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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2002
-------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 0-18281
-------
Hologic, Inc.
-------------
(Exact name of registrant as specified in its charter)
Delaware 04-2902449
-------- ----------
(State of incorporation) (I.R.S. Employer Identification No.)
35 Crosby Drive, Bedford, Massachusetts 01730
---------------------------------------------
(Address of principal executive offices) (Zip Code)
(781) 999-7300
--------------
(Registrant's telephone number, including area code)
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
--- ---
As of August 8, 2002 19,448,246 shares of the registrant's Common Stock, $.01
par value, were outstanding.
1
HOLOGIC, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets
June 29, 2002 and September 29, 2001......................... 3
Consolidated Statements of Operations
Three Months and Nine Months Ended June 29, 2002
and June 30, 2001............................................ 4
Consolidated Statements of Cash Flows
Nine Months Ended June 29, 2002
and June 30, 2001............................................ 5
Notes to Consolidated Financial Statements................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 20
PART II - OTHER INFORMATION............................................. 21
SIGNATURES.............................................................. 22
2
HOLOGIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except per share data)
ASSETS
June 29, September 29,
2002 2001
-------- ------------
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 31,936 $ 12,754
Accounts receivable, less reserves of $4,889 and
$4,668, respectively ....................................... 38,923 42,227
Inventories .................................................. 39,149 39,285
Prepaid expenses and other current assets .................... 9,599 5,309
-------- --------
Total current assets ....................................... 119,607 99,575
-------- --------
PROPERTY AND EQUIPMENT, at cost:
Land ......................................................... 12,203 12,203
Buildings and improvements ................................... 37,026 36,556
Equipment .................................................... 26,176 23,191
Furniture and fixtures ....................................... 3,647 3,678
Leasehold improvements ....................................... 880 1,571
-------- --------
79,932 77,199
Less: Accumulated depreciation and amortization ............. 19,583 17,143
-------- --------
60,349 60,056
-------- --------
INTANGIBLE ASSETS:
Patented technology, net of accumulated amortization of
$4,388 and $3,402, respectively ............................ 2,782 3,741
Developed technology and know-how, net of accumulated
amortization of $1,631 and $991, respectively .............. 7,476 8,160
Goodwill ..................................................... 5,989 5,989
-------- --------
16,247 17,890
-------- --------
Deferred income taxes........................................... 14,816 16,516
Other assets, net .............................................. 991 1,082
-------- --------
Total assets ............................................... $212,010 $195,119
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
June 29, September 29,
2002 2001
-------- -------------
CURRENT LIABILITIES:
Line of credit ............................................... $ -- $ 1,998
Current portion of note payable .............................. 480 485
Accounts payable ............................................. 9,628 18,152
Accrued expenses ............................................. 20,153 25,507
Deferred revenue ............................................. 8,960 8,754
-------- --------
Total current liabilities .................................. 39,221 54,896
-------- --------
Notes payable, net of current portion .......................... 27,532 28,416
-------- --------
Commitments and Contingencies (Note 9)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value-
Authorized - 1,623 shares
Issued - None .............................................. -- --
Common stock, $.01 par value-
Authorized - 30,000 shares
Issued - 19,402 and 15,672 shares, respectively ............ 194 157
Capital in excess of par value ............................... 141,055 111,300
Retained earnings ............................................ 6,315 2,971
Cumulative translation adjustment ............................ (1,843) (2,157)
Treasury stock, at cost, 45 shares ........................... (464) (464)
-------- --------
Total stockholders' equity ................................. 145,257 111,807
-------- --------
Total liabilities and stockholders' equity ................. $212,010 $195,119
======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
3
HOLOGIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
---------------------- --------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
Revenues:
Product sales ................................. $47,496 $42,714 $139,292 $130,716
Other revenue ................................. 141 2,224 1,555 2,514
------- ------- -------- --------
47,637 44,938 140,847 133,230
------- ------- -------- --------
Costs and Expenses:
Cost of product sales ......................... 29,489 26,290 87,003 86,842
Research and development ...................... 4,859 5,536 14,909 17,986
Selling and marketing ......................... 7,463 8,532 20,920 26,904
General and administrative .................... 4,789 4,336 15,047 15,341
Restructuring and nonrecurring costs .......... -- 710 2,070 710
------- ------- -------- --------
46,600 45,404 139,949 147,783
------- ------- -------- --------
Income (loss) from operations .............. 1,037 (466) 898 (14,553)
Interest income 142 258 400 854
Interest/other expense ........................ (687) (908) (2,296) (2,073)
------- ------- -------- --------
Income (loss) before
provision (benefit) for income taxes ....... 492 (1,116) (998) (15,772)
Provision (Benefit) for Income Taxes ........... -- 97 (4,342) 151
------- ------- -------- --------
Net income (loss) .......................... $ 492 $(1,213) $ 3,344 $(15,923)
======= ======= ======== ========
Net Income (Loss) per Common and
Common Equivalent Share:
Basic earnings per share ................... $ .03 $ (.08) $ .18 $ (1.03)
======= ======= ======== ========
Diluted earnings per share ................. $ .02 $ (.08) $ .18 $ (1.03)
======= ======= ======== ========
Weighted Average Number of
Common Shares Outstanding ...................... 19,257 15,476 18,091 15,443
======= ======= ======== ========
Weighted Average Number of Dilutive
Potential Common Shares Outstanding ............ 20,454 15,476 18,902 15,443
======= ======= ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
4
HOLOGIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
------------------------
June 29, June 30,
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................................... $ 3,344 $(15,923)
Adjustments to reconcile net income (loss) to net cash used in
operating activities-
Depreciation and amortization ............................................ 5,842 6,483
Deferred income taxes .................................................... 1,700 --
Reversal of previously recorded Trex reserves ............................ -- (2,143)
Compensation expense related to issuance of common stock ................. -- 166
Changes in assets and liabilities-
Accounts receivable .................................................. 3,305 9,406
Inventories .......................................................... 135 (513)
Prepaid expenses and other current assets ............................ (4,290) (277)
Accounts payable ..................................................... (8,521) (948)
Accrued expenses ..................................................... (4,552) (4,243)
Deferred revenue ..................................................... 205 (2,668)
------- --------
Net cash used in operating activities ............................... (2,832) (10,660)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from settlement of Trex purchase price ............................. -- 932
Purchases of property and equipment ......................................... (4,495) (2,693)
Increase in other assets .................................................... 128 21
------- --------
Net cash used in investing activities ............................... (4,367) (1,740)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) borrowings under line of credit ............................... (1,998) 1,204
Repayments of note payable .................................................. (890) --
Net proceeds from sale of common stock ...................................... 24,780 --
Issuance of common stock pursuant to options and employee stock
purchase plan .............................................................. 4,209 320
------- --------
Net cash provided by financing activities ........................... 26,101 1,524
------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ....................................... 280 6
------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 19,182 (10,870)
CASH AND CASH EQUIVALENTS, beginning of period ................................ 12,754 22,778
------- --------
CASH AND CASH EQUIVALENTS, end of period ...................................... $31,936 $ 11,908
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes ................................ $ 99 $ 42
======= ========
Cash paid during the period for interest .................................... $ 1,707 $ 52
======= ========
SUPPLEMENTAL SCHEDULE OF NON-CASH ITEMS:
Issuance of note payable to Fleet Business Credit Corp.
for litigation settlement ................................................. $ -- $ 1,550
======= ========
The accompanying notes are an integral part of these
consolidated financial statements.
