SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark one)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended June 30, 1998
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 0-18643
Lunar Corporation
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(Exact name of registrant as specified in its charter)
Wisconsin 39-1200501
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
313 West Beltline Highway
Madison, Wisconsin 53713
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(Address of principal executive offices) Zip Code)
Registrant's telephone number (including area code): (608) 274-2663
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
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(Title of class)
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 / /
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 Form 10-K. [ ]
As of September 23, 1998, there were issued and outstanding 8,604,460 shares
of Common Stock. The aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant was $59,521,441 as of
September 23, 1998 assuming solely for purposes of this calculation that all
directors and executive officers of the Registrant are "affiliates." This
determination of affiliate status is not necessarily a conclusive
determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Lunar Corporation Proxy Statement for its 1998 Shareholders
Meeting to be held on November 20, 1998 (Part III)
LUNAR CORPORATION
INDEX TO
ANNUAL REPORT ON FORM 10-K
For Year Ended June 30, 1998
Page
PART I ----
Item 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2 Properties . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 3 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 9
Item 4 Submission of Matters to a Vote of Security Holders. . . . 10
PART II
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters. . . . . . . . . . . . . . . . 10
Item 6 Selected Financial Data. . . . . . . . . . . . . . . . . . 10
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 12
Item 7A Quantitative and Qualitative Disclosures about Market Risk 16
Item 8 Financial Statements and Supplementary Data. . . . . . . . 18
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . . 33
Part III
Item 10 Directors and Executive Officers
of the Registrant. . . . . . . . . . . . . . . . . . . . . 33
Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . 34
Item 12 Security Ownership of Certain
Beneficial Owners and Management . . . . . . . . . . . . . 34
Item 13 Certain Relationships and Related Transactions . . . . . . 35
Part IV
Item 14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K. . . . . . . . . . . . . . . . . . 35
Index to Consolidated Financial Statements and
Financial Statement Schedule . . . . . . . . . . . . . . . . . . . . . . 36
Report of Independent Auditors on Financial
Statement Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Schedule II - Valuation and Qualifying Accounts
for each of the years ended June 30, 1998,
1997, and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Index to Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
PART I
ITEM 1. BUSINESS
INTRODUCTION
Lunar Corporation develops and sells x-ray and ultrasound bone
densitometers for the diagnosis and monitoring of osteoporosis and other
metabolic bone diseases. Lunar also develops and sells medical imaging
equipment used by orthopedists and radiologists for imaging extremities.
Except as the context otherwise requires, as used herein the terms "Lunar"
And the "Company" mean Lunar Corporation, its wholly owned subsidiaries Lunar
GmbH, Lunar Europe, N.V., Lunar France, Bona Fide, Ltd., Lunar FSC, Inc.,
Lunar Finance Corporation, Lunar Funding Corporation, and Lunar Capital
Corporation.
BACKGROUND ON OSTEOPOROSIS
Osteoporosis is a disease generally associated with aging and
characterized by excessive loss of bone mineral, resulting in decreased bone
density over time. Demineralization weakens bone so that minor physical
stress can cause debilitating fractures, usually in the wrists, hips, and
spine. These fractures can result in disfigurement, decreased mobility, and,
in some cases, extensive hospitalization and chronic nursing home care.
Osteoporosis is a major and growing public health problem in the United
States and worldwide. In the United States, 25% of women over age 60 develop
vertebral fractures related to osteoporosis, and as many as 50% of women will
develop vertebral fractures by age 75. According to the National Institutes
of Health, there are currently more than 10 million adults affected by
osteoporosis in the United States. Factors contributing to bone loss include
age- and sex-related hormonal changes, low calcium intake, excessive alcohol
consumption, and certain drug therapies.
An estimated 1.3 million osteoporosis-related fractures occur each year
in the United States. A recently published Mayo Clinic study estimated the
annual direct costs of osteoporosis-related fractures in the United States in
1995 to be $13.8 billion. Without effective diagnosis and treatment, the
medical and social consequences of such fractures will worsen as the
population ages. Osteoporosis is at least partially preventable if
individuals at the greatest risk of fracture are diagnosed and treated in the
early stages.
DIAGNOSIS AND MONITORING. Relatively few people are diagnosed in time
for effective therapy since there are no obvious symptoms of osteoporosis in
the early stages. Often the first symptom is a debilitating fracture.
Studies show that bone mineral density is correlated highly with bone
strength. Since bone strength is a determinant of an individual's
susceptibility to fracture (along with the likelihood of sustaining sufficient
trauma), bone mineral density indicates fracture risk. Bone mineral density
can be measured with accuracy (referring to how well the scanners measure the
actual bone density) and precision (referring to whether the scanners yield
the same result upon multiple scans of the same bone) using dual-photon
absorptiometry ("DPA") or dual-energy x-ray absorptiometry ("DEXA")
techniques.
Bone densitometer technology is based on the fact that bone absorbs x-ray
photons at a different rate than does soft tissue. Photons are directed at
the body, and their differential absorption is measured. The first commercial
bone densitometers utilized single-photon absorptiometry ("SPA"), a method
which was developed at the University of Wisconsin - Madison, Department of
Medical Physics, by investigators including Drs. Richard B. Mazess, James
Sorenson, and John Cameron. SPA, which uses photons at a single-energy level,
became commercially available in 1972 and was widely utilized in research.
During the 1970s, Dr. Richard B. Mazess, James A. Hanson, Philip Judy, Walter
Peppler, Charles Wilson, and other researchers at the University of Wisconsin
- - Madison, Department of Medical Physics, developed a DPA scanner which used
photons of two energy levels. Dr. Mazess organized Lunar to focus on the
diagnosis and monitoring of osteoporosis and to market bone densitometers
using DPA. In the 1980s, DPA and DEXA scanners were developed to measure bone
density in the spine and the hip, which are more clinically significant areas
of the skeleton. SPA and DPA scanners employ a radioactive source; DEXA
scanners generate radiation using a conventional x-ray tube. DEXA scanners
are accurate, have a low precision error, are safe because they emit low
radiation, have scanning times of approximately 5 minutes, and have a low
operating cost.
In recent years, ultrasound technology has been developed to measure the
bone density of certain peripheral sites such as the heel. Ultrasound bone
densitometers are less expensive than DEXA bone densitometers, and since they
use nonionizing radiation, ultrasound bone densitometers encounter fewer
regulatory and licensing requirements as compared to DEXA bone densitometers.
REIMBURSEMENT. To achieve broad acceptance and qualify for third-party
reimbursement, diagnostic products not only must be safe and efficacious, but
also must be deemed cost-effective by public and private health care payors.
Sales of bone densitometers are also dependent upon the level of reimbursement
provided by public and private health care payors. Reimbursement for DEXA and
ultrasound scans has been approved in several countries.
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 national criteria under which Medicare would
cover bone density diagnostic tests, and will be effective July 1, 1998.
Under the provision, axial DEXA tests are reimbursed at $131 and peripheral
DEXA or ultrasound tests are reimbursed at $40.
While many private insurance carriers currently provide reimbursement for
bone mass measurement, a significant number do not. California, Florida,
Oklahoma, Tennessee, Texas, and Maryland have legislation mandating insurance
coverage for bone density tests.
THERAPIES. The demand for bone densitometers sold by the Company is
dependent on the availability of therapies for the treatment of postmenopausal
osteoporosis. The Company does not sell any of the therapies discussed in
this subsection.
Estrogen replacement therapies ("ERT") are approved for marketing and
sale in the United States for the treatment of postmenopausal osteoporosis.
ERT is currently believed to be an effective means to prevent bone loss and
related fractures, but does not stimulate bone formation. In the United
States, ERT most often is used to relieve symptoms related to menopause;
however, usage for osteoporosis is steadily increasing. The Food and Drug
Administration ("FDA") approval of a combined estrogen-progestin pill (Prempro
by Wyeth Ayerst) has increased interest in long-term and potential compliance
therapy of osteoporosis.
Calcitonins are approved for marketing and sale in the United States for
the treatment of osteoporosis. Calcitonins seem to prevent further bone loss,
but do not stimulate bone formation. Miacalcin nasal spray, by Novartis, is a
nasal delivery formulation which was approved for sale by the FDA in the
United States in 1995.
A bisphosphonate (Fosamax, developed by Merck & Co.) was approved in
October 1995 for marketing and sale in the United States for the treatment of
osteoporosis. Studies have shown that bisphosphonates appear to inhibit bone
resorption without interrupting normal bone formation, thereby increasing bone
mass and reducing vertebral fractures. Several other pharmaceutical companies
are developing bisphosphonates to treat osteoporosis and expect to market
these products within the next two years.
Calcium supplements have not been approved for marketing and sale in the
United States for the treatment of osteoporosis, but one preparation is
awaiting consideration by the FDA. Calcium supplements are often recommended
for postmenopausal women, but evidence of their efficacy in treatment and
prevention of osteoporosis is controversial. Calcium supplements are also
recommended for use with bisphosphonates and ERT.
Fluoride preparations have not been approved for marketing and sale in
the United States for the treatment of osteoporosis. Fluoride preparations
are known to increase bone density in the spine (the most common site of
osteoporosis fractures), but have little effect on bone density in the hip
(the most debilitating site of osteoporosis fractures).
A new class of compounds, selective estrogen receptor modulators, have
been shown to prevent bone loss. In December 1997, Raloxifene (Evista by Eli
Lilly) was approved for treatment of osteoporosis.
In Japan and Europe, there is an active market for osteoporosis
therapies. In Japan, available therapies include vitamin D-3 compounds,
calcitonin, and ipriflavone. In Europe, available therapies include
estrogens, calcitonins, vitamin D-3 compounds, ipriflavone, and sodium
fluoride. Vitamin D-3 compounds, primarily 1-alpha-D-3, which are available
in Japan and Europe, are activated by the body into hormones which help
regulate blood levels of calcium required for essential body functions,
including normal bone growth. Studies have shown that low dosages of 1-alpha-
D-3 have little efficacy as an osteoporosis therapy, but at higher dosages,
bone mineral content increased and bone fracture rates decreased.
THE COMPANY'S PRODUCTS
X-RAY DENSITOMETRY SYSTEMS. In 1988, Lunar introduced its DEXA system,
the DPX, which replaced the radioactive source with an x-ray source thereby
allowing for faster scan times and improved precision. Since that time, the
Company has developed numerous enhancements and instrument sizes available
within this product line. Some of the more popular models are described
below.
Lunar's leading product is the DPX-IQ, introduced in 1996. The DPX-IQ
includes a broad range of clinical applications, including software for the
analysis of the spine, femur, hand, and total body bone density and soft-
tissue composition. Additional applications are available via software
upgrades versus hardware modifications. The DPX-IQ is available in a full-
size model for complete clinical utility, and a compact model which requires
less space. The versatility of the DPX-IQ meets a wide range of clinical and
research needs. Primary customers include radiologists, gynecologists,
rheumatologists, endocrinologists and orthopedists.
