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ACCESSION NUMBER: 0000927016-01-504222
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 13
CONFORMED PERIOD OF REPORT: 20010929
FILED AS OF DATE: 20011212
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HOLOGIC INC
CENTRAL INDEX KEY: 0000859737
STANDARD INDUSTRIAL CLASSIFICATION: X-RAY APPARATUS & TUBES & RELATED IRRADIATION APPARATUS [3844]
IRS NUMBER: 042902449
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-18281
FILM NUMBER: 1811688
BUSINESS ADDRESS:
STREET 1: 35 CROSBY DRIVE
CITY: BEDFORD
STATE: MA
ZIP: 01730
BUSINESS PHONE: 7819997300
MAIL ADDRESS:
STREET 1: 590 LINCOLN STREET
CITY: WALTHAM
STATE: MA
ZIP: 02154
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<TYPE>10-K405
<SEQUENCE>1
<FILENAME>d10k405.txt
<DESCRIPTION>FORM 10-K405 FOR 09/29/2001
<TEXT>
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: September 29, 2001
------------------
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 or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
35 Crosby Drive, Bedford, Massachusetts 01730
-----------------------------------------------------
(Address of Principal Executive Offices, Including Zip Code)
(781) 999-7300
--------------
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Rights to Purchase Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
10-K. X
---
The aggregate market value of the registrant's Common Stock held by non-
affiliates of the registrant as of December 7, 2001 was $166,348,970 based on
the price of the last reported sale on the Nasdaq National Market System on that
date.
As of December 7, 2001 there were 15,842,759 shares of the registrant's Common
Stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the registrant's annual meeting of stockholders to be filed
within 120 days of the end of its fiscal year ended September 29, 2001 (Part
III: Items 10, 11, 12 and 13)
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this report are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements involve
known and unknown risks, uncertainties and other factors which may cause our or
our industry's actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. Forward-looking statements include,
but are not limited to statements regarding:
. our goal of returning to profitability;
. our goal of expanding our market positions;
. the development of new competitive technologies and products;
. regulatory approval and clearances for our products;
. production schedules for our products;
. market acceptance of new products;
. business strategies;
. dependence on significant suppliers;
. dependence on significant distributors and customers;
. the availability of debt and equity financing;
. general economic conditions;
. the impact of our cost-savings initiatives; and
. our financial condition or results of operations.
In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "could," "would," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential" and similar
expressions intended to identify forward-looking statements. These statements
are only predictions and involve known and unknown risks, uncertainties, and
other factors that may cause our actual results, levels of activity,
performance, or achievements to be materially different from any future results,
levels of activity, performance, or achievements expressed or implied by such
forward-looking statements. Given these uncertainties, you should not place
undue reliance on these forward-looking statements. Also, these forward-looking
statements represent our estimates and assumptions only as of the date of this
report. We expressly disclaim any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statement contained in this
report to reflect any change in our expectations or any change in events,
conditions or circumstances on which any of our forward-looking statements are
based. Factors that could cause or contribute to differences in our future
financial results include those discussed in the risk factors set forth in Item
7 below as well as those discussed elsewhere in this report. We qualify all of
our forward-looking statements by these cautionary statements.
2
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Part I
Item 1. Business
We are a leading developer, manufacturer and supplier of diagnostic and
medical imaging systems primarily serving the healthcare needs of women. We
focus our resources on developing systems and subsystems offering superior image
quality and diagnostic accuracy, which has enabled us to capture significant
market shares and customer loyalty, despite the presence of large competitors.
Our core women's healthcare business units are focused on bone densitometry,
mammography and breast biopsy and on developing a direct-to-digital X-ray
mammography system. Our bone densitometry product line and our Lorad line of
mammography systems are premier brands in their markets. In addition, we
develop, manufacture and supply other X-ray based imaging systems, such as
general purpose direct-to-digital X-ray equipment and mini c-arm imaging
products. Our customers are hospitals, imaging clinics and private practices and
include many of the leading healthcare organizations in the world. Our customers
are also major pharmaceutical companies who use our products in conducting
clinical trials.