5
HOLOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share data)
(1) Basis of Presentation
The consolidated financial statements of Hologic, Inc. (the "Company")
presented herein have been prepared pursuant to the rules of the Securities and
Exchange Commission for quarterly reports on Form 10-Q and do not include all of
the information and note disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended September 29, 2001,
included in the Company's Form 10-K as filed with the Securities and Exchange
Commission on December 12, 2001.
The consolidated balance sheet as of June 29, 2002, the consolidated
statements of operations for the three months and nine months ended June 29,
2002 and June 30, 2001 and the consolidated statements of cash flows for the
nine months ended June 29, 2002 and June 30, 2001, are unaudited but, in the
opinion of management, include all adjustments (consisting of normal, recurring
adjustments) necessary for a fair presentation of results for these interim
periods.
The results of operations for the three and nine months ended June 29, 2002
are not necessarily indicative of the results to be expected for the entire
fiscal year ending September 28, 2002. Certain prior-period amounts have been
reclassified to conform with the current-period presentation.
(2) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
June 29, September 29,
2002 2001
------- -------------
Raw materials and work-in-process .............. $27,479 $27,421
Finished goods ................................. 11,670 11,864
------- -------
$39,149 $39,285
======= =======
Work-in-process and finished goods inventories consist of material, labor
and manufacturing overhead.
(3) Credit Facility Amendment
In December 2001, the Company executed an amendment to the Loan and
Security agreement with Foothill Capital Corporation primarily to change
financial covenants to reflect restructuring charges the Company incurred in the
fourth quarter of fiscal 2001 and the additional charges expected in connection
with the decision to close the Littleton facility. Also, as a result of this
amendment, the loan may be limited based upon certain financial covenants and
formulas. The term loan accrues interest at prime plus 1.25% for five years. The
line of credit advances accrue interest at prime plus 0.5%. The line of credit
expires in September 2004.
6
(4) Net Income (Loss) Per Share
A reconciliation of basic and dilutive share amounts are as follows:
Three Months Ended Nine Months Ended
----------------------- ---------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
-------- -------- -------- ---------
Weighted average common shares outstanding .................. 19,257 15,476 18,091 15,443
Common stock equivalents outstanding
pursuant to the treasury stock method ................... 1,197 -- 811 --
------ ------ ------ ------
Weighted average number of common and dilutive
potential common shares outstanding ..................... 20,454 15,476 18,902 15,443
====== ====== ====== ======
Anti-dilutive shares of 214 and 531 for the three and nine months ended
June 29, 2002, respectively, have been excluded from the weighted average number
of common and dilutive potential common shares outstanding. Dilutive weighted
average shares outstanding for the three and nine months ended June 30, 2001 do
not include 3,445 common-equivalent shares as their effect would have been
antidilutive due to the Company's net loss position for these periods.
(5) Concentration of Credit Risk
The Company utilizes a distributor in the United States for certain product
lines. The distributor had amounts due to the Company of approximately $8,182 as
of June 29, 2002 and $6,969 as of September 29, 2001, respectively. This
distributor accounted for approximately 20% and 21% of revenues for the three
months ended June 29, 2002 and June 30, 2001, respectively; and approximately
18% and 16% of revenues for the first nine months of fiscal 2002 and fiscal
2001, respectively. There were no other customers with balances greater than 10%
of accounts receivable as of June 29, 2002 or September 29, 2001 or customers
with greater than 10% of the Company's revenues for the first three or nine
months of fiscal 2002 or fiscal 2001.
The Company finances certain sales to Latin America over a two-to-three
year time-frame. At June 29, 2002, the Company had total accounts receivable
outstanding of approximately $2,530 relating to these sales, of which $78 were
long-term and included in other assets. As of June 29, 2002, the Company has not
experienced any significant change in these receivables, however, the economic
and currency related uncertainties in these countries may increase the
likelihood of non-payment.
(6) Comprehensive Income (Loss)
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income established standards for reporting and display of
comprehensive income (loss) and its components in the financial statements. The
Company's only item of other comprehensive income (loss) relates to foreign
currency translation adjustments, and is presented separately on the balance
sheet as required.
A reconciliation of comprehensive income (loss) is as follows:
Three Months Ended Nine Months Ended
---------------------- ---------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
Net income (loss) as reported ................... $ 492 $(1,213) $3,344 $(15,923)
Foreign currency translation adjustment ......... 491 (79) 315 (110)
----- ------- ------ --------
Comprehensive income (loss) ..................... $ 983 $(1,292) $3,659 $(16,033)
===== ======= ====== ========
7
(7) Restructuring Costs
In fiscal 2001, the Company incurred a restructuring charge of $1,218 in
accordance with Emerging Issues Task Force Issue ("EITF") 94-3 and SEC Staff
Accounting Bulletin 100 (SAB 100). The restructuring charge includes
severance-related costs associated with workforce reductions of approximately
102 persons across all functional areas. In addition, the Company recorded $300
of moving and other costs incurred to move the Fluoroscan operations to the
corporate headquarters from Northbrook, Illinois.
During the first quarter of fiscal 2002, the Company announced the
finalization of an exit strategy for the Hologic Systems Division. As part of
this exit strategy, the Company closed its conventional general radiography
manufacturing facility in Littleton, Massachusetts, and relocated certain of its
product lines and sales and support personnel to the corporate headquarters in
Bedford, Massachusetts. The Company accrued costs of approximately $3,500
related to the closing as part of the final Trex Medical purchase price
allocation in the fourth quarter of fiscal 2001. These costs included amounts
for lease abandonment, as well as for the write-off of certain fixed assets and
accounts receivable. The Company commenced the closure of the Littleton
manufacturing facility in the first quarter of fiscal 2002 and completed the
closure in January 2002. The Company also incurred a restructuring charge of
approximately $806 in the first quarter of fiscal 2002 primarily comprised of
severance costs related to the termination of 85 employees at the Littleton
facility. In addition, the Company incurred severance costs of approximately
$561 and $208 in connection with the closure of the Company's direct sales and
service office in Paris, France and the continued reduction of Lorad's
workforce, respectively. The severance charges related to the workforce
reductions of 5 persons in France and 20 persons at Lorad and were across all
functional areas.
