 to reduce costs in excess of net assets of
acquired companies (see Note 9).
COMPREHENSIVE INCOME
During the first quarter of fiscal 1999, the Company adopted SFAS No. 130,
Reporting Comprehensive Income. This pronouncement sets forth requirements for
disclosure of the Company's comprehensive income and accumulated other
comprehensive items. As the Company has no other comprehensive items, net
income (loss) is equal to comprehensive income (loss) for all periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
UNAUDITED INTERIM RESULTS
The interim combined financial statements presented have been prepared by the
Company without audit and, in the opinion of management, reflect all adjustments
of a normal recurring nature necessary for a fair statement of the combined
financial position at July 1, 2000 and the results of operations and cash flows
for the nine-month period ended July 1, 2000. Interim results are not
necessarily indicative of results for a full year.
PRESENTATION
Certain amounts in fiscal 1998 and 1997 have been reclassified to conform to the
presentation in the fiscal 1999 combined financial statements.
(2) ACQUISITIONS
In October 1997, the Company's XRE Corporation subsidiary acquired substantially
all of the assets of Digitec Corporation for $7,176,000 in cash, subject to
certain liabilities. The cost of this acquisition exceeded the estimated fair
value of the acquired net assets by $7,531,000, which
<PAGE>
THE MEDICAL IMAGING BUSINESS OF TREX MEDICAL CORPORATION
Notes to Combined Financial Statements
is being amortized over 15 years. Digitec is a manufacturer of physiological-
monitoring equipment and digital-image archiving and networking systems used in
cardiac catheterization procedures.
This acquisition has been accounted for using the purchase method of accounting,
and the results of operations have been included in the accompanying combined
financial statements from the date of acquisition. Allocation of the purchase
price for this acquisition was based on estimates of the fair value of the net
assets acquired.
In connection with a previous acquisition, the Company has undertaken a
restructuring of the acquired business. In connection with these restructuring
activities, which are accounted for in accordance with the requirements of
Emerging Issues Task Force Pronouncement (EITF) No. 95-3, as part of the cost of
the acquisition, the Company established reserves as detailed below. In
accordance with the requirements of EITF 95-3, the Company finalized its
restructuring plans no later than one year from the date of acquisition.
Accrued acquisition expenses are included in other accrued expenses in the
accompanying combined balance sheet and reflect severance benefits. A summary
of the changes in accrued acquisition expenses follows:
<TABLE>
<CAPTION>
Total
(In thousands)
<S> <C>
Balance at September 28, 1996 $ 579
Usage (290)
-----
Balance at September 27, 1997 289
Usage (289)
-----
Balance at October 3, 1998 $
=====
</TABLE>
As part of the cost of ThermoTrex's 1992 acquisition of Lorad (a division of the
Company), a reserve was established for legal fees and other costs associated
with a patent infringement suit that existed prior to the acquisition. The
balance of this reserve was approximately $1,100,000 at fiscal year-end 1999 and
1998 and is included in other accrued expenses in the accompanying combined
balance sheet. This suit was brought by Fischer Imaging Corporation, alleging
that Lorad infringes a Fischer patent on a precision mammographic needle-biopsy
system. In connection with the organization of Trex Medical, ThermoTrex agreed
to indemnify Trex Medical for any and all cash damages under this lawsuit, with
respect to sales occurring prior to October 16, 1995, the date Lorad was
transferred to Trex Medical. Any payments received under such indemnity would be
treated as a contribution to shareholders' investment. A second patent
infringement lawsuit with respect to Lorad's breast-biopsy system was filed by
Fischer in April 1998. These lawsuits have been combined into a single lawsuit.
An unsuccessful resolution of
<PAGE>
THE MEDICAL IMAGING BUSINESS OF TREX MEDICAL CORPORATION
Notes to Combined Financial Statements
this matter could have a material adverse effect on the Company's future results
of operations and financial position.
(3) EMPLOYEE BENEFIT PLANS
STOCK OPTION PLANS
The Company has stock-based compensation plans for its key employees, directors
and others that permit the grant of a variety of stock and stock-based awards as
determined by the human resources committee of Trex Medical's Board of Directors
(the Board Committee), including restricted stock, stock options, stock bonus
shares or performance-based shares. The option recipients and the terms of
options granted under these plans are determined by the Board Committee.
Generally, options granted to date are exercisable immediately, but are subject
to certain transfer restrictions and the right of Trex Medical to repurchase
shares issued upon exercise of the options at the exercise price upon certain
events. The restrictions and repurchase rights generally lapse ratably over a
one- to ten-year period, depending on the term of the option, which generally
ranges from five to 12 years. Nonqualified stock options may be granted at any
price determined by the Board Committee, although incentive stock options must
be granted at not less than the fair market value of Trex Medical's common stock
on the date of grant. To date, all options have been granted at fair market
value. Trex Medical also has a directors' stock option plan that provides for
the grant of stock options to outside directors pursuant to a formula approved
by Trex Medical's shareholders. Options granted under this plan have the same
general terms as options granted under the stock-based compensation plans
described above, except that the restrictions and repurchase rights generally
lapse ratably over a four-year period and the option term is five years. In
addition to Trex Medical's stock-based compensation plans, certain officers and
key employees may also participate in the stock-based compensation plans of
Thermo Electron and ThermoTrex.