We were founded on and remain committed to the principle of applying
superior technology to medical imaging challenges. We achieved our first market
and technology position shortly after the first commercial shipment of our
initial product targeting bone densitometry in 1987. Our patented technology
remains a leading bone densitometry assessment tool, offering superior, cost-
effective accuracy and reliability. Starting in 1996, we embarked on an
acquisition program intended to expand and diversify our business. In 1996 we
acquired Fluoroscan Imaging Systems, a market leader for low intensity, real-
time mini c-arm X-ray imaging devices that address the trend towards minimally
invasive surgery. We have long identified mammography as an attractive growth
opportunity where superior imaging technology could significantly improve
diagnosis. With this goal in mind, in June 1999, we acquired Direct Radiography
Corporation, or DRC, from Sterling Diagnostics and have continued to invest in
the development of their direct-to-digital X-ray technology, DirectRay,
targeting mammography as well as general radiography applications. While we
originally intended to internally develop mammography systems based on
DirectRay, in September 2000 we significantly expedited our entry into the
mammography market by acquiring the U.S. assets of Trex Medical Corporation,
which included the Lorad product line of mammography and minimally invasive
breast biopsy systems used to detect breast cancer. We estimate that we have
sold over 9,500 mammography systems worldwide and our products are known within
the industry for superior image quality and technological innovation. We plan on
integrating our DirectRay technology into the Lorad mammography product line,
selling both digital upgrades to our existing installed base and new digital
systems to potential customers.
As a result of these acquisitions and our commitment to develop digital
radiography, particularly for mammography systems, we generated losses in fiscal
1999, 2000 and 2001. Following the death in June 2001 of S. David Ellenbogen,
our co-founder, Chairman and Chief Executive Officer, John W. Cumming was named
our Chief Executive Officer and President. In August 2001, we implemented an
extensive restructuring plan focused on returning to profitability and
strengthening our competitive position in the women's health and emerging
digital imaging markets. This restructuring plan included a company-wide cost
savings initiative, which we estimate will result in annual cost savings in
excess of $10 million. Cost savings initiatives which have been effected include
a reduction of the workforce, reduction of operating expenses in each of our
four business units and the phase-out of non-core and unprofitable units. The
second element of our restructuring plan focuses on long-term revenue growth
through new marketing programs, expanded distribution channels, and development
of strategic business relationships. Consistent with the plan, we announced in
November 2001 that we have entered into a non-exclusive distribution agreement
with Siemens Medical Solutions, a unit of Siemens AG, for the sale of our X-ray
bone densitometers throughout the United States. We also announced the closure
of our conventional X-ray equipment manufacturing facility located in Littleton,
Massachusetts, acquired through our acquisition of the U.S. assets of Trex
Medical. This business incurred significant losses during fiscal 2001. We intend
to relocate some of the Littleton product lines, and sales and service support
personnel to our corporate headquarters in Bedford, Massachusetts. Including the
reduction in workforce being implemented in connection with the closure of our
Littleton facility, since the beginning of fiscal 2001, we will have reduced our
workforce by approximately 25%.
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<PAGE>
We are focused on returning to profitability, expanding our market position
in bone densitometry and mammography, and leading the field of digital
mammography. We are evaluating new marketing programs designed to expand market
share in our core markets, assessing new distribution channels for our product
portfolio and pursuing business relationships that would allow us to further
leverage our state-of-the-art technology base.
We were incorporated in Massachusetts in October 1985 and reincorporated in
Delaware in March 1990. Unless the context otherwise requires, references to us,
Hologic or our company refer to Hologic, Inc. and each of its consolidated
subsidiaries. We view our operations and manage our business in four principal
operating segments: bone assessment products, mini c-arm imaging products,
direct-to-digital imaging products, and mammography and general radiography
products. We have provided financial information concerning these segments in
Note 11 of the Notes to our Consolidated Financial Statements included in this
report.
The Hologic logo is one of our service marks. QDR, ACCLAIM, Sahara, EPEX,
RADEX, StereoLoc and Lorad are our registered trademarks. Affinity, QDR 4000,
QDR 4500, QDR 4500A, QDR 4500SL, QDR 4500W, QDR 4500C, Delphi, Fluoroscan,
Premier, OfficeMate, Fluoroscan Imaging Systems, DirectRay, DR1000C, Elite,
MultiCare, HTC, Automatic Internal Reference System, Instant Vertebral
Assessment, Direct Radiography and Omniflex are other trademarks that we own.
Our Markets and Products
Our core women's healthcare business units are focused on bone densitometry,
mammography and breast biopsy and developing a direct-to-digital X-ray
mammography system. In addition, we develop, manufacture and supply general
purpose direct-to-digital X-ray equipment, and other X-ray based imaging
systems, such as c-arm imaging products.