The EXPERT is a high-end imaging bone densitometer, having improvements
on previous densitometers because of its better speed (10X faster) and spatial
resolution (3X finer). In addition, the imaging capability of the EXPERT
allows determinations of the entire lateral spine to be achieved in less than
a minute. Morphometry of individual vertebra can be readily done with
standardized, semiautomated algorithms. EXPERT morphometry, compared to
conventional radiographs, provides uniformity in geometry; there is no
distortion along the axis of the spine, leading to exact values for vertebral
height. The EXPERT is sold primarily to research institutions and high-end
imaging centers.
In 1997, Lunar introduced PIXI, the first peripheral instantaneous x-ray
imager. PIXI is a new generation of peripheral densitometer, utilizing cone-
beam geometry for rapid (5 seconds), high resolution imaging of both the heel
and forearm. While the forearm is an adequate site to assess bone loss due to
hyperparathyroidism, it is only a modest predictor of future fractures and a
poor site to monitor therapeutic response. In contrast, the heel, as a
weight-bearing site with metabolically active bone, has been shown to be both:
(1) a good predictor of hip fractures, and (2) responsive to anti-resorptive
therapies, much like the spine. For maximum clinical versatility, PIXI
measures both of these peripheral sites.
PIXI is designed to become an integral part of day-to-day patient
management, occupies minimal floor space, requires no patient preparation, and
weighs less than 25 kg, making it the lightest DEXA densitometer. Lunar sells
the PIXI to medical specialists such as gynecologists, and other primary care
physicians.
ULTRASOUND DENSITOMETRY SYSTEMS. Lunar introduced the Achilles
ultrasound densitometer in 1991. The Achilles series of products can measure
bone using either speed of sound or broadband ultrasound attenuation. They
are the first densitometers to combine both of these ultrasound measurements
in one device. The Achilles is sold to customers such as endocrinologists,
obstetricians, gynecologists, and family practitioners.
In 1995, the Company introduced the Achilles+ having the same performance
features as its predecessor with increased ease of operation and reduced
patient measurement time. In September 1997, the Company introduced the
Achilles+ Solo featuring a faster scan time (40 seconds per measurement) and
operates without an external computer. In June 1998, the Company received
premarket approval from the FDA to sell the Achilles+ Solo to customers in the
United States.
ORTHOPEDIC IMAGING SYSTEMS - MAGNETIC RESONANCE IMAGING SYSTEM. In
September 1993, the Company signed an exclusive distributor agreement with
ESAOTE Biomedica Spa, a medical device manufacturer based in Italy, to
distribute the Artoscan dedicated MRI system in the United States. The
Artoscan is a specialized MRI scanner suitable for imaging extremities such as
knees, wrists, and ankles. The Company sells the Artoscan in the United
States for less than $300,000, which is significantly below competitive whole
body MRI systems. This lower price, and the fact that installation and siting
costs associated with the Artoscan are minimal, has made the Artoscan
attractive to radiologists, orthopedists, sports medicine specialists, and
other MRI users. Under the agreement with ESAOTE Biomedica, Lunar is required
to meet certain minimum annual purchase commitments. The agreement expires in
December 2003. There can be no assurance that the agreement will be renewed on
terms satisfactory to the Company.
FLUOROSCOPIC C-ARM. The Company introduced a fluoroscopic C-arm for
extremity imaging at the 1996 Conference of the American Academy of Orthopedic
Surgeons. ORCA utilizes digital imaging capabilities coupled with proprietary
processing techniques to produce distortion-free images, particularly of bone.
ORCA is designed for the orthopedic and radiology market.
CUSTOMERS, SALES, AND MARKETING
Lunar's products are sold to medical institutions, hospitals,
pharmaceutical companies active in the field of bone mineral metabolism,
radiological, orthopedic, and other specialty group practices. The Company
has recently seen an increase in sales to primary care physicians and
gynecologists.
In the United States, Lunar markets and sells its products through two
distribution networks and a direct sales force. In April 1998, the Company
entered into distribution agreements with Caligor (a division of Henry Schein
Medical) and McKesson General Medical. Both companies have a presence in the
primary care and gynecology markets with a combined sales force of over 700
representatives. The Company continues to maintain a 30-person direct sales
organization.
Outside of the United States, Lunar markets and sells its products
primarily through independent distributors, all of whom offer sales and
technical support. Employees of these distributors have undergone product and
technical training related to the Company's systems. The Company's wholly
owned German, French, and Belgian subsidiaries provide direct sales and
service support to German, French, and Belgian customers. The Company also
maintains offices in Brussels, Belgium, and Sydney, Australia, to support its
distributors with marketing, sales support, and service.
Lunar markets and sells the Artoscan MRI scanner through a direct sales
force and the fluoroscopic C-arm through a direct sales force and various
radiological and orthopedic surgery equipment dealers.
Lunar markets its products through advertising in medical journals,
direct mailings of brochures, attendance of and presentations at medical
seminars and trade shows, and personal visits by sales representatives with
customers. Lunar had 165 employees engaged in the marketing, sales support,
and service of bone densitometry equipment as of June 30, 1998. Lunar
products carry a one-year warranty. Extended service contracts are also
available.
For the years ended June 30, 1998, 1997, and 1996, approximately 35%,
37%, and 54% of sales, respectively, were to customers located in foreign
countries. No individual end user accounted for more than 2% of Lunar's sales
for the fiscal year ended June 30, 1998 and 1997. For the fiscal year ended
June 30, 1996, sales to the Company's distributor in Japan accounted for 13%
($8,580,406) of the Company's sales.
As of June 30, 1998, substantially all of the Company's backlog was
deliverable within 120 days. Orders included in backlog may generally be
canceled or rescheduled by customers, without significant penalty, and
therefore cannot be considered firm. Also, the Company's revenues tend to be
somewhat seasonal, generally being lower in the first fiscal quarter due
primarily to lower activity in Europe and North America in the summer months.
MANUFACTURING
Lunar's manufacturing operations consist primarily of assembly, testing,
and quality control. Lunar purchases a majority of the parts and peripheral
components for its systems and manufactures certain subsystems, such as the x-
ray tube head, from basic components. Parts and materials are generally
readily available from several supply sources.
PATENTS AND PROPRIETARY RIGHTS
Lunar relies in part upon know-how, trade secrets, trademarks and
copyrights, and patents to protect technology which it considers important to
the development of its business.
Although the Company believes patents are not critical in protecting its
competitive advantage in x-ray bone densitometry, it has obtained a number of
United States patents relating to its technology. The Company owns a number of
issued United States and foreign patents and patent applications related to
various aspects of x-ray and ultrasound bone densitometry. The Company
continues to file United States and foreign patent applications covering its
developments in the bone densitometry and imaging technologies. In addition
to patents and patent applications concerning technology developed by the
Company, the Company has licensed patented technology developed at various
universities.
The Company has obtained United States and foreign trademark
registrations for "LUNAR," "DPX," "Achilles," "EXPERT," "LUNAR Expert,"
"PIXI," "DPX-IQ," and "ORCA." Applications for various trademark
registrations continue to be pursued worldwide.
The Company claims international copyright in its software, user's
manuals, customer brochures, and advertising materials.
The Company also relies on unpatented trade secrets. The Company
requires its employees, consultants, and advisors to execute confidentiality
agreements upon the commencement of an employment or a consulting relationship
with the Company. The agreements provide that all confidential information
developed or made known to the individual during the course of the
relationship shall be kept confidential and not disclosed to third parties
except in specified circumstances. The agreements also provide that all
inventions conceived by the individual during his employment and relating to
the business of the Company shall be the exclusive property of the Company.
There can be no assurance, however, that these agreements will provide
meaningful protection for the Company's trade secrets in the event of
unauthorized use or disclosure of such information. Additionally, others may
independently develop substantially equivalent proprietary information and
techniques, or otherwise gain access to the Company's trade secrets or
disclose such technology.
For information regarding patent litigation, see Item 3 below.
COMPETITION
Lunar product sales are dependent on competition, reimbursement levels,
and availability of therapies on a country-by-country basis. The medical
instrumentation industry is highly competitive and characterized by continual
change and improvement in technology. Many of the companies in the medical
instrumentation industry have significantly greater research, manufacturing,
marketing, and financial resources than the Company.
To date, the market for bone densitometer systems has been characterized
by companies such as Lunar which specialize in instruments for bone density
measurement. Hologic, Inc., based in Massachusetts, and Norland Medical
Systems, Inc., based in White Plains, New York, sell bone densitometer
scanners which compete directly with the DPX series and the EXPERT. In 1997,
Schick Technologies, Inc., based in Long Island City, New York, introduced a
low-cost x-ray based peripheral bone densitometer which competes with the
Company's peripheral bone densitometers. Two Japanese companies, an Italian
company and a French company are developing or have introduced x-ray bone
densitometers in their respective countries. Lunar expects additional
competitors to enter the bone densitometry market, both in the United States
and foreign countries. Competition has intensified as new models have been
introduced by competitors.
The Company believes it is the world's largest seller of ultrasound bone
densitometry instruments. Hologic and at least five other companies have
commercially introduced devices which compete with the Achilles ultrasound
product line. Lunar is aware of several other companies developing ultrasound
bone densitometers.
In addition to competition from other medical equipment manufacturers and
devices, biochemical markers have gained increased interest among researchers
for the detection of high bone turnover which can lead to osteoporosis. Such
markers could be used as an adjunct to bone densitometry.
The primary competitors to the ORCA C-arm include OEC Medical Systems,
Inc., Fluoroscan (a subsidiary of Hologic), and Xitec. Innervision sells an
extremity MRI device competitive to the Artoscan.
REGULATION
The Company's products are subject to regulation by the FDA and by many
foreign governments. Under the United States Food, Drug, and Cosmetic Act
("FDA Act"), manufacturers of medical devices must comply with certain
regulations governing the manufacturing, testing, packaging, and marketing of
medical devices. The Company's x-ray bone densitometry 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. Lunar believes it is in compliance in all material
respects with these various laws and regulations.
The FDA generally must authorize the commercial sale of new medical
devices. Commercial sales of the Company's bone densitometry 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 premarket
approval for a particular medical device. The Section 510(k) notification
filing must contain information which establishes that the device is
substantially equivalent to a legally marketed device or to a device which was
marketed prior to May 28, 1976. The FDA may either deny the Section 510(k)
submission or require further information within 90 days of submission.
Commercial marketing of the device cannot begin until the 510(k) submission is
cleared by the FDA. The premarket approval (PMA) procedure involves a more
complex and lengthy review process by the FDA than the Section 510(k)
premarket notification procedure.