In November 1998, the Company's employees, excluding its officers and directors,
were offered the opportunity to exchange previously granted options to purchase
shares of Trex Medical common stock for an amount of options equal to half of
the number of options previously held, exercisable at a price equal to the fair
market value at the time of the exchange offer. The other terms of the new
options are the same as the exchanged options except that the holders may not
sell shares purchased pursuant to such new options for six months from the
exchange date. The options exchanged were canceled by Trex Medical.
In June 1999, Trex Medical awarded 112,900 shares of restricted Trex Medical
common stock to certain key employees. The shares had an aggregate value of
$635,000 and vest three years from the date of award, assuming continued
employment, with certain exceptions. The Company has recorded the fair value of
the restricted stock as deferred compensation in the accompanying combined
balance sheet (included within Parent Company Investment) and is amortizing such
amount over the vesting period. At fiscal year-end 1999, 3,500 of these shares
have been forfeited.
EMPLOYEE STOCK PURCHASE PROGRAM
Substantially all of the Company's full-time employees are eligible to
participate in an employee
<PAGE>
THE MEDICAL IMAGING BUSINESS OF TREX MEDICAL CORPORATION
Notes to Combined Financial Statements
stock purchase program sponsored by Trex Medical and Thermo Electron. Prior to
November 1, 1997, the program was sponsored by ThermoTrex and Thermo Electron.
Under this program, shares of Trex Medical and Thermo Electron's common stock
may be purchased at 85% of the lower of the fair market value at the beginning
or end of the plan year, and the shares purchased are subject to a one-year
resale restriction. Prior to November 1, 1998, the applicable shares of common
stock could be purchased at the end of a 12-month period at 95% of the fair
market value at the beginning of the period, and the shares purchased were
subject to a six-month resale restriction. Shares are purchased through payroll
deductions of up to 10% of each participating employee's gross wages.
PRO FORMA STOCK-BASED COMPENSATION EXPENSE
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation, which sets forth a fair-value based
method of recognizing stock-based compensation expense. As permitted by SFAS
No. 123, the Company has elected to continue to apply APB No. 25 to account for
its stock-based compensation plans. Had compensation cost for awards granted
after fiscal 1995 under Trex Medical's stock-based compensation plans been
determined based on the fair value at the grant dates consistent with the method
set forth under SFAS No. 123, the effect on the Company's net income (loss)
would have been as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net (Loss) Income-
As reported $(24,103) $19,505 $15,010
Pro forma (25,253) 18,501 14,407
</TABLE>
Because the method prescribed by SFAS No. 123 has not been applied to options
granted prior to October 1, 1995, the resulting pro forma compensation expense
may not be representative of the amount to be expected in future years. Pro
forma compensation expense for options granted is reflected over the vesting
period; therefore, future pro forma compensation expense may be greater as
additional options are granted.
The weighted average fair value per share of options granted was $2.80, $4.96,
and $7.88 in fiscal 1999, 1998, and 1997, respectively. The fair value of each
option grant was estimated on the grant date using the Black-Scholes option
pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Volatility 30% 28% 26%
Risk-free interest rate 5.4% 5.5% 6.5%
Expected life of 5.1 years 5.1 years 8.5 years
options
</TABLE>
<PAGE>
THE MEDICAL IMAGING BUSINESS OF TREX MEDICAL CORPORATION
Notes to Combined Financial Statements
The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions including expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
401(K) SAVINGS PLAN
The majority of the Company's full-time employees are eligible to participate in
Thermo Electron's 401(k) savings plan. Contributions to the 401(k) savings plan
are made by both the employee and the Company. Company contributions are based
upon the level of employee contributions. The Company contributed and charged
to expense for this plan $1,469,000, $1,340,000, and $1,080,000 in fiscal 1999,
1998, and 1997, respectively.
<TABLE>
<C> <S>
(4) INCOME TAXES
</TABLE>
The components of the income tax (provision) benefit are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Currently Refundable
(Payable)-
Federal $ 7,504 $ (9,640) $ (9,913)
State (304) (2,588) (2,677)
------- -------- --------
7,200 (12,228) (12,590)
------- -------- --------
Net Prepaid (Deferred)-
Federal 5,111 92 (172)
State 347 27 (28)
------- -------- --------
5,458 119 (200)
------- -------- --------
$12,658 $(12,109) $(12,790)
======= ======== ========
</TABLE>
The Company receives a tax deduction upon exercise of nonqualified stock options
by its employees for the difference between the exercise price and the market
price of the underlying common stock on the date of exercise. The provision for
income taxes that is currently payable does not reflect $1,000,000 and $982,000
of such benefits that have been allocated to capital in excess of par value
(included within Parent Company Investment) in fiscal 1998 and 1997,
respectively.