In the second quarter of fiscal 2002, the Company incurred additional
severance costs of approximately $495 primarily comprised of severance costs in
connection with the reduction of the Company's workforce in the United States
and Europe by 13 persons across all functional areas.
The following table summarizes the restructuring activity for the nine
months ended June 29, 2002:
Balance at Charged to Balance at
September 29, 2001 Costs and Expenses Payments June 29, 2002
------------------- ------------------ -------- -------------
$784 $2,070 $(2,226) $628
(8) Business Segments and Geographic Information
As a result of the Company's decision to close its Hologic Systems Division
manufacturing facility in Littleton, Massachusetts, the Company has presented
the conventional General Radiography business as a separate segment from
Mammography. Prior periods have been restated to conform to this presentation.
Segment information for the three months and nine months ended June 29, 2002 and
June 30, 2001 is as follows:
Three Months Ended Nine Months Ended
---------------------- -----------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
-------- --------- -------- --------
Total revenues-
Bone Assessment $15,808 $17,410 $ 47,331 $ 47,901
Mammography 19,174 13,471 54,265 43,979
Digital Imaging 6,333 3,574 17,190 8,509
Mini C-Arm Imaging 4,787 3,302 12,843 10,974
General Radiography 1,535 7,181 9,218 21,867
------- ------- -------- --------
$47,637 $44,938 $140,847 $133,230
======= ======= ======== ========
8
Three Months Ended Nine Months Ended
---------------------- -----------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
-------- --------- -------- --------
Operating income (loss)-
Bone Assessment $ 984 $ 3,797 $ 4,711 $ 6,322
Mammography 1,306 1,032 3,282 34
Digital Imaging (2,563) (4,588) (7,316) (16,993)
Mini C-Arm Imaging 976 (135) 2,688 (27)
General Radiography 334 (572) (2,467) (3,889)
------- ------- ------- --------
$ 1,037 $ (466) $ 898 $(14,553)
======= ======= ======= ========
Depreciation and amortization-
Bone Assessment $ 957 $ 786 $ 2,661 $ 2,379
Mammography 571 453 1,792 2,516
Digital Imaging 404 356 1,241 1,059
Mini C-Arm Imaging 57 34 148 173
General Radiography -- 99 -- 356
------- ------- ------- --------
$ 1,989 $ 1,729 $ 5,842 $ 6,483
======= ======= ======= ========
Capital expenditures-
Bone Assessment $ 885 $ 299 $ 1,605 $ 891
Mammography 522 280 1,309 986
Digital Imaging 774 47 1,417 660
Mini C-Arm Imaging 77 -- 164 183
General Radiography -- 47 -- (27)
------- ------- ------- --------
$ 2,258 $ 673 $ 4,495 $ 2,693
======= ======= ======= ========
June 29, September 29,
2002 2001
-------- -------------
Identifiable assets-
Bone Assessment $150,840 $117,796
Mammography 49,377 50,811
Digital Imaging (3,515) 1,108
Mini C-Arm Imaging 15,308 15,402
General Radiography -- 10,002
-------- --------
$212,010 $195,119
======== ========
Export sales from the United States to unaffiliated customers primarily in
Europe, Asia and Latin America during the three months and nine months ended
June 29, 2002 totaled approximately $7,534 and $22,836, respectively; and for
the three months and nine months ended June 30, 2001 totaled approximately
$8,091 and $29,400, respectively.
Transfers between the Company and its European subsidiaries are generally
recorded at amounts similar to the prices paid by unaffiliated foreign dealers.
All intercompany profit is eliminated in consolidation.
Export product sales as a percentage of total product sales are as follows:
Three Months Ended Nine Months Ended
-------------------- -------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
-------- --------- -------- --------
Europe 10% 11% 10% 14%
Asia 6 9 8 8
All others 3 4 3 7
--- --- --- ---
19% 24% 21% 29%
=== === === ===
9
(9) Litigation
In connection with the acquisition of the U.S. assets of Trex Medical, the
Company assumed liability for a lawsuit filed by Fischer Imaging against Trex
Medical alleging that the Lorad prone biopsy system infringes upon two Fischer
Imaging patents, subject to indemnification from Trex Medical and its parent,
Thermo Electron Corporation, for any damages and related costs, including
attorneys' fees, up to the adjusted purchase price for the Trex Medical assets.
In June 2002, Trex Medical and Fischer Imaging reached a settlement in this
lawsuit. Under the settlement, Fischer Imaging has dismissed all actions against
the Company, the Company retains the right to continue to sell this product, and
the Company is not required to pay any damages or ongoing royalties.
In the ordinary course of business, the Company is party to other various
types of litigation. The Company believes it has meritorious defenses to
all claims, and, in its opinion, all litigation currently pending or threatened
will not have a material effect on the Company's financial position or results
of operations.
(10) Public Offering of Common Stock
In December 2001, the Company sold 3,000 shares of its Common Stock to the
public at a price of $9.00 per share. The Company received net proceeds from
this offering of approximately $24.8 million.
(11) New Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. This statement applies to goodwill and intangible assets acquired after
June 30, 2001, as well as goodwill and intangible assets previously acquired.
Under this statement, goodwill will no longer be amortized, instead goodwill
will be reviewed for impairment annually, at a minimum, by applying a
fair-value-based test. The Company early adopted this statement, effective in
the first quarter of this year. Accordingly, the Company has reclassified the
net book value of assembled workforce to goodwill and ceased amortization.
Unaudited pro forma net income (loss) and earnings (loss) per share for the
Company, assuming the adoption of Statement 142 occurred on October 1, 2000 are
as follows:
Three Months Ended Nine Months Ended
---------------------- ----------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
-------- --------- -------- ----------
Reported net income (loss) $492 $(1,213) $3,344 $(15,923)
Add back: Goodwill amortization -- (24) -- 490
---- ------- ------ --------
Adjusted net income (loss) $492 $(1,237) $3,344 $(15,433)
==== ======= ====== ========
Basic earnings per share:
Reported net income (loss) $.03 $ (.08) $ .18 $(1.03)
Goodwill amortization -- -- -- .03
---- ------- ------ ------
Adjusted net income (loss) $.03 $ (.08) $ .18 $(1.00)
==== ======= ====== ======
Diluted earning per share:
Reported net income (loss) $.02 $ (.08) $ .18 $(1.03)
Goodwill amortization -- -- -- .03
---- ------- ------ ------
Adjusted net income (loss) $.02 $ (.08) $ .18 $(1.00)
==== ======= ====== ======
During the second quarter of fiscal 2002, an independent appraiser,
experienced in conducting these impairment tests, completed the fair-value-based
test of the Company's goodwill. Based on the results of this test, goodwill was
deemed not to be impaired for fiscal 2002.