Bone Assessment Products
Overview
Bone densitometry is the precise measurement of bone density to assist in
the diagnosis and monitoring of osteoporosis and other metabolic bone diseases
that can lead to debilitating bone fractures, often of the spine and hip. The
National Osteoporosis Foundation estimates that osteoporosis is a major public
health threat for approximately 28 million Americans and 250 million people
worldwide, the majority of whom are women. Each year osteoporosis contributes
to more than 1.5 million new hip, spine and other fractures. In August 2000, the
National Institutes of Health estimated that the burden of healthcare costs for
osteoporotic and associated fractures were between $10 billion and $15 billion
per year. A significant boost for our bone assessment business was the 1995
introduction of drug therapies to treat and prevent osteoporosis. We believe
that the introduction of new drug therapies, the aging of the population, and an
increased focus on women's health issues and preventive medical practices has
created a growing awareness among patients and physicians that osteoporosis is
treatable. As a result, more women than ever are seeking bone assessment for
osteoporosis. We believe that the demand for our bone densitometry systems will
continue to be driven by an increase in the number of available therapies to
treat osteoporosis, the increase in the at-risk population, and broader
reimbursement coverage for bone density testing. In fiscal 2001, we shipped more
than 750-energy dual-energy X-ray bone densitometry systems worldwide which we
believe represents at least 50% of the worldwide market in fiscal 2001 for these
systems.
We introduced our first product serving the bone densitometry market in
1986, began commercial shipments in 1987, and quickly gained recognition for our
superior technology. Our patented dual-energy X-ray technology remains a leading
bone densitometry assessment tool, offering superior, cost-effective accuracy
and reliability. In 1999, we introduced our next-generation densitometer,
Delphi, which incorporates our patented fan beam imaging technology and Instant
Vertebral Assessment, or IVA, technology. These dual technologies enable
physicians to simultaneously measure bone density and visually assess vertebral
status in a clinical setting. The ability to conduct these two diagnostic
procedures with one system enables doctors to cost-effectively improve fracture
risk assessment and to capture greater reimbursement fees. In May 2001, we
received the 2001 Frost & Sullivan Technology Innovation Award in the
osteoporosis diagnostics market, given for technical superiority within the
industry.
4
<PAGE>
We began commercial shipments of our base models of the Delphi series in
March 2000 and introduced more advanced systems, which perform lateral, side-to-
side scans of the lower spine without patient repositioning, in November 2000.
In our quarter ended September 29, 2001, our high-end Delphi systems represented
approximately 70% of our revenue from shipments of X-ray bone densitometry
systems, and our bone densitometry revenues in the quarter were the highest for
any quarter in the last two fiscal years. Over 500 Delphi systems have been
installed to date. In addition to sales of new Delphi systems, we also offer
upgrade opportunities to purchasers of many of our earlier generation systems in
order to incorporate the technology advantages of Delphi. Worldwide,
approximately 3,900 of our previously installed densitometry systems can be
upgraded with Delphi capabilities. Through September 29, 2001, over 170
previously installed systems have been upgraded.
Products
Our bone assessment products include a family of QDR X-ray bone
densitometers and the Sahara Clinical Bone Sonometer, an ultrasound device that
assesses the bone density of the heel.
QDR X-Ray Bone Densitometers. Since our first commercial shipment of a QDR
system in October 1987, we have sold more than 8,000 QDR systems. We believe
that advantages of our QDR systems include high precision, low patient radiation
exposure equivalent to 1/10th of a conventional chest X-ray, a relatively fast
scanning time, low operating cost, no radioactive source and the ability to
measure bone density of the most important fracture sites, the spine and hip.
Our studies and those of independent investigators have demonstrated that the
systems can detect a change in spine bone density with a precision error of less
than 1%.
All our QDR systems employ our patented Automatic Internal Reference
System, which continuously calibrates each patient's bone density measurement to
a known standard. This system virtually eliminates errors that might result from
manual calibration and saves operators the time-consuming task of calibrating
several times a day. The system automatically compensates for drift in the X-ray
system, detectors or other electronic components, which ensures long-term
measurement stability.
We have invested substantial resources in developing operating and
applications software for our systems. The software includes calibration
software, automated scan and analysis programs for each scan site, and a patient
data base manager that archives all raw data for later retrieval and analysis
and allows the operator to review the current image with an earlier image of the
same patient.