The following table summarizes FDA Section 510(k) clearance received by
Lunar during the last 10 years:
DPX Bone Densitometer June 1988
DPX Total Body Software June 1989
DPX Population Reference Data April 1990
DPX-L/DPX-alpha Bone Densitometers December 1990
Lateral Spine Software August 1991
DPX Forearm Software February 1992
DPX Orthopedics Software February 1992
EXPERT Bone Densitometer April 1995
EXPERT Morphometry Software April 1995
Morphometry Software May 1995
DPX Tissue Quantitation Software October 1995
DPX Hand Software October 1995
ORCA Orthopedic C-arm May 1996
EXPERT Morphometry Reference Value Software July 1996
EXPERT Forearm and Hand Software November 1996
EXPERT Total Body Software April 1997
DPX Expanded Reference Value Software April 1997
PIXI Densitometer April 1997
PIXI Reference Data August 1997
DPX-RX Bone Densitometer August 1998
In June 1998, the FDA concluded its review of the Company's PMA
application of the Achilles+ Ultrasonometer and granted its approval for the
Company to begin distribution of this product in the United States. LUNAR
believes new products being developed in the x-ray densitometry and imaging
product lines will be eligible for a Section 510(k) marketing clearance.
Lunar is also subject to regulation by the Nuclear Regulatory Commission
("NRC") as a result of its storage and handling of radioactive materials used
in the design and testing of its medical devices. The NRC regulates the type,
amount, form, storage, use, disposal, and handling of such radioactive
materials. Licenses from the NRC must be renewed every five years. Lunar has
in place a Radiation Safety Program and believes it is in compliance in all
material respects with NRC regulations.
The Company's product line is subject to approval by certain foreign
regulatory and safety agencies. Lunar believes it is currently in compliance
with all regulations in foreign countries applicable to its business.
As a manufacturer of medical devices, Lunar is subject to certain FDA
regulations which relate to its manufacturing processes and facilities, and
these processes and facilities are subject to continuing review by the FDA.
Lunar has had several FDA on-site inspections and has complied with FDA
regulations. Most states and certain foreign countries monitor and require
licensing of x-ray devices, such as DEXA scanners. Federal, state, and
foreign regulations regarding the manufacture and sale of medical devices are
subject to future change. Lunar cannot predict what impact, if any, such
changes might have on its business.
The Company is subject to various federal, state, and local laws and
regulations relating to the protection of the environment. Lunar believes its
current operations comply with all currently applicable environmental laws and
regulations. Lunar's expenditures for environmental compliance have not had,
nor are they expected to have, a material adverse effect on the results of
operations or financial condition of the Company.
Export clearance for the Company's products varies by country. Generally
if FDA 510(k) or premarket approval is received in the United States, there
are no other export clearances required. However, an increasing number of
countries are implementing regulations requiring their own pre-market review
of new medical devices prior to the Company exporting newly introduced devices
to that country. Other countries require only that the Company comply with
product safety and ISO 9001 quality system standards.
The Company's quality management system for product design, development,
manufacturing and servicing is certified as meeting the internationally
recognized ISO 9001 standard. In December 1997, the Company also received
certification indicating that its quality system meets the requirements of the
European Medical Devices Directive.
RESEARCH AND DEVELOPMENT
As of June 30, 1998, the Company had 65 employees engaged in research and
development. During fiscal 1998, 1997, and 1996, Lunar's research and
development expenses were $7.6 million, $5.9 million, and $5.8 million,
respectively.
PRODUCT LIABILITY INSURANCE
The Company maintains product liability insurance and considers its
current level of product liability insurance coverage to be adequate. While
the Company has not experienced any material product liability claims to date,
if such claims arise in the future, they could have a material adverse effect
on the results of operations or financial condition of the Company.
EMPLOYEES
As of June 30, 1998, Lunar had 314 full-time employees, including 61 in
manufacturing operations; 65 in research and development; 165 in marketing,
sales support, and service; and 23 in finance and administration. None of the
Company's employees is represented by a union. The Company considers its
employee relations to be good.
GLOSSARY OF DEFINED TERMS
CT - computer tomographic
DEXA - dual-energy x-ray absorptiometry
DPA - dual-photon absorptiometry
ERT - estrogen replacement therapies
FDA - Food and Drug Administration
FDA Act - United States Food, Drug, and Cosmetic Act
HCFA - Health Care Finance Administration
Hologic - Hologic, Inc.
MRI - magnetic resonance imaging
NOF - National Osteoporosis Foundation
NRC - Nuclear Regulatory Commission
SPA - single-photon absorptiometry
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance, or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things,
regulation, technical risks associated with the development of new products,
regulatory policies in the United States and other countries, reimbursement
policies of public and private health care payors, introduction and acceptance
of new drug therapies, currency exchange risks, competition from existing
products and from new products or technologies, and market and general
economic factors. Certain of these factors are discussed in more detail
elsewhere herein. Readers should also carefully review the risk factors set
forth in other reports or documents the Company files from time to time with
the Securities and Exchange Commission. Given these uncertainties, readers
are cautioned not to place undue reliance on such forward-looking statements.
The Company disclaims any obligation to update any such factors or to publicly
announce any revisions to any of the forward-looking statements contained
herein to reflect future events or developments.
ITEM 2. PROPERTIES
The Company owns and occupies a building of approximately 70,000 square
feet on approximately 3 acres in Madison, Wisconsin. The Company's facilities
were originally acquired in 1986 and expanded by approximately 30,000 square
feet in 1994. The Company also leases a warehouse in Madison, Wisconsin of
approximately 10,000 square feet, and office facilities in Germany, Belgium,
and France.
In January 1998, the Company purchased a 25-acre parcel of land located
in Madison, Wisconsin, for $1,949,000. The Company plans to begin
construction of an assembly, warehouse, and office building on that parcel in
late 1998. Total construction costs are projected to be approximately
$11,000,000.
ITEM 3. LEGAL PROCEEDINGS
PATENT LITIGATION: On March 5, 1996, the Company and University of
Alabama-Birmingham Research Foundation (UAB) (collectively the co-plaintiffs)
sued EG&G Astrophysics (EG&G) of Long Beach, California, in the United States
District Court for the Western District of Wisconsin for infringement of U.S.
Patent 4,626,688 (the '688 Patent) by EG&G's dual-energy baggage scanners. A
trial of the matter in December of 1996 concluded with a verdict in favor of
the co-plaintiffs. The Company and UAB were awarded $4.2 million in damages,
which was divided between the co-plaintiffs after deducting legal expenses.
The co-plaintiffs also entered into a Settlement and License Agreement with
EG&G whereby EG&G was licensed under the '688 Patent and a related U.S.
patent. The license agreement provides for payment of royalties to the co-
plaintiffs on EG&G's dual-energy baggage scanners manufactured or sold in the
United States. The license agreement ends on December 2, 2003.
The Company is presently co-defendant and counterclaim co-plaintiff with
UAB in two declaratory judgment actions filed in the United States District
Court for the Central District of California. Both actions seek a
determination of non-infringement and invalidity of the '688 Patent. The first
declaratory judgment action was filed on January 21, 1997 by RapiScan Security
Systems, Inc. ("RapiScan"). RapiScan manufactures and sells baggage scanning
equipment and is a competitor of EG&G. The second declaratory judgment action
was filed on February 26, 1997 by Osteometer Meditech A/S ("Osteometer"), a
competitor of the Company. Osteometer manufactures and sells bone densitometry
products and is located in Denmark. The Company has entered into settlement
negotiations with both Osteometer and RapiScan. Terms of a settlement in
principal have been read into the court record and negotiations of final
settlement documentation are ongoing. The Company does not believe these
lawsuits will have a material adverse effect on the results of operations or
financial condition of the Company.
On May 21, 1998 the Company filed suit against International Medical
Research Ottawa (IMRO) for infringement of the Company's Canadian Patent
1,323,090 (the '090 Patent). IMRO manufactures and sells ultrasound bone
densitometers in Canada and has manufactured ultrasound densitometers for
Norland Medical Systems, Inc. for distribution and sales throughout the world.
This suit is pending in the Federal Court of Canada-Trial Division.
On June 30, 1998 the Company and Stanford University filed suit against
Norland Corporation and its parent company Norland Medical Systems, Inc. in
the United States District Court for the Western District of Wisconsin for
infringement of U.S. Patent 4,686,695 (the '695 Patent). The '695 Patent is
owned by Stanford University and is licensed to the Company for the field of
medical devices. It is alleged that Norland x-ray densitometry products
infringe the '695 Patent.
OTHER MATTERS: The Company is a defendant from time to time in actions
arising out of its ordinary business operations. There are no other legal
proceedings known to the Company at this time which it believes would likely
have a material adverse impact on the results of operations or financial
condition of the Company. To the Company's knowledge, there are no material
legal proceedings to which any director, officer, affiliate or more than 5%
shareholder of the Company (or any associate of the foregoing persons) is a
party adverse to the Company or any of its subsidiaries or has a material
interest adverse to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following table sets forth high and low sales prices as reported on
the National Market System of The NASDAQ Stock Market for fiscal years 1998
and 1997.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1998
----
High $24.50 $22.88 $24.50 $20.00
Low 19.00 18.50 19.75 16.25
1997
----
High 40.00 35.75 40.75 34.50
Low 32.00 26.25 29.25 15.00
On September 23, 1998, the Company's common stock was held by
approximately 3,500 stockholders of record or through nominee or street name
accounts with brokers.
The Company has not paid any cash dividends on its shares of common stock
since its initial public offering on August 14, 1990, and does not expect to
pay any cash dividends in the foreseeable future. Lunar intends to reinvest
its earnings on the continued development and operation of its business. Any
payment of dividends would depend upon Lunar's pattern of growth,
profitability, financial condition, and such other factors as the Board of
Directors may deem relevant.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for each of the five
years in the period ended June 30, 1998 have been derived from the audited
consolidated financial statements of LUNAR. The consolidated financial
statements for the fiscal years ended June 30, 1994 through 1998 have been
audited by KPMG Peat Marwick LLP, independent auditors. References to a year
are to Lunar's fiscal year ended June 30, unless otherwise designated.