10
PART I - FINANCIAL INFORMATION (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
HOLOGIC, INC. AND SUBSIDIARIES
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the U.S.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to customer
programs and incentives, product returns, bad debts, inventories, investments,
intangible assets, income taxes, warranty obligations, restructuring and
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Inventory
Our inventories include material, labor and overhead, and are stated at the
lower of cost (first-in, first-out) or market. We write down inventory for
estimated obsolescence based upon assumptions about future demand and market
conditions, which may negatively affect our ability to dispose of inventory. If
actual market conditions are less favorable than those projected by management,
additional inventory write-downs may be required, which would have a negative
effect on our results of operations.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. If the financial
condition of the customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
Valuation of Long-lived and Intangible Assets and Goodwill
We assess the impairment of identifiable intangibles, long-lived assets and
goodwill whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Factors we consider important that could trigger
an impairment review include but are not limited to the following:
. significant under-performance relative to historical or projected
future operating results;
. significant changes in the manner of our use of the acquired
assets or the strategy for our overall business; and
. significant negative industry or economic trends.
When we determine that the carrying value of intangibles, long-lived assets
and goodwill may not be
11
recoverable based on a change in events and circumstances discussed above, we
measure any impairment based on the projected undiscounted cash flow method. Net
intangible assets and goodwill amounted to $16.3 million as of June 29, 2002,
consisting of $13.5 million related to Mammography business, $2.7 million
related to the Bone Assessment Business and $100 related to the Digital Imaging
Business.
In the first quarter of fiscal 2002, we early-adopted Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets", and as a result, we ceased amortizing approximately $4.4 million of
goodwill. We had recorded approximately $549 of amortization on these amounts
during fiscal 2001 and would have recorded approximately $700 of amortization
during 2002 if the existing standards had been continued. In lieu of
amortization, we are required to perform an initial impairment review of our
goodwill in 2002 and an annual impairment review thereafter. During the second
quarter of fiscal 2002, an independent appraiser, experienced in conducting
these impairment tests, completed the fair-value-based test of the Company's
goodwill. Based on the results of this test, goodwill was deemed not to be
impaired for fiscal 2002.
Revenue Recognition
We recognize product revenue upon shipment, provided that there is
persuasive evidence of an arrangement, there are no uncertainties regarding
acceptance, the sales price is fixed or determinable, collection of the
resulting receivable is probable and only perfunctory Company obligations
included in the arrangement remain to be completed. A provision is made at that
time for estimated warranty costs to be incurred. Other product revenues, which
includes primarily replacement parts and services, are recorded at the time of
shipment or as the service is rendered.
In connection with a fee-per-scan program with a leasing company for
certain products, we entered into a remarketing agreement whereby we agreed to
perform certain remarketing activities on a best efforts basis. We agreed to
perform these activities to help recover any losses incurred by the leasing
company up to 10% of the total fee-per-scan contracts funded. The leasing
company purchased all such products covered under these contracts from us. We
had reserved for potential losses under these contracts by deferring revenue in
an amount equal to 10%. During fiscal 1999, we and the leasing company commenced
claims against each other regarding this program. On August 9, 2001, we reached
an agreement with the leasing company to settle the litigation between the
parties. Under the terms of the $3,050 settlement, we made a cash payment of
$1,500 and issued a note payable to the leasing company for $1,550 payable in
full on August 10, 2004 and bearing interest at a rate of prime (6.0% at
September 29, 2001) plus 1%. As of June 29, 2002, there was approximately $1.0
million outstanding on this note.
As a result of the settlement, we recognized the amount deferred in excess
of the settlement totaling $2,147 as revenue in the fourth quarter of 2001. In
addition, we reversed $500 of related warranty reserves which were no longer
necessary through a reduction of cost of product sales.
Income Taxes
We account for income taxes under SFAS No. 109, "Accounting for Income
Taxes". This statement requires that we recognize a current tax liability or
asset for current taxes payable or refundable and a deferred tax liability or
asset for the estimated future tax effects of temporary differences and
carryforwards to the extent they are realizable. We record a valuation allowance
to reduce our deferred tax assets to the amount that is more likely than not to
be realized. While we have considered future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for the valuation
allowance, in the event we were to determine that we would be able to realize
our deferred tax assets in the future in excess of the net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
determination was made. Likewise, should we determine that we would not be able
to realize all or part of our net deferred tax asset in the future, an
adjustment to the deferred tax asset would be charged to income in the period
such determination was made.
12
We do not provide for U.S. income taxes on earnings of our subsidiaries
outside of the U.S. Our intention is to reinvest these earnings permanently or
to repatriate the earnings only when tax-effective to do so. It is not practical
to estimate the amount of additional taxes that might be payable upon
repatriation of foreign earnings; however, we believe that U.S. foreign tax
credits would largely eliminate any U.S. taxes or offset any foreign withholding
taxes.
Warranty Reserves
We provide for the estimated cost of product warranties at the time revenue
is recognized. Although we engage in extensive product quality programs and
processes, our warranty obligation is affected by product failure rates and
service delivery costs incurred in correcting a product failure. Should actual
product failure rates or service delivery costs differ from our estimates, which
are based on historical data and engineering estimates, where applicable,
revisions to the estimated warranty liability would be required.
Legal Contingencies
We are currently involved in certain legal proceedings. In connection with
these legal proceedings, which we discuss in Note 9 to our Consolidated
Financial Statements, management periodically reviews estimates of potential
costs to be incurred by the Company in connection with the adjudication or
settlement, if any, of these proceedings. These estimates are developed in
consultation with outside counsel and are based on an analysis of potential
litigation outcomes and settlement strategies. In accordance with FASB Statement
No. 5, Accounting for Contingencies, loss contingencies are accrued if, in the
opinion of management, an adverse outcome is probable and such outcome can be
reasonably estimated. We do not believe that these proceedings will have a
material adverse effect on our financial position; however, it is possible that
future results for any particular quarter or annual period may be materially
affected by changes in our assumptions or the effectiveness of our strategies
relating to these proceedings.