<PAGE>
THE MEDICAL IMAGING BUSINESS OF TREX MEDICAL CORPORATION
Notes to Combined Financial Statements
The income tax (provision) benefit in the accompanying combined statement of
operations differs from the (provision) benefit calculated by applying the
statutory federal income tax rate of 35% to income (loss) before income taxes
due to the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
---------------(in thousands)---------------
<S> <C> <C> <C>
Income Tax (Provision) $12,579 $(10,947) $ (9,612)
Benefit at Statutory Rate
Increases (Decreases)
Resulting from-
State income taxes, net of 1,802 (1,665) (1,758)
federal tax
Amortization of cost in (558) (566) (541)
excess of net assets of
acquired companies
Research and development 750 972 -
tax credits
Increase in valuation (1,802) - -
allowance
Other, net (113) 97 (879)
------- -------- --------
$12,658 $(12,109) $(12,790)
======= ======== ========
</TABLE>
Prepaid and deferred income taxes in the accompanying combined balance sheet
consist of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Prepaid Income Taxes-
Inventory basis difference $ 6,194 $2,215
Reserves and accruals 5,209 3,648
Net operating loss carryforward 1,802 -
Accrued compensation 480 273
------- ------
13,685 6,136
Less--Valuation allowance 1,802 -
------- ------
$11,883 $6,136
======= ======
Deferred Income Taxes-
Depreciation and amortization $ 1,382 $ 853
======= ======
</TABLE>
<PAGE>
THE MEDICAL IMAGING BUSINESS OF TREX MEDICAL CORPORATION
Notes to Combined Financial Statements
The valuation allowance at fiscal year-end 1999 relates to state net operating
loss carryforwards. The utilization of such losses is subject to various
limitations. The valuation allowance increased primarily due to losses in
fiscal 1999 that were not benefited. As of October 2, 1999, the Company had
approximately $35,000,000 of state loss carryforwards.
(5) LONG-TERM OBLIGATIONS
At fiscal year-end 1998, the Company had other borrowings and capital lease
obligations outstanding of $19,000, due in fiscal 2000.
(6) COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases portions of its office and operating facilities under various
operating lease arrangements. The accompanying combined statement of operations
includes expenses from operating leases of $2,477,000, $2,573,000 and $2,894,000
in fiscal 1999, 1998 and 1997, respectively. Future minimum payments due under
noncancelable operating leases at October 2, 1999 are $1,784,000 in fiscal 2000;
$1,784,000 in fiscal 2001; $1,784,000 in fiscal 2002; $1,784,000 in fiscal 2003;
$1,784,000 in fiscal 2004 and $8,886,000 in fiscal 2005 and thereafter. Total
future minimum lease payments are $17,806,000.
During fiscal 1999, the Company entered into certain purchase commitments
aggregating $5,535,000, of which $820,000 is payable in calendar 1999,
$3,080,000 in calendar 2000 and $1,635,000 in calendar 2001.
CONTINGENCIES
In October 1998, a former employee filed a lawsuit against Trex Medical alleging
theft of trade secrets related to the high-transmission cellular (HTC)(TM) grid,
a component for some of the Company's mammography systems.
See Note 2 for a discussion of certain other litigation.
The Company intends to vigorously defend itself against these lawsuits.
However, given the inherent uncertainties of dispute resolutions, management
cannot predict the outcome of these matters. An unfavorable outcome of one or
more of these matters could have a material adverse effect on the Company's
future results of operations and financial condition.
(7) RELATED-PARTY TRANSACTIONS
CORPORATE SERVICES AGREEMENT
Trex Medical and Thermo Electron have a corporate services agreement under which
Thermo Electron's corporate staff provides certain administrative services,
including certain legal advice and services, risk management, certain employee
benefit administration, tax advice and preparation of tax returns, centralized
cash management and certain financial and other services,
<PAGE>
THE MEDICAL IMAGING BUSINESS OF TREX MEDICAL CORPORATION
Notes to Combined Financial Statements
for which Trex Medical currently pays Thermo Electron annually an amount equal
to 0.8% of the Company's revenues. In calendar 1997 and 1996, Trex Medical paid
an amount equal to 1.0% of the Company's revenues. For these services, the
Company was charged its allocable portion of the fee in the amount of
$1,390,000, $1,938,000 and $2,293,000 in fiscal 1999, 1998 and 1997,
respectively. The fee is reviewed and adjusted annually by mutual agreement of
the parties. Management believes that the service fee charged by Thermo Electron
is reasonable and that such fees are representative of the expenses the Company
would have incurred on a stand-alone basis. The corporate services agreement is
renewed annually but can be terminated upon 30 days' prior notice by Trex
Medical or upon Trex Medical's withdrawal from the Thermo Electron Corporate
Charter (which defines the relationship among Thermo Electron and its majority-
owned subsidiaries). For additional items such as employee benefit plans,
insurance coverage and other identifiable costs, Thermo Electron charges the
Company based upon costs attributable to the Company.
RELATED-PARTY REVENUES
ThermoLase Corporation (ThermoLase), a majority-owned subsidiary of ThermoTrex,
engaged the Company to design and manufacture the laser used in ThermoLase's
laser-based hair-removal system. During fiscal 1999, 1998 and 1997, the Company
recorded $3,414,000, $2,902,000 and $11,390,000, respectively, of revenue under
this arrangement. As a result of ThermoLase exiting the hair-removal business,
the Company does not expect future sales to ThermoLase.