The following data should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Annual
Report and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
STATEMENTS OF INCOME DATA
(in thousands, except per-share data)
Year Ended June 30,
1998 1997 1996 1995 1994
-------------------------------------------
REVENUES
Equipment sales and other revenue $79,727 $81,467 $66,859 $44,572 $30,027
OPERATING EXPENSES
Cost of sales 38,867 36,300 30,388 18,994 11,807
Research and development 7,577 5,922 5,812 4,495 2,847
Sales and marketing 19,698 17,215 14,513 9,869 6,833
General and administrative 4,097 4,051 4,311 4,002 2,292
- ------------------------------------------------------------------------------
70,239 63,488 55,024 37,360 23,779
- ------------------------------------------------------------------------------
Income from operations 9,488 17,979 11,835 7,212 6,248
OTHER INCOME (EXPENSE)
Interest income 1,813 1,533 1,549 1,312 1,229
Settlement of lawsuit - 1,829 - - -
Other (1,115) 186 (238) 328 178
- ------------------------------------------------------------------------------
698 3,548 1,311 1,640 1,407
- ------------------------------------------------------------------------------
Income before income taxes 10,186 21,527 13,146 8,852 7,655
Income tax expense 3,324 7,241 3,910 2,151 1,849
- ------------------------------------------------------------------------------
NET INCOME $6,862 $14,286 $9,236 $6,701 $5,806
==============================================================================
Basic Earnings Per Share $0.78 $1.66 $1.13 $0.85 $0.74
==============================================================================
Diluted Earnings Per Share $0.75 $1.57 $1.04 $0.76 $0.68
==============================================================================
Weighted average number of
common shares 8,774 8,615 8,195 7,905 7,810
==============================================================================
Weighted average number of common
and diluted potential common shares 9,112 9,106 8,908 8,824 8,526
==============================================================================
BALANCE SHEET DATA
(in thousands)
As of June 30,
1998 1997 1996 1995 1994
---------------------------------------------------
Working capital $40,786 $45,549 $38,999 $33,140 $17,603
Total assets 90,115 83,283 62,872 56,700 45,515
Long-term liabilities - - - - -
Shareholders' equity 75,612 70,243 52,405 48,096 40,451
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
STATEMENTS OF INCOME (percent of sales)
Year Ended June 30,
1998 1997 1996
---- ---- ----
REVENUES 100% 100% 100%
OPERATING EXPENSES
Cost of sales 49 45 45
Research and development 9 7 9
Sales and marketing 25 21 22
General and administrative 5 5 6
- ------------------------------------------------------------------------------
88 78 82
- ------------------------------------------------------------------------------
Income from operations 12 22 18
OTHER INCOME (EXPENSE)
Interest income 2 2 2
Other, net (1) 3 -
- ------------------------------------------------------------------------------
1 5 2
- ------------------------------------------------------------------------------
Income before income taxes 13 27 20
Income tax expense 4 9 6
- ------------------------------------------------------------------------------
NET INCOME 9% 18% 14%
==============================================================================
YEAR ENDED JUNE 30, 1998 VERSUS 1997 - Equipment sales and other
revenue decreased 2% to $79,727,000 in fiscal 1998, from $81,467,000 in fiscal
1997. Sales by product line are summarized as follows:
Revenues by Product
(in thousands)
Fiscal Year Fiscal Year
1998 1997
----------- -----------
X-ray densitometry $56,611 $61,827
Ultrasound densitometry 4,118 5,528
Orthopedic imaging 12,223 9,121
Service 5,193 3,546
Other 1,582 1,445
----------- -----------
$79,727 $81,467
=========== ===========
The Company's sales of bone densitometers in the United States have been
negatively impacted by a shift away from traditional hospital buyers toward
physician clinical practices, which tend to favor the lowest priced
densitometers. The Company recently announced two new distributor agreements
to better address this market segment. Bone densitometry sales were also
negatively affected by the economic problems in Asian markets. The increase
in orthopedic imaging sales for the current fiscal year is primarily due to
increased unit sales of the Artoscan dedicated MRI system. The increase in
service revenue is primarily due to the growing installed base of
densitometers in the United States.
Cost of sales as a percentage of equipment sales averaged 49% in fiscal
1998 compared to 45% in fiscal 1997. The increase is primarily the result of
lower gross profit margins on sales of densitometry equipment as a result of
competitive pricing pressures and a higher mix of orthopedic imaging equipment
which have lower gross profit margins.
Research and development expenditures increased to $7,577,000 in fiscal
1998 compared to $5,922,000 in fiscal 1997, primarily due to increased
expenditures for ultrasound and x-ray densitometry products.
Sales and marketing expenses increased 14% to $19,698,000 (25% of product
sales) in fiscal 1998 from $17,215,000 (21% of product sales) in fiscal 1997.
This increase is primarily the result of increased sales and marketing efforts
to address the expanding primary care market for densitometry.
General and administrative expenses increased to $4,097,000 in fiscal
1998 from $4,051,000 in fiscal 1997.
Interest income of $1,813,000 in fiscal 1998 compared to interest income
of $1,533,000 in fiscal 1997. This increase is primarily the result of
increased investments in marketable securities partially offset by decreases
in the amount of financed receivables.
Other expenses in fiscal 1998 are primarily the result of approximately
$1,788,000 in legal fees incurred with respect to patent litigation with
RapiScan Security Systems, Inc. ("RapiScan") and Osteometer Meditech A/S
("Osteometer"). The Company has entered into settlement negotiations with
both RapiScan and Osteometer. A final settlement agreement has not yet been
reached. These legal expenses were partially offset by royalties of
approximately $632,000 from license agreements. The Company anticipates
royalties from these agreements to be significantly lower in the future.
The effective tax rate averaged 33% in fiscal 1998 and 34% in fiscal
1997. The Company's effective rate has been below the 34% federal statutory
rate as a result of the tax benefit from the Company's foreign sales
corporation, Lunar FSC, Inc., and tax-exempt interest income offset by the
effect of state income taxes.
YEAR ENDED JUNE 30, 1997 VERSUS 1996 - Equipment sales and other
revenue increased 22% to $81,467,000 in fiscal 1997, from $66,859,000 in
fiscal 1996. Sales by product line are summarized as follows:
Revenues by Product
(in thousands)
Fiscal Year Fiscal Year
1997 1996
----------- -----------
X-ray densitometry $61,827 $51,399
Ultrasound densitometry 5,528 5,054
Orthopedic imaging 9,121 6,402
Service 3,546 2,984
Other 1,445 1,020
----------- -----------
$81,467 $66,859
=========== ===========
The increase in x-ray densitometry sales from fiscal 1996 is primarily
attributable to increased shipments in the United States, which the Company
believes are related to the introduction of several new drug therapies during
the last 24 months. The increase in orthopedic imaging sales is due to the
Company's introduction of the ORCA mini C-arm, a portable x-ray device used by
surgeons to image extremities, and higher Artoscan MRI sales resulting from
increased acceptance of the system, particularly by orthopedic surgeons.
Cost of sales as a percentage of equipment sales averaged 45% in fiscal
years 1997 and 1996.
Research and development expenditures remained stable at $5,922,000 in
fiscal 1997 compared to $5,812,000 in fiscal 1996. Expenditures related to
the development of densitometry products increased approximately $1,082,000
over 1996 levels offset by the discontinuance of D-hormone research. The
Company spun off Bone Care International, Inc. to its shareholders on May 8,
1996 in a transaction intended to qualify as a tax-free distribution. The
costs of clinical trials and any other costs related to the research and
development of D-hormones are not included in the Company's consolidated net
income after the spin-off. D-hormone related expenses were $972,000 in fiscal
1996.
Sales and marketing expenses increased 19% to $17,215,000 (21% of product
sales) in fiscal 1997 from $14,513,000 (22% of product sales) in fiscal 1996.
This increase is primarily attributable to increased marketing personnel and
sales force placed in position for an expanding market with increased
products.
General and administrative expenses decreased to $4,051,000 in fiscal
1997 from $4,311,000 in fiscal 1996. Legal expenses decreased approximately
$965,000. Lunar had been involved in several patent lawsuits initiated in
September 1994 with Hologic, Inc., a Massachusetts-based competitor, related
to x-ray and ultrasound densitometers. These lawsuits were settled in
November, 1995. Offsetting this reduction were increases in labor and other
office-related costs.
Interest income of $1,533,000 in fiscal 1997 approximated interest income
of $1,550,000 in fiscal 1996.
In December 1996, a court awarded the Company and the University of
Alabama-Birmingham (the co-plaintiffs) $4,200,000 in a patent infringement
case against EG&G Astrophysics (EG&G). The co-plaintiffs split the award
after deducting legal expenses. The Company's resulting $1,829,000 share of
the award is reflected in other income. The co-plaintiffs entered into a
Settlement and License Agreement with EG&G providing for future royalty
payments based on the volume of EG&G equipment sales utilizing the technology
subject to the license.
The effective tax rate averaged 34% in fiscal 1997 and 30% in fiscal
1996. The Company's effective rate has been below the 34% federal statutory
rate as a result of the tax benefit from the Company's foreign sales
corporation, Lunar FSC, Inc., and tax-exempt interest income offset by the
effect of state income taxes. The effective tax rate was higher fiscal 1997
due to increased profits from sales within the United States, which do not
benefit from foreign sales corporation treatment.
LIQUIDITY AND CAPITAL RESOURCES - Total cash and cash equivalents
decreased $9,809,000 to $4,608,000 at June 30, 1998 from $14,417,000 at June
30, 1997. Marketable securities increased $8,417,000 to $30,901,000 at June
30, 1998 from $22,484,000 at June 30, 1997. During fiscal 1998, the Company
invested its excess cash in marketable securities. Marketable securities
consist of a laddered portfolio of readily marketable high-grade municipal
bonds with various maturities not exceeding 48 months.
The Company's accounts receivable increased $2,387,000 to $31,402,000 at
June 30, 1998 from $29,015,000 at June 30, 1997. The increase is primarily
attributable to higher accounts receivable from financed customers in Latin
America and higher accounts receivable from Artoscan MRI customers which
generally have longer payment terms. The Company sold $4,200,000 and
$10,800,000 of Latin American accounts receivable in fiscal 1998 and 1997,
respectively, to various finance companies. The Company continues to have
recourse of approximately $1,395,000 in the event of non-payment of the
underlying accounts receivable.
Inventories increased 42% to $13,288,000 on June 30, 1998 from $9,373,000
on June 30, 1997. The increase in finished goods is primarily attributable to
increases in Artoscan MRI units. The increase in materials and purchased
parts is primarily attributable to higher service inventories needed to
support the higher sales in the United States.
In January 1998, the Company purchased a 25-acre parcel of land located
in Madison, Wisconsin, for $1,949,000. The Company plans to begin
construction of an assembly, warehouse, and office building on that parcel in
late 1998. Total construction costs are projected to be approximately
$11,000,000. The Company does not have any other pending material commitments
for capital expenditures.
On April 22, 1997, the Company approved a stock repurchase program
pursuant to which it may repurchase up to 1,000,000 shares of its common stock
from time to time based upon market conditions and other factors. The Company
has repurchased 294,400 shares under this program as of September 23, 1998.