RESULTS OF OPERATIONS
This report contains forward-looking information that involves risks and
uncertainties, including statements about our and our management's plans,
objectives, expectations, beliefs and intentions. Actual results may be
materially different than those anticipated in these forward-looking statements.
Factors that could cause actual results to materially differ include known and
unknown risks, including, without limitation, the early stage of market
development for digital X-ray products, our ability to predict accurately the
demand for our products and to develop strategies to address our markets
successfully; uncertainties inherent in the development of new products and the
enhancement of existing products, including technical and regulatory risks, cost
overruns and delays; the risk that newly introduced products may contain
undetected errors or defects or otherwise not perform as anticipated; risks
relating to our reliance on a single source of supply for some key components of
our products; the need to comply with especially high standards in the
manufacture of digital X-ray products; risks related to ongoing litigation; our
ability to meet ongoing financial covenants under our line of credit; technical
innovations that could render products marketed or under development by us
obsolete; competition; reimbursement policies for the use of our products;
market acceptance of drug therapies for osteoporosis. Other factors that could
adversely affect our business and prospects are described in our reports and
registration statements filed with the Securities and Exchange Commission. Our
results of operations have and may continue to be subject to significant
quarterly variation. The results for a particular quarter may vary due to a
number of factors, including those set forth above. We expressly disclaim any
obligation or undertaking, except as required by law, to release publicly any
updates or revisions to any such statements to reflect any change in our
expectations or any change in events, conditions or circumstances on which any
such statement is based.
Revenues. Product sales for the third quarter of fiscal 2002 increased 11%
to $47.5 million from $42.7 million for the third quarter of fiscal 2001.
Product sales for the current nine month period increased 7% to $139.3 million
from $130.7 million for the first nine months of fiscal 2001. These increases
were primarily due
13
to an increase in revenues from sales of our mammography, digital imaging, mini
c-arm and bone assessment products. Partially offsetting these increases was a
decrease in revenues from our conventional general radiography business. In the
third quarter of fiscal 2002, we completed the process of phasing-out the
unprofitable conventional general radiography product line we acquired from Trex
Medical.
Other revenues decreased for the current three month period by 94% or $2.1
million due to recognizing the remaining deferred revenue in connection with the
settlement of the litigation with Fleet Business Credit Corp. in fiscal 2001.
The decrease for the current nine month period of $1.0 million was due to the
licenses of certain digital imaging software and mammography patented technology
which was less than the revenue recognized from the Fleet settlement in the
third quarter of fiscal 2001.
Revenues in our mammography business increased approximately 42% to $19.2
million for the third quarter of fiscal 2002 from $13.5 million for the
corresponding three month period in fiscal 2001 and increased 23% to $54.3
million for the nine months ended June 29, 2002 from $44.0 million for the same
period in fiscal 2001. These increases were primarily due to an increase in the
number of mammography systems sold in the United States partially offset by
fewer systems sold internationally.
Digital imaging revenues increased 77% to $6.3 million in the third quarter
of fiscal 2002 compared to revenues of $3.6 million in the third quarter of
fiscal 2001 and increased 102% to $17.2 million for the first nine months of
fiscal 2002 compared to $8.5 million for the comparable period in fiscal 2001.
These increases were primarily due to an increase in the number of digital
systems sold in the United States and to a lesser extent, an increase in the
number of systems sold internationally.
Mini c-arm revenues increased 45% to $4.8 million in the current quarter of
fiscal 2002 from $3.3 million for the same period last year and increased 17%
for the current nine month period to $12.8 million from $11.0 million for the
first nine months of fiscal 2001. These increases were primarily due to an
increase in the number of systems sold domestically.
Bone assessment revenues decreased 9% to $15.8 million in the third quarter
of fiscal 2002 from $17.4 million for the same period last year due to the $2.1
million of deferred revenue recognized in fiscal 2001 from the Fleet settlement
which was partially offset from an increase in product revenues due to higher
average selling prices. These revenues for the first nine months of fiscal 2002
decreased 1% to $47.3 million from $47.9 million for the comparable nine month
period in fiscal 2001 primarily due to an increase in the number of systems sold
in the United States which partially offset the revenue from the Fleet
settlement recognized last year.
Conventional radiography revenues decreased 78% to $1.5 million in the
third quarter of fiscal 2002 from $7.2 million in the same quarter of fiscal
2001 and decreased 58% to $9.2 million for the first nine months of fiscal 2002
from $21.3 million for the same period in fiscal 2001. These decreases were
primarily due to our decision to phase-out our unprofitable conventional general
radiography product line.
In the first nine months of fiscal 2002, approximately 79% of product sales
were generated in the United States, 10% in Europe and 11% in other
international markets. In the first nine months of fiscal 2001, approximately
71% of product sales were generated in the United States, 14% in Europe and 15%
in other international markets.
We expect that foreign sales in the current fiscal year will continue to
account for a substantial portion of product sales. Continued economic and
currency related uncertainty in a number of foreign countries, especially in
Asia and Latin America, could reduce our future sales to these markets and
impact collections on previous sales.
Cost of Product Sales. The cost of product sales remained constant as a
percentage of product sales at 62% for the third quarters of fiscal 2002 and
fiscal 2001. The cost of product sales decreased as a
14
percentage of product sales to 62% in the current nine month period from 66% in
the first nine months of fiscal 2001. Fiscal 2001 cost of product sales includes
a $2.0 million reduction of expenses related to the final purchase price
adjustment of the Trex Medical acquisition and the settlement of the Fleet
litigation. Absent these reductions, cost of product sales would have been 66%
and 68% for the three and nine month periods ended June 30, 2001, respectively.
These costs decreased as a percentage of product sales primarily due to improved
gross margins recognized on the mammography and digital imaging products as a
result of a significant increase in revenues and cost savings initiatives
enacted in the summer of 2001. The increased volume has improved the absorption
of manufacturing overhead at both facilities. DRC continues to have significant
fixed manufacturing costs and is operating significantly below manufacturing
capacity. However, margins on these products were positive in both the second
and third quarters of fiscal 2002 compared to negative margins for prior
periods. Our gross margins also improved as a result of the decrease in sales of
conventional general radiography products which generally have lower margins.
Partially offsetting these improvements was an increase in these costs related
to the Bone Assessment business due to additional personnel and other costs in
our field service area. Included in the cost of product sales for Lorad
mammography products in the first quarter of fiscal 2001 was approximately
$800,000 for the impact of the fair market write-up of acquired inventory on
equipment sold.