In November 1999, we introduced our Delphi QDR Series bone densitometer.
The Delphi offers physicians the ability to simultaneously assess two of the
strongest risk factors for osteoporotic fracture: existing fractures of the
spine and low bone density. Using high-resolution fan beam X-ray imaging
technology, Delphi's IVA technology enables clinicians to perform a rapid, low-
dose evaluation of the spine in a single office visit during a routine bone
densitometry exam. The high-resolution, single-energy images obtained with IVA
visually reveal spinal fractures, which substantially increase the risk of
future fracture, and thereby affect a clinician's therapeutic decisions. Prior
to the introduction of Delphi, spine fractures were rarely evaluated in clinical
osteoporosis assessment, primarily due to the inconvenience and high radiation
dose associated with obtaining conventional X-ray films. Delphi with IVA
provides a simple, point of care tool for vertebral assessment, with only 1% of
the radiation dose of standard radiographic assessment. The combination of bone
mineral density assessment and spine fracture assessment improves the
clinician's ability to accurately target therapy to those who can benefit most.
In March 2000, we began commercial shipments of Delphi.
In addition to instant vertebral assessment, our Delphi series of bone
densitometers offers rapid scanning and high-resolution imaging using our latest
fan beam and high density, solid-state multi-detector array technology. These
systems are built in modular configurations that allow customers to add new
features and capabilities, while protecting their investment in the equipment
and patient data. During fiscal 2000, two systems from the Delphi series were
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available: the Delphi C and Delphi W. At the November 2000 annual meeting of the
Radiological Society of North America, we introduced the more advanced Delphi SL
and Delphi A systems.
We also continue to offer our customers four versions of the ACCLAIM QDR
Series bone densitometer: the QDR 4500A; the QDR 4500SL; the QDR 4500W; and the
QDR 4500C. As with the Delphi, these systems are built in modular configurations
that allow customers to add new features and capabilities. These systems do not
offer the instant vertebral assessment capability offered by the Delphi systems.
An important feature of the Delphi A and SL and ACCLAIM A and SL systems is
their ability to perform lateral, side-to-side scans of the lower spine, without
turning the patient on her side, in addition to back-to-front measurements. The
Delphi and ACCLAIM A and SL systems are capable of producing high quality images
of the spine, lateral spine, hip and other skeletal sites. The scan arm allows
for multiple scan views without patient repositioning. The images produced can
be combined with capabilities that enable the dimensions of the spine to be
determined. By using either of the A or SL Delphi and ACCLAIM systems, high-
quality lateral images of the entire spine can be obtained in as little as ten
seconds.
Our QDR 4000 pencil beam bone densitometer combines the reliability and
economy of our DXA bone densitometers with a unique package of value-added
applications that provide physicians with bone density measurements of the hip,
spine and forearm. The QDR 4000 is targeted at the price-sensitive segment of
the market.
Ultrasound. In addition to our QDR X-ray bone densitometers, we have
developed and sell an enhanced dry ultrasound bone analyzer, called Sahara, that
assesses the bone density of the heel. Clinical trials of ultrasound systems
have indicated a significant association of low ultrasonic bone measurements of
the heel and the risk of fracture. At the time of our introduction of the
Sahara, other ultrasound bone analyzers required the patient to place her foot
in water. The use of water requires cumbersome plumbing and cleaning mechanisms
to be incorporated into the system; our dry Sahara avoids the need for these
mechanisms. Advantages of ultrasound examination are the complete absence of
radiation and the small size and low cost of the equipment. In addition, since
ultrasound devices do not use X-rays in making their measurements, they do not
require X-ray licensing or registered operators. However, because ultrasound
bone measurements currently are not as precise as X-ray and other measurements,
they are less reliable for continued monitoring of small changes in bone density
or for assessing the response to therapies. In addition, they are generally
limited to measurements at peripheral sites, not the more important spine or hip
fracture sites. We believe that our Sahara ultrasound system represents a
relatively low cost, compact, easy-to-use, non-ionizing measurement technique to
assist in the initial diagnosis of osteoporosis.
Mammography and Other Breast Cancer Detection Products
Overview
According to the American Cancer Society, breast cancer is the second most
common cancer among women, and an estimated 192,000 new invasive cases of breast
cancer are expected to occur among women in the United States during 2001.