Management believes the current level of cash and short-term marketable
securities is adequate to finance the Company's operations for the foreseeable
future.
NEW ACCOUNTING PRONOUNCEMENTS - SFAS No. 130, "Reporting Comprehensive
Income" is effective for fiscal years beginning after December 15, 1997. SFAS
No. 130 establishes standards for the reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. The Statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. The
Company is evaluating the Statement's provisions to conclude how it will
present comprehensive income in its financial statements, and has not yet
determined the amounts to be disclosed. The Company will adopt SFAS No. 130,
as required, in fiscal 1999.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" is effective for financial statements for periods beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report financial and descriptive information about
reportable operating segments in annual financial statements and interim
financial reports issued to stockholders. The Company is evaluating the new
Statement's provision and will adopt SFAS No. 131, as required, in fiscal
1999.
SFAS No. 132, "Employers' Disclosure About Pensions and Other
Postretirement Benefits" is effective for fiscal years beginning after
December 31, 1997. SFAS No. 132 revises employers' disclosures about pensions
and other postretirement benefit plans. The Company is evaluating the new
Statement's provisions and will adopt SFAS No. 132, as required, in fiscal
1999.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" is effective for financial statements for periods beginning after
June 15, 1999. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments and hedging activities. The Company is evaluating
the new Statement's provisions.
YEAR 2000 COMPLIANCE - Many currently installed computer systems and
software products are coded to accept only two-digit entries in the date code
field. To distinguish 21st century from 20th century dates, these date code
fields must be able to accept four-digit entries.
The Company has reviewed its existing financial and other business
information systems and believes that its computer systems will be able to
manage and manipulate all material data involving the transition from 1999 to
2000 without functional or data abnormality and without inaccurate results
related to such data. During fiscal 1998, the Company replaced its
manufacturing and financial accounting software package at a cost of
approximately $230,000. This new software package is year 2000 compliant.
The Company does not expect to incur significant additional costs to complete
its year 2000 compliance program.
It is possible that third parties, such as suppliers and distributors,
may have noncompliant computer systems or programs which may not interface
properly with the Company's computer systems or may otherwise result in a
disruption of the Company's operations. The Company is requesting assurances
from third parties with which it has a material relationship that their
computers, systems, and programs be year 2000 compliant.
The Company currently anticipates that the expenses and capital
expenditures associated with its year 2000 compliance program will not have a
material effect on its financial position or results of operations. Because
the Company's software programs are year 2000 compliant, and the Company does
not believe any material problems will arise if a third party is not year 2000
compliant, the Company has not developed any contingency plan.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investment portfolio. The Company does not
use derivative financial instruments in its investment portfolio. The Company
places its investments with high credit quality issuers and, by policy, limits
the amount of credit exposure to any one issuer. As stated in its policy, the
Company is adverse to principal loss and ensures the safety and preservation
of its invested funds by limiting default risk, market risk, and reinvestment
risk. The Company mitigates default risk by investing in only high credit
quality securities. The portfolio includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity. All
investments mature, by policy, in 48 months or less.
The Company uses forward currency contracts in its management of foreign
currency exposures. The contracts are in German Deutsche Marks and generally
have maturities which do not exceed three months. Realized gains and losses
on such contracts are included in other income at the time the hedged
transaction occurs. There were no deferred gains or losses at June 30, 1998.
These contracts are entered into with major financial institutions thereby
minimizing the risk of credit loss.
The table below provides information about the Company's market sensitive
financial instruments and constitutes a "forward-looking statement." All
items described below are non-trading and are stated in U.S. dollars.
During fiscal year ended June 30,
------------------------------------------------
Maturity dates 1999 2000 2001 2002
- ------------------------------------------------------------------------------
ASSETS
Cash equivalents
Variable taxable rate $2,599,275
Average taxable interest rate 5.05%
Variable tax-exempt rate $2,009,152
Average tax-exempt rate 3.48%
Marketable securities
Fixed tax-exempt rate $8,025,000 $8,232,800 $9,173,600 $4,445,000
Average tax-exempt rate 3.92% 4.17% 4.25% 4.19%
Forward contract
German DM denominated $ 943,763
Contracted exchange rate 1.8013:1
(DM to US$)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Statements of Income
Years ended June 30, 1998, 1997, and 1996
- ------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
Revenues $ 79,726,809 81,466,859 66,859,196
Operating expenses:
Cost of sales 38,866,757 36,300,375 30,388,410
Research and development 7,576,796 5,922,409 5,811,929
Sales and marketing 19,697,733 17,214,627 14,512,905
General and administrative 4,097,413 4,050,713 4,311,342
- ------------------------------------------------------------------------------
70,238,699 63,488,124 55,024,586
- ------------------------------------------------------------------------------
Income from operations 9,488,110 17,978,735 11,834,610
- ------------------------------------------------------------------------------
Other income (expense):
Interest income 1,813,153 1,533,127 1,549,786
Settlement of lawsuit - 1,828,905 -
Other (1,115,121) 186,058 (237,952)
- ------------------------------------------------------------------------------
698,032 3,548,090 1,311,834
- ------------------------------------------------------------------------------
Income before income taxes 10,186,142 21,526,825 13,146,444
- ------------------------------------------------------------------------------
Income tax expense (benefit):
Currently payable 3,226,000 7,548,000 4,714,000
Deferred 98,000 (307,000) (804,000)
- ------------------------------------------------------------------------------
3,324,000 7,241,000 3,910,000
- ------------------------------------------------------------------------------
Net income $ 6,862,142 14,285,825 9,236,444
==============================================================================
Basic earnings per share $ 0.78 1.66 1.13
==============================================================================
Diluted earnings per share $ 0.75 1.57 1.04
==============================================================================
See accompanying notes to consolidated financial statements.
Consolidated Balance Sheets
June 30, 1998 and 1997
- ------------------------------------------------------------------------------
Assets 1998 1997
- ------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 4,608,427 14,417,155
Marketable securities 8,117,655 5,891,350
Receivables:
Trade, less allowance for doubtful
accounts of $3,272,000 in 1998
and $2,602,000 in 1997 24,285,511 23,768,712
Short-term financed 2,092,164 1,700,169
Other 929,179 1,061,558
- ------------------------------------------------------------------------------
27,306,854 26,530,439
- ------------------------------------------------------------------------------
Inventories:
Finished goods and work in process 4,682,086 2,909,854
Materials and purchased parts 8,605,801 6,463,636
- ------------------------------------------------------------------------------
13,287,887 9,373,490
- ------------------------------------------------------------------------------
Other current assets 350,360 84,790
Deferred income taxes 1,618,000 2,291,000
- ------------------------------------------------------------------------------
Total current assets 55,289,183 58,588,224
- ------------------------------------------------------------------------------
Property, plant, and equipment - at cost:
Buildings and improvements 2,420,058 2,376,763
Furniture and fixtures 876,813 680,413
Machinery and other equipment 6,630,755 5,276,267
- ------------------------------------------------------------------------------
9,927,626 8,333,443
Less accumulated depreciation and
amortization 5,086,141 3,889,838
- ------------------------------------------------------------------------------
4,841,485 4,443,605
Land 2,088,118 138,858
- ------------------------------------------------------------------------------
6,929,603 4,582,463
- ------------------------------------------------------------------------------
Long-term trade accounts receivable 4,095,565 2,485,022
Long-term marketable securities 22,783,003 16,592,053
Patents and other intangibles, net of
accumulated amortization of $1,512,781
in 1998 and $1,185,613 in 1997 809,468 850,867
Other 208,136 183,954
- ------------------------------------------------------------------------------
$ 90,114,958 83,282,583
==============================================================================
See accompanying notes to consolidated financial statements.
Consolidated Balance Sheets
June 30, 1998 and 1997
- ------------------------------------------------------------------------------
Liabilities and Shareholders' Equity 1998 1997
- ------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 4,881,399 4,209,485
Customer advances and deferred income 1,027,872 639,707
Income taxes payable 3,494,822 2,375,955
Accrued liabilities:
Commissions payable 2,186,040 2,146,189
Compensation payable 413,084 290,913
Property, payroll, and other taxes 155,683 141,906
Accrued warranty and installation expenses 2,145,000 2,984,000
Other 199,324 251,036
- ------------------------------------------------------------------------------
Total current liabilities 14,503,224 13,039,191
- ------------------------------------------------------------------------------
Shareholders' equity:
Common stock - authorized 25,000,000 shares
of $.01 par value; issued and outstanding,
8,701,210 shares in 1998 and 8,721,425
shares in 1997 87,012 87,214
Capital in excess of par value 24,936,811 26,500,942
- ------------------------------------------------------------------------------
25,023,823 26,588,156
Retained earnings 50,568,281 43,706,139
Unrealized appreciation in marketable
securities 136,932 34,220
Cumulative translation adjustment (117,302) (85,123)
- ------------------------------------------------------------------------------
75,611,734 70,243,392
- ------------------------------------------------------------------------------
$ 90,114,958 83,282,583
==============================================================================
<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Equity
Years ended June 30, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
- -------------------------------------
Unrealized
Number Capital in
appreciation Culmulative
of Common excess of Retained
in marketable translation
shares stock par value earnings
securities adjustment Total
- --------------------------------------------------------------------------------
- -------------------------------------
<S> <C> <C> <C> <C>
<C> <C> <C>
Balance at June 30, 1995 7,988,190 $53,255 15,438,402 32,622,240
- (18,131) 48,095,766
Issuance of shares under
stock option plans 497,315 4,421 2,085,272 -
- - 2,089,693
Effect of 3 for 2 stock split - 27,180 (27,180) -
- - -
Payment of fractional shares
resulting from stock split (30) - (875) -
- - (875)
Tax benefit from issuance of
shares under stock option
plans - - 5,280,585 -
- - 5,280,585
Issuance of stock awards 775 7 25,899 -
- - 25,906
Net income for the year
ended June 30, 1996 - - - 9,236,444
- - 9,236,444
Spin-off of Bone Care
International, Inc. - - - (12,438,370)
- - (12,438,370)
Unrealized appreciation in
marketable securities - - - -
29,122 - 29,122
Translation adjustment - - - -
- 87,132 87,132
- --------------------------------------------------------------------------------
- -------------------------------------
Balance at June 30, 1996 8,486,250 84,863 22,802,103 29,420,314
29,122 69,001 52,405,403
Issuance of shares under
stock option plans 233,200 2,332 1,121,254 -
- - 1,123,586
Tax benefit from issuance of
shares under stock option
plans - - 2,504,036 -
- - 2,504,036
Issuance of stock awards 1,975 19 73,549 -
- - 73,568
Net income for the year
ended June 30, 1997 - - - 14,285,825
- - 14,285,825
Unrealized appreciation in
marketable securities - - - -
5,098 - 5,098
Translation adjustment - - - -
- (154,124) (154,124)
- --------------------------------------------------------------------------------
- -------------------------------------
Balance at June 30, 1997 8,721,425 87,214 26,500,942 43,706,139
34,220 (85,123) 70,243,392
Issuance of shares under
stock option plans 174,210 1,742 885,963 -
- - 887,705
Tax benefit from issuance of
shares under stock option
plans - - 947,521 -
- - 947,521
Issuance of stock awards 575 6 13,435 -
- - 13,441
Repurchase of common stock (195,000) (1,950) (3,411,050) -
- - (3,413,000)
Net income for the year
ended June 30, 1998 - - - 6,862,142
- - 6,862,142
Unrealized appreciation in
marketable securities - - - -
102,712 - 102,712
Translation adjustment - - - -
- (32,179) (32,179)
- --------------------------------------------------------------------------------
- -------------------------------------
Balance at June 30, 1998 8,701,210 $87,012 24,936,811 50,568,281
136,932 (117,302) 75,611,734
================================================================================
=====================================
See accompanying notes to consolidated financial statements.