Research and Development Expenses. Research and development expenses
decreased 12% to $4.9 million (10% of total revenues) in the current quarter
from $5.5 million (12% of total revenues) in the third quarter of fiscal 2001.
For the current nine month period, these costs decreased 17% to $14.9 million
(11% of total revenues) from $18.0 million (13% of total revenues) for the first
nine months of fiscal 2001. These decreases were primarily due to a decrease in
research and development spending and personnel primarily related to our
cost-saving initiatives enacted in the summer of 2001. In addition,
approximately $1.6 million and $1.2 million of these expenses in the third
quarter of fiscal 2002 and 2001, respectively, and approximately $4.3 million
and $4.2 million of these expenses in the first nine months of fiscal 2002 and
2001, respectively, related to the development of new digital mammography and
radiography systems detectors at DRC.
Selling and Marketing Expenses. Selling and marketing expenses
decreased 13% to $7.5 million (16% of product sales) in the current quarter from
$8.5 million (20% of product sales) in the third quarter of fiscal 2001. For the
current nine month period, selling and marketing expenses decreased 22% to $20.9
million (15% of product sales) from $26.9 million (21% of product sales) for the
first nine months of fiscal 2001. These decreases were primarily due to our
reduction in personnel relating to our cost-saving initiatives enacted during
the summer of 2001.
General and Administrative Expenses. General and administrative
expenses increased 10% to $4.8 million (10% of total revenues) in the current
quarter from $4.3 million (10% of total revenues) in the third quarter of fiscal
2001. During the first nine months of fiscal 2002, general and administrative
expenses decreased 2% to $15.0 million (11% of total revenues) from $15.3
million (12% of total revenues) in the first nine months of fiscal 2001. For the
three and nine months ended June 30, 2001, these expenses included a reduction
of approximately $1.0 million related to the final purchase price adjustment of
the Trex acquisition. Absent this reduction, these decreases were primarily due
to our reduction in personnel and other cost-savings initiatives enacted during
the summer of 2001 and, to a lesser extent, the elimination of the legal
expenses as a result of the settlement with Fleet Business Credit, LLC in
August, 2001. In addition, in connection with our early adoption of SFAS 142,
(see Note 11) we eliminated approximately $180,000 and $540,000 of goodwill
amortization expense in the current quarter and nine month periods,
respectively.
Restructuring and Nonrecurring Costs. Restructuring costs in the first
and second quarters of fiscal 2002 were primarily the result of our continuing
efforts to streamline operations and eliminate unprofitable product lines.
Nonrecurring and restructuring charges in the third quarter and nine month
periods of fiscal 2001 included $500,000 related to the move of our Fluoroscan
operations to our corporate headquarters and severance charges at Lorad of
$200,000.
15
Interest Income. Interest income decreased to $142,000 in the current
quarter from $258,000 in the third quarter of fiscal 2001 and decreased to
$400,000 in the current nine month period from $854,000 in the comparable period
in fiscal 2001. These decreases were primarily due to reduced interest rates on
our investments.
Interest / Other Expense. In the third quarters of fiscal 2002 and
2001, we incurred interest and other expenses of approximately $687,000 and
$908,000, respectively. For the first nine months of fiscal 2002 and 2001, we
incurred interest and other expense of approximately $2.3 million and $2.1
million, respectively. In the current fiscal year, these expenses included
interest costs of approximately $720,000 per quarter on the $25 million note
payable issued in connection with the Trex Medical acquisition, and to a lesser
extent, foreign currency transaction gains and interest costs on a bank line of
credit used by our European subsidiaries to borrow funds in their local
currencies to pay for intercompany sales, thereby reducing the foreign currency
exposure on those transactions. To the extent that foreign currency exchange
rates fluctuate in the future, we may be exposed to continued financial risk.
Although we have established a borrowing line of credit denominated in the
foreign currency, the euro, in which our subsidiaries currently conduct business
to minimize this risk, we cannot assure that we will be successful or can fully
hedge our outstanding exposure. In the first nine months of fiscal 2001, these
expenses were primarily due to the interest costs on the Trex Medical note
payable which was partially offset by insurance proceeds received in excess of
cost related to storm damage at Fluoroscan in fiscal 2000.
Provision (Benefit) for Income Taxes. For the current nine month
period, the Company has recorded a tax benefit of $4.5 million as a result of
the passing of the President's Economic Stimulus Bill. This bill includes an
extension of the net operating loss carry back for losses incurred in tax years
2001 and 2002. Accordingly, the benefit reflects our ability to carry back our
net operating losses to previous years to obtain a refund. In fiscal 2001, the
effective tax rate reflected the establishment of a valuation allowance for the
tax benefit associated with the losses in those periods.
Segment Results of Operations
As a result of our decision to close the Hologic Systems Division
manufacturing facility, we have moved the General Radiography business from the
Mammography/General Radiography segment into a separate segment. Prior periods
have been restated to conform to this presentation. Our businesses are reported
as five segments: bone assessment; mammography; digital imaging; mini c-arm
imaging; and general radiography. The accounting policies of the segments are
the same as those described in the footnotes to the accompanying consolidated
financial statements. We measure segment performance based on total revenues and
operating income or loss. Revenues from each of these segments are described
above. The discussion that follows is a summary analysis of the primary changes
in operating income or loss by segment.
Bone Assessment. Reported operating income for bone assessment was
$984,000 and $4.7 million for the three and nine months ended June 29, 2002,
respectively, compared to operating income of $3.8 million and $6.3 million for
the same periods in fiscal 2001. The three and nine month periods of fiscal 2001
include $2.6 million of additional revenues and decreased expenses as a result
of the Fleet litigation settlement. Absent the effect of this settlement, the
improvement in operating income for this business segment for the first nine
months of fiscal 2002 was primarily due to an overall reduction in operating
expenses as a result of our cost-savings initiatives enacted during last summer.
The slight decrease in operating income in the current quarter, absent the
effect of the Fleet settlement, as compared with the third quarter of fiscal
2001 was primarily due to an increase in field service and training related
expenses including added headcount which was offset by an overall reduction in
operating expenses from last years cost-saving initiatives.
Mammography. Reported operating income for this business segment in the
third quarter of fiscal 2002 improved to $1.3 million from $1.0 million in the
corresponding quarter of fiscal 2001. For the nine months ended June 29, 2002,
operating income was $3.3 million compared to $34,000 for the first nine months
of fiscal
16
2001. The fiscal 2001 results for the third quarter and nine month
period for the Mammography business segment included expense reductions of
approximately $2.0 million related to the final purchase price adjustment for
the Trex acquisition. The significant improvements in operating income in the
current three and nine month periods, excluding these expense reductions in
fiscal 2001, were primarily due to additional gross margins from the increase in
revenues and a reduction in manufacturing cost and operating expenses as a
result of our cost-saving initiatives enacted during the summer of 2001 and, to
a lesser extent, to a non-recurring charge of $800,000 in the first quarter of
fiscal 2001 to product cost of sales for the fair market write-up of acquired
inventory.