Under an arrangement with Thermedics Detection Inc., a majority-owned subsidiary
of Thermo Electron, the Company manufactures an X-ray source, pursuant to
written purchase orders, that is used as a component in a fill-measuring device
produced by Thermedics Detection, Inc. During fiscal 1999, 1998 and 1997, the
Company recorded $43,000, $406,000 and $37,000, respectively, of revenues under
this arrangement.
Trex Medical's Trophy dental imaging subsidiary purchases X-ray equipment from
the Company's Lorad division. These sales totaled $803,000 and $342,000 for the
years ended 1999 and 1998, respectively.
VENDOR AGREEMENT
During 1995, the Company placed an order with Thermo Electron's wholly-owned
Tecomet division for $2,500,000 for the design and production of high-
transmission cellular grids, which were received through fiscal 1999. During
fiscal 1999, 1998 and 1997, the Company purchased high-transmission cellular
grids valued at $1,352,000, $486,000 and $678,000, respectively, from Tecomet
under this arrangement. During fiscal 1998, the Company purchased additional
grids from Tecomet for $311,000 under other arrangements.
RESEARCH AND DEVELOPMENT AGREEMENT
In October 1995, Trex Medical and ThermoTrex entered into a license agreement
under which the Company undertook to fund approximately $6.0 million of
ThermoTrex's research and development efforts related to direct-detection
digital imaging technology in certain medical imaging fields. In fiscal 1998
and 1997, the Company recorded $2,200,000 and $2,000,000,
<PAGE>
THE MEDICAL IMAGING BUSINESS OF TREX MEDICAL CORPORATION
Notes to Combined Financial Statements
respectively, of expense under this agreement, which concluded in fiscal 1998.
In fiscal 1999, the Company paid $500,000 to ThermoTrex for certain research and
development efforts related to digital mammography technology.
(8) RESTRUCTURING AND RELATED COSTS
During fiscal 1999, the Company experienced a decline in business due to the
loss of an original equipment manufacturer customer, lower demand for its
products resulting from a decline in the radiographic market, and a decline in
sales of cardiac catheterization systems. In response, the Company initiated
certain restructuring activities in fiscal 1999, including consolidation of
manufacturing facilities and headcount reductions to achieve material cost
improvements and focus on cost efficiencies, as described below. Certain of
these actions commenced in February 1999, while most commenced in May 1999. The
Company intends to complete implementation of its restructuring plans during
fiscal 2000.
During fiscal 1999, the Company recorded $23,197,000 of restructuring and
related costs, including restructuring costs of $9,292,000 and inventory and
warranty provisions of $13,905,000. The restructuring costs are primarily in
connection with the consolidation of the Company's Bennett X-Ray Corporation and
Continental X-Ray Corporation facilities into the Company's Danbury,
Connecticut, and Littleton, Massachusetts, sites. Restructuring costs of
$9,292,000 include $2,249,000 for facility-closing costs, net of assumed
sublease income; $2,001,000 to write off leasehold improvements at facilities to
be closed and to write down fixed assets to their estimated disposal value;
$2,350,000 for severance for 308 employees across all functions, 162 of whom
were terminated in fiscal 1999; $1,299,000 of costs that related to the
consolidation and relocation of facilities, which were recorded in the period in
which they were incurred; $1,059,000 for retention bonuses that were earned and
$334,000 for the loss on the sale of a business.
The inventory and warranty charge of $13,905,000, which is included in cost of
revenues in the accompanying combined statement of operations, includes
$10,222,000 to establish inventory provisions and $1,057,000 to terminate
purchase commitments for products that have become obsolete due to planned
product changes or excess as a result of the recent decline in demand. The
largest component of the inventory charge was recorded as a result of the August
1999 decision by the United States Food and Drug Administration (FDA) to deny
the Company's 510(k) filing for its digital mammography system and resulting
design changes expected to be made to the system. Provisions resulting from
other planned product and technology changes, as well as decreased sales of
certain products at the Company's Lorad division, are also principal components
of the inventory charge. The warranty charge of $2,626,000 represents estimated
costs to address certain product warranty issues including costs associated with
corrective actions to be taken with respect to certain previously sold
mammography products.
During the first nine months of fiscal 2000, the Company recorded restructuring
charges of $4,080,000 for costs related to the consolidation and relocation of
facilities and retention bonuses. Costs related to the consolidation and
relocation of facilities are recorded as incurred. Retention costs are recorded
ratably over the period through which employees must work to qualify for a
payment. The Company expects to record approximately $1,590,000 of additional
restructuring and unusual items, including $750,000 during the remainder of
fiscal 2000 and
<PAGE>
THE MEDICAL IMAGING BUSINESS OF TREX MEDICAL CORPORATION
Notes to Combined Financial Statements
$840,000 during the first half of fiscal 2001. These charges represent estimated
costs for certain employee retention agreements related to the proposed sale of
the Company.