Breast cancer ranks as the second leading cause of cancer-related deaths among
women, causing an estimated 40,000 deaths in 2001. A leading industry analyst
estimates that the mammography imaging equipment market was approximately $293
million in 1999 and expects that it may grow to $567 million by 2007. When we
acquired the U.S. assets of Trex Medical in September 2000, we immediately
gained a significant market share in the mammography and breast biopsy systems
market and a leading market share in the high-end segment of the mammography
systems market in which we primarily compete. In fiscal 2001 we shipped 585
mammography systems worldwide.
Products
Our Lorad division offers a broad product line of breast imaging products,
including a range of mammography systems and breast biopsy systems. Currently
our highest-end Lorad system, the M-IV, is considered a technology leader
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in the mammography marketplace. The M-IV incorporates our High Transmission
Cellular Imaging System, HTC, recognized by Frost & Sullivan in connection with
Lorad's receipt of the 2001 Frost & Sullivan Technology Innovation Award, as one
of the most effective contrast improvements in 20 years of breast imaging. The
patented HTC technology reduces X-ray scatter in two dimensions, delivering
superior contrast and resolution without an increase in radiation dose. Our mid-
tier system, the Lorad Elite, can also be configured with our HTC technology. In
addition, we recently received marketing clearance from the FDA for our Lorad
Affinity mammography system, which is a high-performance screen-film mammography
system specifically developed to fill a market need for a cost-effective
product, with performance characteristics similar to high-end systems. We expect
to begin full commercial production of these systems in the first fiscal
quarter of 2002.
We also offer two minimally invasive breast biopsy systems. These systems
provide an alternative to open surgical biopsy, which is generally performed
under general anesthesia. Minimally invasive biopsies are most often performed
on an outpatient basis under local anesthesia and are less expensive than open
surgery. The following is a more detailed description of the products sold by
our Lorad Division.
Mammography Systems
. Lorad M-IV. The Lorad M-IV was introduced in 1996. Since that
introduction, more than 2,400 units have been sold. Features of the
Lorad M-IV include a bi-angular X-ray tube, dual filter capability, auto
filter mode, three-cell AEC sensor and high image quality. Image quality
can be further improved through an HTC Imaging Systems option. Other
features of the Lorad M-IV include improved patient management through
streamlined patient scheduling, integrated auto film identification,
optional bar code reader, and connectivity through a radiology
information systems interface. The Lorad M-IV has also been designed to
be upgradable to our direct-to-digital full field digital mammography
system, currently under development.
. Lorad Elite. The Lorad Elite was introduced in June 1998. The Lorad
Elite is designed to combine quality with value. The product provides
high image quality through bi-angular X-ray tube technology and the use
of our HTC system. The unit offers high reliability, high throughput,
cost-effective ownership and upgradabilty. In combination with the Lorad
StereoLoc II, the Lorad Elite provides both screening and diagnostic
capabilities.
. Lorad Affinity. We received FDA marketing clearance for the Lorad
Affinity in October 2001. The Lorad Affinity is a screen-film
mammography system developed to fill a market need for a cost-effective,
high performance mammography product. The Affinity can be used with
other Lorad innovations to improve mammographic image quality, including
our HTC technology and our Fully Automatic Self-adjusting Tilt
(F.A.S.T.) compression paddle.
Breast Biopsy Systems
We provide clinicians with the flexibility of choosing from either upright
or prone systems for breast biopsy. Our minimally invasive breast biopsy
systems provide an alternative to open surgical biopsy, which is generally
performed under general anesthesia. Minimally invasive biopsies are typically
done on an outpatient basis under local anesthesia and are less expensive than
open surgery.
We offer the StereoLoc II upright biopsy system, which is used in
conjunction with our mammography systems. In addition, for physicians that
perform a significant number of biopsies, we offer a dedicated, prone biopsy
system called the Lorad MultiCare Breast Biopsy System (formerly called the
StereoGuide). This system is used with our digital "spot" mammography system,
which enables a doctor to position the sampling device at the site of the
suspicious lesion. When performing a biopsy with any of our systems, a doctor
has a choice of tissue-sampling devices, which are not manufactured by us.