Digital Imaging. The digital imaging business reported a 44% decrease
in loss from operations to $2.6 million in the current quarter from $4.6 million
in the third quarter of fiscal 2001. The operating loss decreased 57% to $7.3
million for the first nine months of fiscal 2002 from $17.0 million for the
first nine months of fiscal 2001. These decreases were primarily due to
additional gross margins from the increase in revenues plus reduced research and
development spending related to the completion of the EPEX(TM) and RADEX(TM)
direct-to-digital general radiography systems and a reduction in other operating
expenses as a result of our cost-saving initiatives enacted last summer.
Mini C-Arm Imaging. The mini c-arm business reported operating income
of $1.0 million and $2.7 million for the three and nine months ended June 29,
2002, respectively, compared to an operating loss of $136,000 and $26,000 for
the same periods in fiscal 2001. These improvements were primarily attributable
to an overall reduction in manufacturing costs and operating expenses in
connection with the assimilation of the Fluoroscan product line into the
corporate headquarters located in Bedford, Massachusetts.
General Radiography. As previously discussed, we have closed the
manufacturing facility of the Hologic Systems Division and relocated certain of
its product lines and sales and service support personnel to our corporate
headquarters. This business reported operating income of $334,000 for the
current quarter and an operating loss of $571,000 for the same period last year.
For the first nine months ended June 29, 2002, the operating loss was $2.5
million compared to an operating loss of $3.9 million for the first nine months
of fiscal 2001. The decrease in operating losses are primarily due to the
elimination of costs in the current period related to the facility closure.
Acquired In-Process Technology
As part of the Trex Medical purchase price allocation, all intangible
assets that were a part of the acquisition were identified and valued. It was
determined that technology assets and assembled workforce had value. At the
acquisition date, Trex Medical was conducting design, development, engineering
and testing activities associated with the completion of several research and
development projects related to its mammography and general radiography lines of
business. As part of our exit strategy for the conventional general radiography
business, we have terminated the development projects and efforts for the
general radiography line of business. We will not incur any further expenditures
related to these projects.
Since the acquisition, we have used the acquired in-process technology
to develop new products, which have or are expected to become part of our
product lines when completed. However, we are constantly reviewing the
allocation of our research and development resources to respond to the ever
changing market and technology developments, as well as developments of our own
internally developed and acquired evolving technology portfolio. Also, we have
combined acquired research and development projects with other of our
development activities, and we have delayed two projects.
As of June 29, 2002 our expenditures incurred and estimates to complete
our acquired in-process projects related to the mammography business were
consistent with our initial expectations other than the delays mentioned above.
If we are not successful in implementing our projects, we may be unable to
realize the remaining value assigned to this in-process technology. In addition,
the remaining value of the other acquired intangible assets associated with this
technology may also become impaired.
17
Liquidity and Capital Resources
At June 29, 2002 we had approximately $80.4 million of working capital.
At that date our cash and cash equivalents totaled $31.9 million. Our cash and
cash equivalents balance increased approximately $19.2 million since September
29, 2001 primarily due to the net proceeds from our common stock offering in
December 2001, partially offset by the use of cash for purchases of property and
equipment and in operating activities. Our cash used in operating activities
included net income of $3.3 million for the first nine months of fiscal 2002
plus changes in our current assets and liabilities that were partially offset by
non-cash charges for depreciation and amortization of $5.8 million and a $1.7
million decrease in long term deferred income taxes. Cash used in operations due
to changes in our current assets and liabilities included a decrease in accounts
payable of $8.5 million, a decrease in accrued expenses of $4.6 million, and an
increase in prepaid expenses and other current assets of $4.3 million. These
uses of cash were partially offset by a decrease of $3.3 million in accounts
receivable. The increase in prepaid expenses and the decrease in accrued
expenses and deferred income taxes were primarily due to the recording of income
tax refunds of approximately $5.8 million due to the effect of the Economic
Stimulus Bill and, to a lesser extent, other tax refunds totaling $2.5 million.
The decrease in accounts receivable was primarily due to improved collections
and the decrease in accounts payable was primarily due to the timing of
payments.
In the first nine months of fiscal 2002, we used approximately $4.4
million of cash in investing activities. This use of cash was primarily
attributable to purchases of property and equipment of $4.5 million, which
consisted primarily of corporate wide computer information software and systems
equipment and building improvements at the Delaware facility.
In the first nine months of fiscal 2002, financing activities provided
us with $26.1 million of cash. These cash flows included approximately $24.8
million, net of offering expenses, from the sale of 3,000,000 shares of our
common stock and proceeds from the issuance of common stock pursuant to options
and employee stock purchase plan of $4.2 million partially offset by $2.9
million of repayments of our European line of credit and our term loan with
Foothill Capital Corp.
As of June 29, 2002 we had short term borrowings, including the current
portion of our long term obligations, of $480,000 and long term notes payable
totaling $27.5 million. The short term borrowings represent the current portion
of our long term notes payable. The long term notes payable consisted of the
$25.0 million note payable for the Trex Medical acquisition, the $1.5 million
borrowed from Foothill Capital Corporation as the long term portion of our term
loan under our credit facility, and the $1.0 million balance due on the note to
Fleet Business Credit, LLC.
We maintain an unsecured line of credit with a European bank for the
equivalent of $3.0 million, which bears interest at the Europe Interbank Offered
Rate (3.79% at September 29, 2001) plus 1.5%. The borrowings under this line are
primarily used by our European subsidiaries to settle intercompany sales and are
denominated in the respective local currencies of its European subsidiaries. The
line of credit may be canceled by the bank with 30 days notice. At June 29,
2002, there were no outstanding borrowings under this line.
The Trex Medical note bears interest at 11.5% per year, with accrued
interest first payable on September 13, 2001 and semi-annually thereafter. The
entire principal balance is due on September 13, 2003. The note is secured by
our real property in Danbury, Connecticut and Bedford, Massachusetts.