A summary of the changes in accrued restructuring costs is as follows (in
thousands):
<TABLE>
<CAPTION>
FACILITY-CLOSING
SEVERANCE COSTS OTHER(1) TOTAL
--------- ----- -------- -----
<S> <C> <C> <C> <C>
Balance at October 3, 1998 $ - $ - $ - $ -
Provision charged to expense(2) 2,349 2,250 2,358 6,957
Usage (1,751) - (1,879) (3,630)
------- ------ ------- -------
Balance at October 2, 1999 598 2,250 479 3,327
Provision charged to expense 239 411 3,430 4,080
(unaudited)
Usage (unaudited) (837) (361) (2,909) (4,107)
------- ------ ------- -------
Balance at July 1, 2000
(unaudited) $ - $2,300 $ 1,000 $ 3,300
======= ====== ======= =======
</TABLE>
--------------------
1 Includes provisions in fiscal 1999 of $1.3 million for facilities-
consolidation costs incurred during the period and $1.1 million for retention
bonuses.
2 Reflects restructuring costs of $7.0 million recorded by the medical imaging
segment. Excludes medical imaging segment charges of $2.6 million for warranty
provisions, $1.1 million for termination of purchase commitments and
$10.2 million for noncash inventory provisions, all of which were included in
cost of revenues; and other noncash charges of $2.0 million for an asset
write-down and $0.3 million for the loss on the sale of a business.
The aggregate future cash expenditures for restructuring will include amounts
accrued at July 1, 2000, as well as the $1,590,000 of future costs that are
expected to be incurred over the next 12 months. These amounts total
$5.0 million, of which the Company expects to pay $0.4 million during the
remainder of fiscal 2000, $3.0 million during fiscal 2001, and the balance
primarily over the term of facility leases expiring through 2005.
In November 1999, the Company sold the operating facility of its Continental X-
ray subsidiary for $3,119,000 in cash, resulting in a gain of $941,000, which is
included in restructuring costs and unusual item, net, in the accompanying
combined statement of operations for the nine-month period ended July 2000.
In connection with the plan to sell the Company, Trex Medical expected to sell
its principal domestic and foreign operating units individually, due to the
absence of a prospective buyer for Trex Medical in its entirety. As a result,
during the third quarter of fiscal 2000, the Company
<PAGE>
THE MEDICAL IMAGING BUSINESS OF TREX MEDICAL CORPORATION
Notes to Combined Financial Statements
recorded a charge of $80.1 million to write down the carrying amounts of the
businesses to their estimated disposal value. The charge includes four
components: cost in excess of net assets of acquired companies of $50.0 million;
inventory provisions of $20.0 million; a deferred tax asset of $7.1 million and
property, plant, and equipment of $3.0 million. The inventory provisions were
recorded as a component of cost of revenues, and the establishment of a
valuation allowance for the deferred tax asset was recorded as a component of
income tax provision. The remaining charges were recorded as restructuring and
other unusual costs. As a result of the sale transaction discussed in Note 1,
Trex Medical will record a charge related to the difference between the sales
proceeds and the net parent company investment.
(9) SIGNIFICANT CUSTOMERS, BUSINESS SEGMENTS AND GEOGRAPHICAL INFORMATION
Sales of medical imaging products to one customer accounted for 19% of the
Company's total revenues in fiscal 1999. Sales of medical imaging products to
another customer accounted for 15% and 17% of the Company's total revenues in
fiscal 1998 and 1997, respectively. This customer was acquired by another
corporation in September 1998 and, in the fourth quarter of fiscal 1998, agreed
to pay the Company a one-time fee of $4.7 million in lieu of purchasing products
for which it was contractually obligated, which was recorded as revenue in the
accompanying fiscal 1998 combined statement of operations. The Company did not
have sales to the customer after fiscal 1998.
The Company's businesses operate in one segment: medical imaging. The medical
imaging segment designs, manufactures and markets mammography equipment,
minimally invasive digital breast-biopsy systems, and general-purpose and
specialized medical X-ray equipment. All revenues of the medical imaging
segment are derived domestically based on location of the selling entity.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
receivable, accounts payable and current maturity of long-term obligations. The
carrying amounts of these financial instruments approximate fair value due to
their short-term nature.
<PAGE>
(a)(2) UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS.