</TABLE>
Consolidated Statements of Cash Flows
Years ended June 30, 1998, 1997, and 1996
- ------------------------------------------------------------------------------
1998 1997 1996
Cash flows from operating activities:
Net income $6,862,142 14,285,825 9,236,444
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,066,514 1,446,929 1,365,348
Minority interest in net income
of subsidiary - - 79,983
Changes in assets and liabilities:
Receivables (2,411,140) 6,895,502 (11,727,295)
Inventories (3,914,397) (698,003) (2,024,761)
Other current assets (265,570) 77,039 (52,094)
Deferred income taxes 673,000 (307,000) (804,000)
Accounts payable 639,735 546,557 1,436,573
Customer advances and
deferred income 388,165 74,343 103,314
Accrued liabilities (714,913) (26,463) 2,164,204
Income taxes payable 1,118,867 1,824,103 (1,650,046)
- ------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 4,442,403 24,118,832 (1,872,330)
- ------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of marketable securities (14,512,714) (20,885,936) (700,000)
Sales and maturities of marketable
securities 5,717,000 1,601,600 13,132,594
Additions to property, plant,
and equipment (3,543,443) (1,906,588) (839,703)
Patents and other intangibles (347,641) (213,525) (303,664)
- ------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities (12,686,798) (21,404,449) 11,289,227
- ------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of
stock options 901,146 1,197,154 2,114,724
Income tax benefit from stock
option exercises 947,521 2,504,036 5,280,585
Repurchase of common stock (3,413,000) - -
Cash distributed with Bone Care
spin-off - - (11,388,279)
- ------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (1,564,333) 3,701,190 (3,992,970)
- ------------------------------------------------------------------------------
Net cash increase (decrease) in cash and
cash equivalents (9,808,728) 6,415,573 5,423,927
Cash and cash equivalents at beginning
of year 14,417,155 8,001,582 2,577,655
- ------------------------------------------------------------------------------
Cash and cash equivalents at end
of year $4,608,427 14,417,155 8,001,582
==============================================================================
Supplemental disclosure of cash flow
information-income taxes paid net
of refunds $ 337,531 3,237,541 1,083,461
==============================================================================
See accompanying notes to consolidated financial statements.
(1) SUMMARY OF ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Lunar
Corporation (the Company) and its wholly owned subsidiaries, Lunar Finance
Corporation, Lunar Funding Corporation, Lunar Capital Corporation, Bona Fide
Ltd, Lunar FSC, Inc. (collectively referred to as Lunar USA), Lunar GmbH,
Lunar Europe, N.V., and Lunar France. In May 1996, the Company spun-off its
97% owned subsidiary, Bone Care International, Inc. (Bone Care), and its
subsidiary, Continental Assays Corporation (note 2). The accompanying
consolidated financial statements reflect the results of operations of Bone
Care prior to the date of the spin-off. All significant intercompany accounts
and transactions have been eliminated in consolidation.
DESCRIPTION OF BUSINESS
The Company develops and sells x-ray and ultrasound bone densitometers
for the diagnosis and monitoring of osteoporosis and other metabolic bone
diseases. The Company also develops and sells medical imaging equipment used
by orthopedists and radiologists for imaging extremities. Lunar GmbH supports
customers and sells Lunar's products in Germany. Lunar Europe, N.V. supports
customers and sells Lunar's products in Belgium and supports customers in
other European countries. Lunar France supports customers and sells Lunar's
products in France. Bona Fide, Ltd. reviews and analyzes data from clinical
trials. Lunar FSC, Inc. is a foreign sales corporation responsible for the
sale of Lunar's products outside of the United States. Lunar Finance
Corporation, Lunar Funding Corporation, and Lunar Capital Corporation manage
and sell Latin American receivables to third-party finance companies.
REVENUE RECOGNITION
Revenue is recognized from sales upon customer acceptance. Amounts
billed for service contracts are recognized as revenue when earned.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments purchased with original
maturities of three months or less to be cash equivalents.
MARKETABLE SECURITIES
Marketable securities generally consist of state and municipal bonds with
original maturities generally ranging from less than one year to four years.
The Company classifies its investment securities as available-for-sale.
Available-for-sale securities are reported at fair value, with unrealized
gains and losses excluded from earnings and reported in a separate component
of shareholders' equity. Interest income is recognized when earned.
INVENTORIES
Inventories are stated at the lower of cost or market; cost is determined
by the first-in, first-out method.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated
service lives. A combination of straight-line and accelerated methods of
depreciation are used for financial and income tax reporting purposes.
The cost of property and equipment are depreciated over the following
estimated useful lives:
Asset classification Estimated useful life
- ------------------------------------------------------------------------------
Machinery, furniture, and fixtures 5-7 years
Buildings and improvements 19-39 years
- ------------------------------------------------------------------------------
Legal costs incurred to register patents are amortized over periods not
exceeding ten years.
RESEARCH AND DEVELOPMENT COSTS
Materials, labor, and overhead expenses related to research and
development projects are charged to operations as incurred.
PROVISION FOR WARRANTIES
The Company makes certain initial warranties as to material and
workmanship. The estimated costs associated with these warranties are accrued
at the time of sale.
STOCK-BASED COMPENSATION
Stock-based compensation related to employees is recognized using the
intrinsic value method and thus recognizes no compensation expense for options
granted with exercise prices equal to the fair value of the Company's common
stock on the date of the grant. Stock-based compensation related to non-
employees is not material.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts. Deferred tax assets and liabilities
are measured using enacted rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
EARNINGS PER SHARE
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share." SFAS No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share includes the effect of all potential
common shares that are dilutive and outstanding during the reporting period.
Earnings per share amounts for all periods presented have been restated to
conform to SFAS No. 128.
FOREIGN CURRENCY TRANSLATION
For each of the Company's foreign subsidiaries, the functional currency
is its local currency. Accordingly, assets and liabilities are translated
into U.S. dollars using current exchange rates. Revenue and expense accounts
are translated at average exchange rates prevailing during the year. The
resulting translation gains and losses are included as a separate component of
shareholders' equity.
The Company uses forward currency contracts in its management of foreign
currency exposures. Realized gains and losses on such contracts are included
in other income at the time the hedged transaction occurs. Unrealized gains
and losses, which were not significant at June 30, 1998 and 1997, are not
recognized.
USE OF ESTIMATES
In preparing the consolidated financial statements, the Company's
management makes 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments, which consisted of cash and cash
equivalents, marketable securities, receivables, accounts payable, customer
advances, and accrued liabilities, approximated their carrying values at June
30, 1998 and 1997.
(2) SPIN-OFF OF SUBSIDIARY
The Company distributed all of its shares of Bone Care to the Company's
shareholders on May 8, 1996 in a transaction intended to qualify as a tax-free
distribution. Previously in October 1995, the Company had contributed its
ownership of Continental Assays Corporation, and all other D-hormone related
assets with a book value of $175,867, and forgave intercompany loans
receivable of $634,683 for 1,806,075 shares of Bone Care common stock. The
Company also contributed $10,000,000 for 1,698,674 shares of Bone Care common
stock on May 8, 1996 and reimbursed Bone Care $725,000 for tax savings
realized in prior years when Bone Care losses were included in the Company's
consolidated tax returns. The shares distributed to the Company's
shareholders represented 97% of the total outstanding Bone Care shares as of
the date of the distribution.
Bone Care entered into a Transition Agreement with the Company pursuant
to which certain employees of the Company perform administrative services for
Bone Care and lease office space to Bone Care. The term of the Transition
Agreement is three years; however, Bone Care may terminate the agreement by
giving the Company 90 days advance written notice. Total payments received
under these arrangements were $65,950, $135,000, and $66,968 for the years
ended June 30, 1998, 1997, and 1996, respectively.
(3) MARKETABLE SECURITIES
The Company's marketable securities are all classified as available-for-
sale. As of June 30, 1998 and 1997 there were no gross unrealized holding
losses for any of the Company's marketable securities. The amortized cost,
gross unrealized holding gains, and fair value for marketable securities at
June 30, 1998 and 1997 were as follows:
- ------------------------------------------------------------------------------
Gross
unrealized
Amortized holding
1998 cost gains Fair value
- ------------------------------------------------------------------------------
Current $ 8,102,063 15,592 8,117,655
Due after one year 22,661,663 121,340 22,783,003
- ------------------------------------------------------------------------------
$ 30,763,726 136,932 30,900,658
==============================================================================
1997
- ------------------------------------------------------------------------------
Current $ 5,872,101 19,249 5,891,350
Due after one year 16,577,082 14,971 16,592,053
- ------------------------------------------------------------------------------
$ 22,449,183 34,220 22,483,403
==============================================================================
The scheduled maturities for marketable securities at June 30, 1998 were
as follows:
Less than 6 months More than
6 months to 1 year 1 year Total
- ------------------------------------------------------------------------------
State and municipal bonds $ 4,093,923 4,023,732 22,783,003 30,900,658
- ------------------------------------------------------------------------------
$ 4,093,923 4,023,732 22,783,003 30,900,658
==============================================================================
The gross realized gains and losses on the sale of available-for-sale
marketable securities for the year ended June 30, 1998 were not material.
The Company had historically reported its marketable securities as held-
to-maturity. In December 1995, the Company changed its classification of
marketable securities from held-to-maturity to available-for-sale. The impact
of the change in classification was not material to the consolidated financial
statements as book value approximated the fair value.
(4) INCENTIVE COMPENSATION PROGRAMS
Lunar Corporation has granted options to key employees, directors, and
consultants under two separate programs.