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Direct-to-Digital Imaging Products
Overview
We have made a strategic commitment to digital radiography. We believe that
the advantages of digital radiography over conventional film technology create a
market with significant growth potential in general and in our core mammography
systems market in particular. Digital image capture offers speed, eliminates
film storage issues and provides for almost instantaneous image preview,
modification and re-take when required. Diagnostic images captured in an
outpatient setting can be delivered electronically for interpretation throughout
a provider's computer network and can enable hospitals to share patient data and
allow radiologists to confer more easily regarding diagnoses. In spite of their
high acquisition cost, we believe that digital radiography systems are cost
effective in the long-term when considering increased throughput, savings in
film-related expenses, image storage and transfer costs as well as the benefits
of enhanced diagnostic convenience.
We believe that a significant factor in the market's acceptance of digital
technology is the current transition within the healthcare industry from
conventional X-ray film archiving to Picture, Archive and Communication Systems,
known as PACS, to store X-ray images electronically. We believe that only a
limited number of hospitals have adopted the PACS environment to date. We
expect this adoption rate to accelerate over the next several years as hospitals
realize the value and cost savings of a filmless infrastructure. Industry
analysts estimate that the worldwide replacement market for installed X-ray
units is approximately 11,000 systems per year, and, while not all facilities in
which X-ray units are installed will migrate to digital technology, we believe
many large facilities will, particularly those in the U.S. where PACS is an
important initiative.
According to an industry analyst, in 2000 there were approximately 300,000
general radiographic X-ray units installed worldwide. Although the market for
general radiography products is mature, we expect the market for digital X-ray
systems to grow substantially over the next several years. By 2005, a leading
industry analyst projects that the market for digital radiography products will
reach $1.0 billion annually.
Digital radiography can be implemented with a number of technologies,
involving the direct or indirect conversion of X-ray energy captured by a
detector into electronic signals. The different digital technologies are
principally differentiated by their image resolution, X-ray dosage requirement,
cost and field of view. First-generation digital radiography systems use
indirect-conversion detectors where the X-ray energy is first converted into
light, through the use of a fluorescent screen or other device, and then into
electronic signals. Second-generation systems utilize a direct conversion method
wherein the X-rays are absorbed and the electric signals are created in one
step. We believe that amorphous selenium is currently the only commercially
available direct conversion technology.
Selenium is particularly well-suited for high-quality digital imaging
because it has high X-ray absorption efficiency, very high intrinsic resolution
and low noise. We believe that amorphous selenium technology results in the
highest quality digital image across a wide range of general radiographic
applications and is particularly valuable for mammography which has high
resolution requirements.
We have developed two digital technologies. Our first-generation digital
technology, developed by Lorad, is an indirect conversion technology involving
charged coupled devices, or CCDs, to detect the light emitted by a fluorescent
screen. Our second-generation digital technology is DirectRay, developed by DRC,
which is a selenium-based direct-conversion technology. While we have no
exclusivity on the use of amorphous selenium in detector plates, we hold 34
patents related to our DirectRay technology, and we believe that our amorphous
selenium development efforts are the most advanced in the industry. As the only
commercially available, FDA-cleared, direct-conversion selenium detector, we
believe that our DirectRay technology has the potential to gain industry
acceptance as a standard for direct-to-digital conversion technology.
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Products
We currently offer the DirectRay digital technology in several forms for
general radiographic applications, including as fully integrated radiographic
systems, such as our EPEX and RADEX systems and our Digital Chest imaging
systems, as an image capture upgrade to existing X-ray equipment, and as a
digital component for OEMs to incorporate into their own equipment. As of the
close of our fourth quarter of 2001, we had a record backlog of 26 systems, or
greater than $8.0 million, due to increasing orders for our EPEX, RADEX and
Digital Chest imaging systems. We supply our amorphous selenium flat panels to
Agfa Corporation for non-destructive imaging applications as well as to Analogic
Corporation, which incorporates our panels into systems, which it supplies to
Eastman Kodak.
Integrated Products. Our Direct Radiography integrated product line offers
high quality imaging, ease-of-use, a full range of motion for easy patient
positioning in multiple planes, and full DICOM compliance, which is the standard
protocol for communicating with a hospital's Picture, Archive and Communication
Systems.
. EPEX and RADEX. We have developed two integrated direct-to-digital
general radiography systems. The EPEX system is a high-end system that
permits a full range of general radiography examinations. The RADEX
system is a simpler general radiography system designed with need for
flexibility as required by outpatient departments. Commercial shipments
of the RADEX began in May 2000 and shipments of the EPEX began in July
2000.
. DR1000C. The DR1000C is a dedicated chest radiography system. The system
is configured to provide a wide range of vertical motion, allowing
upright chest radiography of most patients, ranging from a small child
to a large adult.