HOLOGIC, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 25, 1999
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------
TREX MEDICAL PRO FORMA PRO FORMA
HOLOGIC, INC. CORPORATION ADJUSTMENTS COMBINED
------------------ ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Revenues $84,140 $173,737 $257,877
Costs and Expenses
Cost of product sales 50,333 131,737 4,460 B 188,884
2,009 F
345 G
Research and development 12,664 25,770 38,434
Selling, general and
administrative 30,621 44,261 1,976 A 79,246
2,388 B
Charge for in process R&D 5,000 E -
(5,000) I
Restructuring and other
costs - 9,292 9,292
------- -------- -------- --------
Total costs and expenses 93,618 211,060 11,178 315,856
Loss from operations (9,478) (37,323) (11,178) (57,979)
Other income (expense) 3,656 562 (477)
(2,875) C
(1,820) D
Loss before benefit for income taxes (5,822) (36,761) (15,873) (58,456)
Benfit for income taxes 2,075 12,658 5,556 H 20,289
------- -------- -------- --------
Net loss $(3,747) $(24,103) $(10,317) $(38,167)
======= ======== ======== ========
Net loss per share (Basic and Diluted) $ (0.27) $ (2.74)
Weighted Average Shares Outstanding
(Basic and Diluted) 13,950 13,950
</TABLE>
<PAGE>
HOLOGIC, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
For the nine months ended July 1, 2000 (Unaudited)
Amounts in thousands, except per share data
<TABLE>
<CAPTION>
Historical
----------------------------------
Trex Medical Pro Forma Pro Forma
Hologic, Inc. Corporation Adjustments Combined
------------ ------------ ----------- --------
<S> <C> <C> <C> <C>
Revenues $ 66,629 $ 87,083 $ 153,712
Costs and Expenses
Cost of product sales 40,531 89,518 259 M 130,308
Research and development 12,626 9,996 22,622
Selling, general and administrative 28,154 27,752 1,482 J 57,388
Restructuring and other costs - 56,038 56,038
-------- -------- ------- ---------
Total costs and expenses 81,311 183,304 1,741 266,356
Income (loss) from operations (14,682) (96,221) (1,741) (112,644)
Other income (expense), net 2,685 266 (2,156) K (328)
(1,123) L
Income (loss) before provision for income taxes (11,997) (95,955) (5,020) (112,972)
Benefit (provision) for income taxes 4,300 (3,897) 1,757 N 2,160
-------- -------- ------- ---------
Net income loss $ (7,697) $(99,852) $(3,263) $(110,812)
======== ======== ======= =========
Net loss per share (Basic and Diluted) $ (0.50) $ (7.24)
Weighted Average Shares Outstanding (Basic
and Diluted) 15,302 15,302
</TABLE>
<PAGE>
HOLOGIC, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
As of July 1, 2000 (Unaudited)
Amounts in thousands, except per share data
<TABLE>
<CAPTION>
Historical
----------------------------------
Trex Medical Pro Forma Pro Forma
Hologic, Inc. Corporation Adjustments Combined
------------ ------------ ----------- --------
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash & Cash equivalents $ 34,098 $ 1,749 $ (1,749) R $ 4,098
(30,000) S
Short term investments 15,033 - 15,033
Accounts receivable, net 26,240 29,263 (1,463) P 54,040
Inventories 21,733 23,131 (25) P 47,528
2,689 Q
Prepaid expenses and other 2,814 5,132 (93) P 7,853
current assets
-------- -------- ------- ---------
TOTAL CURRENT ASSETS 99,918 59,275 (30,641) 128,552
PP&E, net 51,859 6,986 3,451 Q 62,296
Other assets, net 18,829 18,829
Devloped technology and 11,800 O 11,800
Know-how
Assembled workforce 3,000 O 3,000
Goodwill and other 2,942 O 2,942
intangibles, net
Cost in excess of Net - 30,006 (30,006) R -
Assets of Acquired
Companies
-------- -------- ------- ---------
70,688 36,992 (8,813) 98,867
TOTAL ASSETS $170,606 $ 96,267 $(39,454) $ 227,419
======== ======== ======= =========
CURRENT LIABILITIES
Line of credit 411 411
Accounts payable 6,842 12,748 45 P 19,635
Accrued expenses 9,970 20,152 5,222 P 38,813
1,000 S
2,469 U
Deferred revenue 10,767 2,025 12,792
-------- -------- ------- ---------
TOTAL CURRENT LIABILITIES 27,990 34,925 8,736 71,651
Note payable - - 25,000 S 25,000
STOCKHOLDERS' EQUITY
Parent Company investment 61,342 (61,342) R -
Common stock 154 154
Capital in excess of par value 109,985 109,985
Retained Earnings (deficit) 34,744 22,896
(6,848) P
(5,000) T
Cumulative translation adjustment (1,803) (1,803)
Treasury stock (464) (464)
-------- -------- ------- ---------
TOTAL STOCKHOLDERS' EQUITY 142,616 61,342 (73,190) 130,768
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $170,606 $ 96,267 $(39,454) $ 227,419
======== ======== ======= =========
</TABLE>
<PAGE>
HOLOGIC, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
On September 15, 2000, pursuant to an Asset Purchase and Sale Agreement between
Hologic, Inc. (Hologic) and Trex Medical Systems Corporation (Trex Medical) (the
Purchase Agreement), dated August 13, 2000, Hologic acquired the U.S. business
assets of Trex Medical in exchange for $30 million in cash and a note in the
amount of $25 million. The note has a term of three years, bears interest at a
rate of 11.5% per annum and requires the full amount of principal be repaid on
September 13, 2003. The note is secured by a mortgage on Hologic's principal
office in Bedford, Massachusetts as well as the facility in Danbury,
Connecticut, which was acquired from Trex Medical.
Trex Medical manufactures X-ray mammography systems used in the detection and
diagnosis of breast cancer. Trex Medical business activities also include that
of mobile X-ray systems, X-ray systems for non destructive testing, specialized
medical X-ray imaging equipment for cardiac catheterization laboratories,
digital radiographic / fluoroscopic (R/F) systems, electrophysiology products
and general radiography products. Hologic intends to substantially continue the
conduct of the business operations of Trex Medical as conducted prior to the
acquisition.
The aggregate purchase price for Trex Medical was approximately $56,000,000 of
which $30,000,000 was paid in cash, $25,000,000 is payable under a note and
approximately $1,000,000 relates to acquisition related fees and expenses. The
purchase price is subject to an adjustment based upon the working capital
position of the business as of September 15, 2000. The Trex Medical acquisition
has been accounted for as a purchase in accordance with Accounting Principles
Board (APB) Opinion No. 16 and accordingly, the purchase price has been
allocated to the assets and liabilities of Trex Medical based on their fair
value.