Under a September 1, 1984 agreement with an employee/officer, options to
purchase 138,000 shares at $0.16 per share are outstanding and exercisable and
will expire in the event of termination of employment. Under the second
option program, titled the Non-Qualified Stock Option program, a total of
3,000,000 shares of common stock were made available, of which 544,600 remain
available. Options granted under this program vest over a three-year or five-
year period. The options will expire ten years from the granting date, or
upon termination of employment.
The option price under both option programs was based on 100% of
estimated fair market value of the Company's stock on the dates the options
were granted.
A summary of the Company's stock option activity, and related information
are summarized as follows:
==============================================================================
Year ending June 30,
1998 1997 1996
-------------- --------------- --------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Options price Options price Options price
- ------------------------------------------------------------------------------
Outstanding -
beginning
of year 1,071,615 $ 9.20 1,131,115 $ 8.21 1,482,720 $ 4.87
Granted 286,150 17.91 531,480 20.31 203,750 22.97
Exercised (174,210) 5.10 (233,200) 4.82 (497,315) 4.20
Expired/canceled (43,560) 15.11 (357,780) 25.43 (58,040) 8.53
- ------------------------------------------------------------------------------
Outstanding -
end of year 1,139,995 $ 9.50 1,071,615 $ 9.20 1,131,115 $ 8.21
==============================================================================
Exercisable at
end of year 521,531 486,290 544,375
==============================================================================
Weighted average
fair value of
options granted
during year $10.11 $ 7.74 $10.46
==============================================================================
The options outstanding at June 30, 1998 have been segregated into five
ranges for additional disclosure as follows:
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Weighted Weighted Options Weighted
Range of Options average average currently average
exercise outstanding remaining exercise exercisable exercise
prices at June 30, contractual price at June 30, price
1998 life 1998
- ------------------------------------------------------------------------------
$ 0.16 138,000 - $ 0.16 138,000 $ 0.16
0.64 9,220 0.7 0.64 9,220 0.64
5.66 - 7.83 336,565 5.2 7.00 268,375 6.87
10.00 - 14.33 43,080 6.2 11.72 32,460 11.67
16.25 - 25.50 613,130 9.1 17.21 73,476 16.69
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, Accounting for Stock-Based Compensation, requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and net income per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to June 30, 1995 under the fair market value method of that
statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted-
average assumptions for 1998, 1997, and 1996; risk free interest rate of 5.5%
for 1998, 6.0% for 1997, and 5.5% for 1996, volatility factors of the expected
market price of the Company's common stock of .52 for 1998, .53 for 1997, and
.52 for 1996, and no expected dividends. Based on an analysis of historical
optionee exercise behavior, the option grants exercised have aggregated
weighted average lives of six years for 1998 and four years for 1997 and 1996.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the 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 market 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.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
- ------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
Pro forma net income $ 6,278,188 $14,327,467 $ 9,047,185
Pro forma net income per share 0.69 1.57 1.02
- ------------------------------------------------------------------------------
Since Statement 123 is applicable only to options granted subsequent to
June 30, 1995, its pro forma effect will not be fully reflective until 2000.
The Company has a longevity stock award program whereby 25 shares of
common stock are issued to employees with five years of service, and 100
shares are issued for ten years of service. The Company issued 575, 1,975,
and 775 shares under this program in the years ended June 30, 1998, 1997, and
1996, respectively.
The Company has a program which provides for bonuses to all employees
contingent upon achieving certain financial goals. Total expense under the
program was $206,273, $315,165, and $338,690 for the years ended June 30,
1998, 1997, and 1996, respectively.
(5) PROFIT-SHARING PLAN
The Company has established a 401(k) profit-sharing plan covering
substantially all employees. Employer contributions to the plan are at the
discretion of the Board of Directors. The Company's policy is to fund profit-
sharing plan contributions as they accrue. Profit-sharing expense amounted to
$298,273, $199,322, and $88,254, for the years ended June 30, 1998, 1997, and
1996 respectively.
(6) SETTLEMENT OF LAWSUIT
In December 1996, a court awarded the Company and the University of
Alabama-Birmingham (the co-plaintiffs) $4,200,000 in a patent infringement
case against EG&G Astrophysics (EG&G). The co-plaintiffs split the award
after deducting legal expenses. The Company's resulting $1,828,905 share of
the award is reflected in other income and represents $0.12 per share after
tax. The co-plaintiffs entered into a Settlement and License Agreement with
EG&G providing for future royalty payments based on the volume of EG&G
equipment sales utilizing the technology subject to the license.
(7) INCOME TAXES
Income taxes consist of the following:
- ------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
Current:
Federal $ 2,954,000 7,048,000 4,714,000
State 172,000 500,000 -
- ------------------------------------------------------------------------------
3,126,000 7,548,000 4,714,000
- ------------------------------------------------------------------------------
Deferred:
Federal 83,000 (287,000) (804,000)
State 15,000 (20,000) -
- ------------------------------------------------------------------------------
98,000 (307,000) (804,000)
- ------------------------------------------------------------------------------
$ 3,224,000 7,241,000 3,910,000
==============================================================================
A reconciliation of the provision for income taxes with the applicable
Federal income tax rate is presented below:
- ------------------------------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
Percent Percent Percent
of pretax of pretax of pretax
Amount income Amount income Amount income
- ------------------------------------------------------------------------------
Provision computed
at normal rate $3,463,289 34% $7,319,121 34% $4,469,791 34%
Increases (reductions)
in taxes resulting from:
State income taxes,
net of federal
benefit 113,520 1 330,000 2 - -
Tax benefit of exempt
foreign trade
income (510,193) (5) (596,010) (3) (731,265) (6)
Other 257,384 3 187,889 1 171,474 2
- ------------------------------------------------------------------------------
Provision for
income taxes $3,324,000 33% $7,241,000 34% $3,910,000 30%
==============================================================================
The tax effect of temporary differences that give rise to deferred tax
assets at June 30, 1998 and 1997 are as follows:
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
Accrued warranty $ 747,000 1,108,000
Inventory valuation 86,000 167,000
Allowance for doubtful accounts 680,000 983,000
Other 105,000 33,000
- ------------------------------------------------------------------------------
$1,618,000 2,291,000
==============================================================================
The Company has determined, more likely than not, that a valuation
allowance is not required based upon the Company's history of operating
earnings and its expectations for continued future earnings.
(8) EARNINGS PER SHARE
Reconciliations of the numerators and denominators of the basic and
diluted earnings per share computations for the years ended June 30, 1998,
1997, and 1996 are as follows:
- ------------------------------------------------------------------------------
1998
-------------------------------
Per Share
Income Shares Amount
- ------------------------------------------------------------------------------
Basic earnings per share $ 6,862,142 8,773,516 $ 0.78
======
Effect of dilutive stock options - 338,779
---------- ---------
Dilutive earnings per share $ 6,862,142 9,112,495 $ 0.75
========== ========= ======
==============================================================================
1997
-------------------------------
Per Share
Income Shares Amount
- ------------------------------------------------------------------------------
Basic earnings per share $14,285,825 8,614,567 $ 1.66
======
Effect of dilutive stock options - 491,481
---------- ---------
Dilutive earnings per share $14,285,825 9,106,048 $ 1.57
========== ========= ======
==============================================================================
1996
-------------------------------
Per Share
Income Shares Amount
- ------------------------------------------------------------------------------
Basic earnings per share $ 9,236,444 8,194,821 $ 1.13
======
Effect of dilutive stock options - 713,002
---------- ---------
Dilutive earnings per share $ 9,236,444 8,907,823 $ 1.04
========== ========= ======
==============================================================================
(9) SUPPLEMENTAL SALES AND CUSTOMER INFORMATION
The Company's approximate revenues by geographic regions are as follows
(in thousands):
- ------------------------------------------------------------------------------
June 30, June 30, June 30,
1998 1997 1996
- ------------------------------------------------------------------------------
United States and Canada $ 51,440 51,051 30,835
Europe 13,333 13,445 11,140
Asia 3,591 6,259 14,760
Latin America 11,363 10,712 10,124
- ------------------------------------------------------------------------------
$ 79,727 81,467 66,859
==============================================================================
The Company sells its products to end-user customers or its distributors
in Latin America on financed terms. Generally, the financing is over a two-
or three-year time period and denominated in U.S. dollars. As of June 30,
1998, 1997, and 1996, the Company had approximately $4,862,000, $4,614,000,
and $12,541,000, respectively, of financed trade accounts receivable from
Latin American customers. The collateral for these receivables is generally
the equipment sold.
During fiscal 1998 and 1997, the Company sold approximately $4,200,000
and $10,800,000, respectively, of accounts receivable from selected customers
in Latin America. The income statement effect of these transactions was not
material. The Company continues to have recourse of 10% or approximately
$1,080,000 to one finance company and 7.5% or approximately $315,000 to a
second finance company.
For the years ended June 30, 1998 and 1997, no one distributor
represented more than 10% of total sales. Sales to one distributor accounted
for 13% of total sales for the year ended June 30, 1996.
(10) FEE PER PATIENT PROGRAM
The Company has entered into an agreement with a finance company whereby
the Company sells its systems to the finance company, which, in turn, leases
the systems to third parties on a fee-per-patient basis. Under the terms of
the agreement, the Company is contingently liable to two finance companies for
approximately $378,000 as of June 30, 1998 and approximately $485,000 as of
June 30, 1997.
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
LUNAR CORPORATION:
We have audited the accompanying consolidated balance sheets of Lunar
Corporation and subsidiaries as of June 30, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the years in the three-year period ended June 30, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Lunar
Corporation and subsidiaries as of June 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1998, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Chicago, Illinois
July 24, 1998
QUARTERLY FINANCIAL INFORMATION (unaudited)
The following table sets forth unaudited selected quarterly financial
information for each of the two most recent fiscal years.
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(in thousands except per-share data)
1998
- ----
Revenues $18,832 $21,584 $18,060 $21,251
Income from operations 2,747 4,174 870 1,697
Net income 2,013 2,729 692 1,428
Net income per share 0.22 0.30 0.08 0.16
1997
- ----
Revenues $18,915 $20,516 $19,857 $22,179
Income from operations 4,289 4,548 4,334 4,808
Net income 2,901 4,545 3,277 3,563
Net income per share 0.32 0.50 0.36 0.39
Lunar is unable to predict the timing of purchase orders and the related
product shipments and is unable to predict demand for Lunar's products in
specific foreign markets. Therefore, quarterly sales and earnings
fluctuations can be expected.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company incorporates by reference the information included in the
Company's definitive Proxy Statement for its 1998 Shareholders Meeting to be
held on November 20, 1998 ("Proxy Statement") under the captions "Purposes of
the Meeting - Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance," which will be filed with the Securities and Exchange
Commission separately pursuant to Rule 14a-6 under the Securities Exchange Act
of 1934 and in accordance with General Instruction G(3) to Form 10-K, not
later than 120 days after the end of the Company's fiscal year.