. Inverse Topography. Inverse Topography is a software application that we
introduced at the annual meeting of the Radiological Society of North
America in November 2000. This application capitalizes on the dynamic
range of the digital detector and enables our direct radiography
products to enhance the appearance of soft tissue and bone in one image
display.
Digital Upgrade Products. Our Digital Upgrade products offer customers an
option to convert existing conventional film-based X-ray equipment to DirectRay
technology. This customized offering includes a replacement bucky assembly
specifically designed for the DirectRay detector, and related control equipment.
This product is installed in place of the existing bucky mechanism in the
examination table, enabling the conversion to a direct-to-digital system. This
upgrade opportunity varies depending on the different specifications on the wide
variety of X-ray systems installed worldwide. This upgrade is currently
available for some of General Electric Medical System's conventional X-ray
systems.
OEM Products. We offer our DirectRay panel for sale to select original
equipment manufacturers that desire to incorporate direct-to-digital technology
into their product offerings. Our current OEM customers include Agfa, Analogic
(a supplier to Eastman Kodak) and E-Com Technology.
Digital Mammography Products under Development
We expect digital technology to bring particularly important benefits to
mammography. In addition to speed and convenience, digital technology and high-
resolution detector plates have the potential for greater image accuracy than
conventional films, a critical factor in mammography. While digital mammography
systems are presently several times more expensive than conventional systems, we
believe they can provide long-term savings as they eliminate the recurring film
costs and reduce the cost of image manipulation.
We have pursued digital mammography with both our CCD-based and our
DirectRay technologies. In October 2001, we received an approvable letter from
the FDA for our Lorad Full Field Digital Mammography system. The Lorad Full
Field Digital Mammography system utilizes our first-generation CCD-based
technology. Final marketing clearance
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for the Lorad Full Field Digital Mammography System is subject to labeling
discussions, the agreement on criteria on the use of the product and successful
completion of a Good Manufacturing Practices audit by the FDA of our
manufacturing facilities in Bedford, Massachusetts and Danbury, Connecticut. We
are also in the advanced stages of development of a second-generation digital
mammography system that incorporates our proprietary amorphous selenium
DirectRay direct-to-digital technology. This system will require regulatory
review by the FDA. We are currently collecting clinical data for this system as
part of a premarket approval application which we expect to submit to the FDA in
the first half of 2002. To our knowledge, as of the date of this report, no
other company has filed a premarket approval application for a direct-to-digital
mammography system. We believe our DirectRay technology to be superior to
currently available technologies and expect that the experience gained through
our CCD development will enhance our ability to transition to the selenium
technology and to gain FDA approval for use of DirectRay in mammography.
We expect that our DirectRay direct-to-digital mammography product line
under development, if and when approved by the FDA, will position us to expand
our share of the mammography market. With the improved imaging of our direct-
to-digital amorphous selenium technology, we believe our Lorad mammography
systems will offer women one of the most advanced tools available for early
detection of breast cancer.
General Electric Medical Systems and Fischer Imaging received FDA approval
to commercialize their own indirect conversion digital mammography systems in
January 2000 and September 2001, respectively. In the short time since these
systems became available, we believe that approximately 250 full field digital
mammography systems have been installed worldwide. We believe that growth of the
digital mammography market will accelerate as product offerings improve image
quality over existing systems. We believe that, when and if approved, our
DirectRay product line could be the first direct-to-digital FDA approved
mammography system. We believe that it will provide excellent image quality,
offering women one of the most advanced tools available for early detection of
breast cancer, and therefore will receive market acceptance. We intend to offer
DirectRay to our existing customer base through upgrades or replacement systems.
We estimate that we have sold over 9,500 mammography systems worldwide. We will
also seek to expand our market beyond our historic customer base with expansion
of our sales force or co-distribution arrangements.
We recently entered into a letter of intent with Siemens AG to enter into a
strategic alliance focused on the development of direct-to-digital mammography
systems. Through this alliance we intend to combine our proprietary amorphous
selenium direct-to-digital technology with Siemens' proprietary software for a
dedicated physician's workstation to bring to market direct-to-digital
mammography systems. The launch of this strategic alliance is subject to several
conditions, including the negotiation and execution of definitive agreements,
which we expect will occur over the next several months. We cannot assure that
any definitive agreement with Siemens will be reached.