As part of the purchase price allocation, all intangible assets that are a part
of the acquisition were identified and valued. It was determined that technology
assets and assembled workforce had value. As a result of this identification and
valuation process, the Company allocated approximately $5 million of the
purchase price to in-process research and development projects. This allocation
represented the estimated fair value based on risk-adjusted cash flows related
to the incomplete research and development projects. At the date of acquisition,
the development of these projects had not yet reached technological feasibility,
and the research and development in progress had no alternative future uses.
Accordingly, these costs were expensed as of the acquisition date.
At the acquisition date, Trex Medical was conducting design, development,
engineering and testing activities associated with the completion of several R&D
projects related to its Mammography and General Radiography-R/F lines of
business. Mammography-related projects included development efforts on a
full-field digital mammography system, Lorad M-V, the I-650 platform to replace
the Lorad Elite, and a second-generation mobile x-ray system. Projects related
to the Radiography and R/F division included the next-generation R/F 3000i,
second-generation mobile x-ray system, and the TouchView user-interface and
System HUB R&D efforts.
At the acquisition date, the Mammography technologies under development were
approximately 46% percent complete based on engineering man-month data and
technological progress. The Radiography and R/F projects in progress were
approximately 60% complete. Trex Medical had
<PAGE>
spent approximately $5.7 million on the in-process projects, and expected to
spend approximately $5.1 million to complete all phases of the R&D. Anticipated
completion dates ranged from 6 to 18 months, at which times the Company expects
to begin benefiting from the developed technologies.
In making its purchase price allocation, management considered present value
calculations of income, an analysis of project accomplishments and remaining
outstanding items, an assessment of overall contributions, as well as project
risks. The value assigned to purchased in-process technology was determined by
estimating the costs to develop the acquired technology into commercially viable
products, estimating the resulting net cash flows from the projects, and
discounting the net cash flows to their present value. The revenue projection
used to value the in-process research and development was based on estimates of
relevant market sizes and growth factors, expected trends in technology, and the
nature and expected timing of new product introductions by the Company and its
competitors. The resulting net cash flows from such projects are based on
management's estimates of cost of sales, operating expenses, and income taxes
from such projects.
Aggregate revenues for Trex Medical technologies were estimated to grow at a
compounded annual growth rate of approximately 17 percent for the five years
following the acquisition, assuming the successful completion and market
acceptance of the major R&D programs. The estimated revenues for the in-process
projects were expected to peak approximately in fiscal 2006 and then decline as
other new products and technologies are expected to enter the market.
The rates utilized to discount the net cash flows to their present value were
based on estimated cost of capital calculations. Due to the nature of the
forecast and the risks associated with the developmental projects, a discount
rate of 25 percent was used for the in-process R&D. The discount rate utilized
was higher than the Company's weighted average cost of capital due to the
inherent uncertainties surrounding the successful development of the purchased
in-process technology, the useful life of such technology, the profitability
levels of such technology, and the uncertainty of technological advances that
are unknown at this time.
If these projects are not successfully developed, the sales and profitability of
the combined company may be adversely affected in future periods. Additionally,
the value of other acquired intangible assets may become impaired.
As a result of the identification and valuation of intangibles acquired , the
Company also allocated approximately $11,800,000 and $3,000,000 to developed
technology and assembled workforce, respectively. Developed technology
represents patented and unpatented technology and know-how related to the Trex
X-ray mammography, breast biopsy and radiography systems. Developed technology
is expected to be amortized over a period of 10 years. Assembled workforce is
the presence of a skilled workforce that is knowledgeable about company
procedures and possesses expertise in certain fields that are important to
continued profitability and growth of a company. Assembled workforce is expected
to be amortized over a period of 5 years.
The excess of the purchase price over the fair value of identifiable intangible
net assets of approximately $3,000,000 will be allocated to goodwill.
Unidentifiable intangible assets are expected to be amortized over a period of
15 years.
<PAGE>
In connection with the allocation of the purchase price to the acquired assets
and assumed liabilities of Trex Medical based on their estimated fair value,
Management determined that the balance of certain reserves and accruals at the
closing date were not sufficient to cover the estimated economic exposure.
Therefore, the Company has increased the balance of the applicable reserves and
accruals to reflect Management's estimated economic exposure through charges to
earnings in the period after acquisition in accordance with the guidance
provided under Staff Accounting Bulletin No. 100 (SAB 100), Restructuring and
Impairment. As a result, in the period the acquisition occurred, the Company
recorded pre-tax charges totaling $6.8 million to increase the reserve for bad
debts, warranty accruals and other liabilities.
Also, in conjunction with the acquisition, the Company committed to dispose of
the acquired Trexnet product line. Trex Medical had existing obligations under
contractual agreements with customers related to this product line which were
assumed by the Company in the acquisition. The Company has begun to solicit
offers on this product line from likely buyers. Based on the current level of
interest and interaction with potential buyers, the Company has estimated that
it will likely be required to pay a buyer approximately $2.5 million in order to
transfer these obligations, along with the assets and other liabilities
associated with that product line. Such amount has been accrued as part of the
purchase price allocation.