EXECUTIVE OFFICERS OF THE REGISTRANT
As of September 24, 1998, the executive officers of the Registrant are as
follows:
Name Age Title
- ------------------------------------------------------------------------------
- -
Richard B. Mazess, Ph.D. 59 President
James A. Hanson, Ph.D. 48 Vice President - Marketing
Robert A. Beckman 44 Vice President - Finance
John A. Comerford, J.D. 36 Corporate General Counsel
and Secretary
James V. Pietropaolo 44 Vice President - Domestic
Sales
James T. Karam, Ph.D. 57 Vice President - Operations
Peter Peemans 39 Vice President - European
Operations
Dr. Richard B. Mazess, the founder of the Company, has been President and
a director of the Company since its inception. Dr. Mazess became Professor
Emeritus of Medical Physics at the University of Wisconsin - Madison in 1985,
and has been on the faculty of the Department of Medical Physics since 1968.
Dr. Mazess has authored over 100 scientific publications on bone, bone
measurement, and body composition; he also has edited several books and has
served on the editorial boards of several medical journals. Dr. Mazess has
organized various international scientific meetings on bone measurement and
osteoporosis.
Dr. James A. Hanson, Vice President of Marketing, joined the Company in
September 1984. From July 1980 to August 1984, Dr. Hanson was on the faculty
of the Department of Radiology at the University of Washington, Seattle,
Washington, and from 1979 to 1980, he was a Researcher at the University of
Wisconsin - Madison, Department of Medical Physics.
Robert A. Beckman joined the Company in 1986 as Controller and has been
Vice President of Finance since 1987. Mr. Beckman is a Certified Public
Accountant.
John A. Comerford, J.D., joined the Company in January 1998 as Corporate
General Counsel and Secretary. From 1990 through 1997, Mr. Comerford was
Associate Resident Counsel with National Presto Industries, Inc., in Eau
Claire, Wisconsin. From 1988 until 1990, Mr. Comerford was a Staff Attorney
with Fort Howard Corporation in Green Bay, Wisconsin. He received his J.D.
degree in 1988 from Marquette University Law School and his B.A. degree in
Business Administration from St. Norbert College in 1985.
James V. Pietropaolo joined the Company in September 1996 as Vice
President of Domestic Sales. From March 1990 to September 1996, Mr.
Pietropaolo was Vice President of Sales and Marketing for Aloka Co., Ltd's
United States operations.
James T. Karam, Ph.D., joined the Company in August 1997 as Vice
President of Operations. From 1992 to August 1997, Dr. Karam was Vice
President of Systems Engineering at Sony Corporation of America, Business and
Professional Group. Dr. Karam received his Ph.D. in Mechanical Engineering
from Purdue University in 1972.
Peter Peemans joined the Company in January 1994 as a Director of
European Sales. Mr. Peemans became Director of European Operations in June
1996 and was appointed Vice President of European Operations in January 1998.
From January 1990 until December 1993, Mr. Peemans served as European Sales
and Marketing Manager for Ferno Washington.
ITEM 11. EXECUTIVE COMPENSATION
The Company incorporates by reference the information included in the
Proxy Statement under the caption "Executive Compensation," other than the
information included in the Proxy Statement under the sub-captions "Board of
Directors Report on Executive Compensation" and "Performance Graph."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company incorporates by reference the information included in the Proxy
Statement under the caption "Securities Beneficially Owned by Principal
Shareholders, Directors, and Executive Officers."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company incorporates by reference the information included in the Proxy
Statement under the caption "Executive Compensation - Compensation Committee
Interlocks and Insider Participation."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1 and 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Reference is made to the separate index to the Company's consolidated
financial statements and schedule contained on page 36 hereof.
3. Exhibits
Reference is made to the separate exhibit index contained on page 40
hereof.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fourth
quarter ended June 30, 1998.
LUNAR CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND
FINANCIAL STATEMENT SCHEDULE
The following documents are filed Page(s) in
as part of this report: Form 10-K
----------
(1) Financial Statements:
Independent Auditors' Report . . . . . . . . . . . . . . . . . 32
Consolidated Balance Sheets at
June 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . .19-20
Consolidated Statements of Income
for the years ended June 30, 1998,
1997, and 1996 . . . . . . . . . . . . . . . . . . . . . . . . 18
Consolidated Statements of
Shareholders' Equity for the
years ended June 30, 1998,
1997, and 1996 . . . . . . . . . . . . . . . . . . . . . . . . 21
Consolidated Statements of Cash Flows
for the years ended June 30, 1998,
1997, and 1996 . . . . . . . . . . . . . . . . . . . . . . . . 22
Notes to Consolidated Financial Statements . . . . . . . . .23-31
Page(s) in
(2) Financial Statement Schedule: Form 10-K
----------
Report of Independent Auditors on
Financial Statement Schedule . . . . . . . . . . . . . . . . . 37
Schedule II - Valuation and Qualifying
Accounts for each of the years ended
June 30, 1998, 1997, and 1996. . . . . . . . . . . . . . . . . 38
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Lunar Corporation:
Under date of July 24, 1998, we reported on the consolidated balance sheets of
Lunar Corporation and subsidiaries as of June 30, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity, and cash
flows for each of the years in the three-year period ended June 30, 1998,
which are included herein. In connection with our audits of the
aforementioned consolidated financial statements, we also have audited the
related financial statement schedule as listed in the accompanying index. The
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statement schedule based on our audits.
In our opinion, the financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Chicago, Illinois
July 24, 1998
Schedule II
LUNAR CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
- ------------------------------------------------------------------------------
Additions
-------------------------
Balance Charged Other
at to Charged Charges Balance
Beginning Costs and to Other Add at End
Description of Year Expenses Account (Deduct) of Year
- ------------------------------------------------------------------------------
For the year ended June 30, 1998:
Allowance for
doubtful accounts $2,602,000 $670,000 - - $3,272,000
For the year ended June 30, 1997:
Allowance for
doubtful accounts $2,235,000 $367,000 - - $2,602,000
For the year ended June 30, 1996:
Allowance for
doubtful accounts $1,150,000 $1,085,000 - - $2,235,000
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.
LUNAR CORPORATION
Date: September 24, 1998 By: /s/ Richard B. Mazess
---------------------------
Richard B. Mazess, Ph.D.
President
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.
Name
- ----
/s/ Richard B. Mazess President and September 24, 1998
- --------------------------- Director (Principal
Richard B. Mazess, Ph.D. Executive Officer)
/s/ Robert A. Beckman Vice President of September 24, 1998
- --------------------------- Finance (Principal
Robert A. Beckman Financial and
Accounting Officer)
/s/ Samuel E. Bradt Director September 24, 1998
- ---------------------------
Samuel E. Bradt
/s/ John W. Brown Director September 24, 1998
- ---------------------------
John W. Brown
/s/ Reed Coleman Director September 24, 1998
- ---------------------------
Reed Coleman
/s/ James W. Nellen II Director September 24, 1998
- ---------------------------
James W. Nellen II
/s/ Malcolm R. Powell Director September 24, 1998
- ---------------------------
Malcolm R. Powell, M.D.
LUNAR CORPORATION
INDEX TO EXHIBITS
Exhibit
Number Document Description
- ------- --------------------
3.1 Articles of Amendment and Restated Articles of
Incorporation of Registrant(1) (Exhibit 3.1)
3.2 By-Laws of Registrant(2) (Exhibit 3.2)
10.1* Lunar Corporation Amended and Restated Stock Option Plan(3)
(Exhibit 99.1) and Forms of Stock Option Agreements
10.2* Forms of Stock Option Agreements(3) (Exhibit 99.2)
10.3 Distribution Agreement Between Bone Care and Lunar
Corporation(1)
(Exhibit 10.3)
10.4 Tax Disaffiliation Agreement Between Bone Care and Lunar
Corporation(1) (Exhibit 10.4)
11 Computation of Per Share Earnings
21 List of Subsidiaries of Registrant
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
(1) Incorporated by reference to exhibits filed with Registrant's Annual
Report on Form 10-K for the year ended June 30, 1996 (File No. 0-18643).
Parenthetical references to exhibit numbers are to the exhibit numbers on the
Form 10-K.
(2) Incorporated by reference to exhibits filed with Registrant's Form 10-Q
for the quarter ended December 31, 1996 (File No. 0-18643). Parenthetical
references to exhibit numbers are to the exhibit numbers on the Form 10-Q.
(3) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-3 (File No. 333-40469). Parenthetical references to
exhibit numbers are to the exhibit numbers on the Form S-3.
*Indicates a management contract or compensatory plan or arrangement required
to be filed as an exhibit to this Form 10-K.
Exhibit 11
LUNAR CORPORATION AND SUBSIDIARIES
Computation of Per-Share Earnings
June 30, 1998 June 30, 1997 June 30, 1996
------------- ------------- -------------
Net income $ 6,862,142 $14,285,825 $ 9,236,444
============= ============= =============
Weighted average number of
common shares 8,773,516 8,614,567 8,194,821
Effect of dilutive securities -
Stock options calculated according
to the treasury stock method 338,979 491,481 713,002
------------- ------------- -------------
Weighted average number of common and
diluted potential common shares 9,112,495 9,106,048 8,907,823
============= ============= =============
Basic earnings per share $0.78 $1.66 $1.13
===== ===== =====
Diluted earnings per share $0.75 $1.57 $1.04
===== ===== =====
EXHIBIT 21
LUNAR CORPORATION AND SUBSIDIARIES
Name of Subsidiary Jurisdiction of Incorporation
- ------------------------- -----------------------------
Bona Fide, Ltd. Wisconsin
Lunar FSC, Inc. U.S. Virgin Islands
Lunar Finance Corporation Delaware
Lunar Funding Corporation Delaware
Lunar Capital Corporation Delaware
Lunar GmbH Germany
Lunar Europe, N.V. Belgium
Lunar France France
EXHIBIT 23
CONSENT OF KPMG PEAT MARWICK LLP
The Board of Directors
Lunar Corporation:
We consent to incorporation by reference in the registration statements on Form
S-8 (File No. 33-63891) and Form S-3 (File No. 333-40469) of Lunar Corporation
of our reports dated July 24, 1998 relating to the consolidated balance sheets
of Lunar Corporation and subsidiaries as of June 30, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity, and cash flows
and the related financial statement schedule for each of the years in the
three-year period ended June 30, 1998, which reports appear in the June 30,
1998 annual report on Form 10-K of Lunar Corporation.
KPMG Peat Marwick LLP
Chicago, Illinois
September 25, 1998
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<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM FORM 10-K FOR THE YEAR ENDED JUNE 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
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