In September 2001 we obtained a secured loan from Foothill Capital
Corporation. The loan agreement with Foothill Capital Corporation provides for a
term loan of approximately $2.4 million, which we borrowed at signing, and a
revolving line of credit facility. The maximum amount we can borrow under the
loan agreement is $25 million with an option for us to increase this amount to
$30 million during the term of the Agreement, if certain conditions are met. The
loan agreement contains financial and other covenants and the actual amount
18
which we can borrow under the line of credit at any time is based upon a formula
tied to the amount of our qualifying accounts receivable and inventory. In
December 2001 we amended this loan agreement primarily to change financial
covenants to reflect restructuring charges we incurred in the fourth quarter of
fiscal 2001 and the additional charges we expect to incur in connection with our
decision to close our Littleton facility. Also, as a result of this amendment,
our loan may be limited based upon some financial covenants and formulas. The
term loan accrues interest at prime plus 1.25% for five years. The line of
credit advances accrue interest at prime plus 0.5%. The line of credit expires
in September 2004.
As a result of the passing of the Economic Stimulus Bill in March 2002
and other tax refund opportunities, the Company received $1.6 million during the
current quarter and was expecting to receive an additional $6.7 million before
the end of fiscal 2002. These uncollected cash refunds were recorded as an
income tax receivable in the June 29, 2002 balance sheet. In July, the Company
received $6.0 million of this receivable and expects the remaining balance of
$700,000 before the end of fiscal 2002.
We financed some sales to Latin America over a two-to-three year
time-frame. At June 29, 2002, we had total accounts receivable outstanding of
approximately $2.5 million relating to these sales, of which approximately
$78,000 were long-term and included in other assets. As of June 29, 2002, we had
not experienced any significant write-offs of these receivables, however, the
economic and currency related uncertainties in these countries may increase the
likelihood of non-payment.
In connection with our acquisition of the U.S. assets of Trex Medical,
we assumed liability for a lawsuit filed by Fischer Imaging against Trex Medical
alleging that the Lorad prone biopsy system infringes upon two Fischer Imaging
patents, subject to indemnification from Trex Medical and its parent, Thermo
Electron Corporation, for any damages and related costs, including attorneys'
fees, up to our adjusted purchase price for the Trex Medical assets. In June
2002, Trex Medical and Fischer Imaging reached a settlement in this lawsuit.
Under the settlement, Fischer Imaging has dismissed all actions against us, we
have retained the right to continue to sell this product, and we are not
required to pay any damages or ongoing royalties.
In April 2002, we began an implementation project for an integrated
enterprise wide software application. We expect to incur costs of approximately
$2.5 million over the next year in connection with this implementation. These
costs include hardware, software and consulting services. Most of the cost is
currently being capitalized and upon completion will be amortized over its
expected useful life.
The following table summarizes our contractual obligations and
commitments as of June 29, 2002:
Payments Due by Period
(in thousands)
Contractual Obligations Total Less than 1 year 1-3 years 4-5 years
- ----------------------- ------- ---------------- --------- ---------
Long Term Debt $28,012 $ 480 $27,532 $ --
Operating Leases $ 4,679 $1,931 $ 2,214 $534
------- ------ ------- ----
Total Contractual Cash Obligations $32,691 $2,411 $29,746 $534
======= ====== ======= ====
Except as set forth above, we do not have any other significant capital
commitments. We are working on several projects, with an emphasis on direct
radiography plates and systems. We believe that we have sufficient funds in
order to complete the development, conduct clinical trials and achieve
regulatory approvals of our direct radiography and other products under
development for at least the next twelve months.
19
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments. SFAS No. 107, Disclosure of Fair Value of Financial
Instruments, requires disclosure about fair value of financial instruments.
Financial instruments consist of cash equivalents, short and long-term
investments, accounts receivable, accounts payable and debt obligations. The
fair value of these financial instruments approximates their carrying amount.
Primary Market Risk Exposures. Our primary market risk exposures are in
the areas of interest rate risk and foreign currency exchange rate risk. We
incur interest expense on loans made under a line of credit at the Europe
Interbank Offered Rate and under a term loan agreement at prime plus 1.25%. At
June 29, 2002, we had no outstanding borrowings under the European line of
credit and approximately $1.5 million outstanding borrowings under the term loan
with Foothill Capital Corporation.
Substantially all of our sales outside the United States are conducted
in U.S. dollar denominated transactions. We operate two European subsidiaries
which incur expenses denominated in local currencies. However, we believe that
these operating expenses will not have a material adverse effect on our
business, results of operations or financial condition.
20
PART II - OTHER INFORMATION
HOLOGIC, INC. AND SUBSIDIARIES
Item 1. Legal Proceedings.
The following sets forth developments in previously disclosed legal proceedings
that occurred during the second quarter of fiscal 2002. There were no other
material developments in legal proceedings during the quarter.
On April 2, 1992, Fischer Imaging filed a lawsuit in the United States District
Court, District of Colorado, against Trex Medical, alleging that Lorad's prone
breast biopsy system infringes a Fischer Imaging patent on a precision
mammographic needle-biopsy system. On April 7, 1998, Fischer Imaging filed a
second lawsuit in the United States District Court, District of Colorado,
against Trex Medical, alleging that Lorad's manufacture of breast-imaging
equipment and breast biopsy system equipment infringes on a second Fischer
Imaging patent which was issued April 7, 1998. These two lawsuits were
consolidated into a single lawsuit. The lawsuit sought to enjoin further
violation of Fischer Imaging's patents, unspecified damages of up to three times
the amount found or assessed, and attorneys' fees. In connection with our Trex
Medical acquisition, we assumed liability for this lawsuit subject to
indemnification from Trex Medical and its parent, Thermo Electron Corporation,
for any damages, including attorneys' fees, up to our adjusted purchase price
for the Trex Medical assets.
In June 2002, Trex Medical and Fischer Imaging reached a settlement in this
lawsuit. Under the settlement, Fischer Imaging has dismissed all actions against
us, we have retained the right to continue to sell this product, and we are not
required to pay any damages or ongoing royalties.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits furnished:
Exhibit 99.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
A Form 8-K was filed on June 27, 2002 regarding Hologic's
announcement that its Board of Directors, upon the
recommendation of its Audit Committee, dismissed Arthur
Andersen LLP who had previously acted as Hologic's independent
auditor. Hologic engaged Ernst & Young LLP as its new
independent auditors to audit the financial statements of
Hologic for the fiscal year ending September 28, 2002, as well
as to perform a timely review of its third quarter results for
fiscal 2002.
21
HOLOGIC, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Hologic, Inc.
(Registrant)
August 13, 2002 /s/ John W. Cumming
- --------------- -----------------------------------------------------
Date John W. Cumming
President and Chief Executive Officer
August 13, 2002 /s/ Glenn P. Muir
- --------------- -----------------------------------------------------
Date Glenn P. Muir
Executive Vice President, Finance and Treasurer
(Principal Financial Officer)
22