Based on the timing of the closing of the transaction, the finalization of the
integration plans, resolution of the pending purchase price adjustment with Trex
Medical and other factors, the final purchase adjustments may differ materially
from those presented in the pro forma financial information. The effect of the
adjustments on the results of operations will depend on the nature and amount of
assets or liabilities adjusted.
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
Note 1. Basis of Presentation
The unaudited pro forma combined condensed statement of operations for the year
ended September 25, 1999 and the nine months ended July 1, 2000 and gives effect
to the acquisition as if the transaction had occurred at the beginning of the
fiscal 1999. The unaudited pro forma combined consolidated condensed balance
sheet as of July 1, 2000 gives effect to the acquisition as if it had occurred
on July 1, 2000. The estimated purchase price of the acquisition is $56,000,000,
which is composed of $30,000,000 in cash; the issuance of a note to Trex Medical
in the amount of $25,000,000 and $1,000,000 in acquisition related fees and
expenses. Below is a table of the estimated purchase price allocation as of July
1, 2000. The purchase price allocation is subject to the resolution of the
pending purchase price adjustment with Trex Medical and further change based on
final valuations and appraisals.
The pro forma results of operations are not necessarily indicative of future
operations or the actual results that would have occurred had the acquisition of
Trex Medical occurred at the beginning of fiscal 1999.
Purchase price allocation as of July 1, 2000:
Tangible net assets acquired, at fair value $33,258
In-process research and development 5,000
Developed Technology &know how 11,800
Assembled workforce 3,000
Goodwill and other intangibles 2,942
-------
Total $56,000
-------
Note 2. Pro Forma Adjustments
Adjustments to record the acquisition of Trex Medical as if it had happened at
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the beginning of the year ended September 25, 1999:
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<TABLE>
<S> <C>
(A) Gives effect to amortization of developed technology & know-how for fiscal 1999. $ 1,180,000
Gives effect to amortization of assembled workforce for fiscal 1999 $ 600,000
Gives effect to amortization of goodwill and other intangibles for fiscal 1999 $ 196,000
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$ 1,976,000
(B) To record charges related to increases in acquired reserves and accruals
to management's estimate of economic exposure $ 6,848,000
(C) Gives effect to additional interest expense as if the $25,000,000 note payable
to Trex Medical had been outstanding since the beginning of fiscal 1999 $ 2,875,000
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(D) Gives effect to a reduction in interest income related to the utilization of
$30,000,000 in cash for the acquisition at the beginning of fiscal 1999 $ 1,820,000
(E) To record write off of in-process research and development costs $ 5,000,000
(F) To record impact of fair market value write-up of acquired inventory
subsequently sold $ 2,009,000
(G) To reflect depreciation on the fair value step-up of property, plant and
equipment assuming an average life of 10 years since the beginning of fiscal
1999 $ 345,000
(H) To reflect the income tax effect of the pro forma adjustments for fiscal 1999
assuming a 35% effective tax rate $ 5,556,000
(I) As required by Article 11 of Regulation S-X, the unaudited pro forma combined
condensed statements of operations excludes material non-recurring charges which
result directly from the acquisition and which will be recorded within twelve
months following the acquisition. Thus, the write off of in-process research and
development is reversed. $ 5,000,000
(J) Gives effect to amortization of developed technology & know-how for
fiscal 1999 $ 885,000
Gives effect to amortization of assembled workforce for fiscal 1999 $ 450,000
Gives effect to amortization of goodwill and other intangibles for fiscal 1999 $ 147,000
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$ 1,482,000
(K) Gives effect to additional interest expense as if the $25,000,000 note payable
to Trex Medical had been outstanding for the nine-month period
ended July 1, 2000 $ 2,156,000
(L) Gives effect to a reduction in interest income related to the utilization of
$30,000,000 in cash for the acquisition for the nine-month period
ended July 1, 2000 $ 1,123,000
(M) To reflect depreciation on the fair value step-up of property, plant and
equipment assuming an average life of 10 years for the nine-month period
ended July 1, 2000 $ 259,000
(N) To reflect the income tax effect of the pro forma adjustments for
the nine-month period ended July 1, 2000 assuming a 35%effective tax rate $ 1,757,000
</TABLE>
<PAGE>
Adjustments to record the acquisition of Trex Medical on July 1, 2000 unaudited
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pro forma combined condensed balance sheet:
------------------------------------------
<TABLE>
<S> <C>
(O) To record developed technology & know-how $11,800,000
To record assembled workforce $ 3,000,000
To record goodwill and other intangibles $ 2,942,000
-----------
$17,742,000
(P) To increase the balance of acquired reserves and accruals to
Management's estimate of economic exposure $ 6,848,000
(Q) To state acquired property, plant and equipment and inventories at their
estimated fair market value:
PP&E $ 3,451,000
Inventory $ 2,689,000
(R) Elimination of assets and liabilities not assumed in the acquisition $29,587,000
(S) To record purchase price, including cash paid and issuance of the note, and
accrue estimated acquisition related fees and expenses $56,000,000
(T) To record write-off of in-process research and development costs $ 5,000,000
(U) To record a reserve related to disposition of the TrexNet product line
and related obligations $ 2,469,000
</TABLE>