Mini C-arm Imaging Products
Overview
We manufacture and distribute the Fluoroscan Imaging System, a low
intensity, real-time mini c-arm X-ray imaging device which provides high
resolution images at radiation levels and at a cost well below those of
conventional X-ray and fluoroscopic equipment. These mini c-arm systems are used
primarily by orthopedic surgeons to perform minimally invasive surgical
procedures on a patient's extremities, such as the hand, wrist, knee, foot and
ankle.
Products
Premier. We introduced the Premier mini c-arm system in August 1998. The
Premier's .045 mm focal spot X-ray tube, currently the smallest in the mini c-
arm industry, provides clear resolution and detailed images on a six-inch field
of view. The Premier's mini c-arm is designed to rotate 360 degrees easily. The
Premier also features dual video channels that allow a surgeon to display
different views of the anatomy for side-by-side comparison; four image buffer
memories for instant recall of previous images; and built-in video and Ethernet
connections that allow the user to output
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images to a printer or workstation, send to or receive from remote work
stations, or record, review and archive images using existing Windows NT or
hospital PACS.
We believe that the combination of advanced technical features and ease-of-
use has made the Premier attractive to hospitals, surgery centers, orthopedic
group practices and private physician offices.
OfficeMate. We introduced the OfficeMate imaging system in fiscal 1997.
This system was designed specifically to meet the needs of the physician office.
The OfficeMate features efficient, user-friendly operation, high resolution
real-time and freeze frame images, and the choice of three or four inch field-
of-view. Due to its compact size and portability, we believe the OfficeMate is
well suited for the in-office extremity imaging requirements of hand and
orthopedic surgeons.
Conventional General Radiography Products
On November 13, 2001 we announced that we are closing our conventional X-
ray equipment manufacturing facility in Littleton, Massachusetts, and that we
will relocate some of the Littleton product lines and sales and service support
personnel to our corporate headquarters in Bedford, Massachusetts. This
consolidation is a part of our previously announced plan to phase-out non-core
and unprofitable product lines. In addition to continuing to provide sales and
service for our discontinued product lines, we intend to continue to manufacture
and supply the following general radiography products:
. Omniflex, a ceiling mounted X-ray tube support system
. Digital Chest Tube Stand, a floor mounted X-ray tube support system for
dedicated chest X-ray rooms
Marketing and Sales
Recently, we have restructured our sales channels, which included the
addition of centralized sales management for all of our businesses. We believe
that this restructuring positions us to capitalize on our well-developed
distribution network including Trex Medical's distribution channels, which we
have integrated with our own. In addition, because some of our biggest
competitors do not sell their products through distributors, we believe that we
have one of the broadest and most attractive product lines for distributors in
the diagnostic and imaging systems market. We believe that our bone
densitometry and mammography systems are particularly attractive to distributors
because they often represent the high-end of the medical imaging marketplace
and, consequently, often enjoy premium-pricing consideration. Physician Sales &
Service, Inc. and its affiliates, our largest distributor network in the United
States, accounted for approximately 20% of our product sales for fiscal 2001.
We have also recently entered into a number of agreements which have
strengthened the sales and distribution channels for our core product lines in
the United States, as follows:
. We entered into a non-exclusive distribution agreement with Siemens
Medical Solutions, a unit of Siemens AG, for the sale of our X-ray bone
densitometers throughout the United States. Siemens is a global leader
in medical imaging technologies. With the Siemens relationship, we hope
to increase sales of our bone densitometry line to the Siemens customer
base and increase our presence in the hospital market.
. We entered into an agreement with Ethicon Endo-Surgery for non-exclusive
distribution rights in the United States to Ethicon's minimally invasive
breast biopsy device, the Mammotome ST, for purchase with Lorad's
MultiCare and StereoLoc II stereotactic breast biopsy systems.
. We expanded our relationships with group purchasing organizations with
contracts entered into during or after the fourth quarter of fiscal 2001
as follows:
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. We entered into an exclusive two-year contract, with options to
renew for an additional two years, with Broadlane Inc., a leader in
providing supply chain management services to the healthcare
industry, for the sale of Lorad mammography systems. Broadlane
customers include leading healthcare providers such as Kaiser
Permanente, Tenet Healthcare Corporation and Universal Health
Services.
. We have extended our existing agreement with HealthTrust Purchasing
Group for the sale of Lorad mammography systems.
. We entered into a three year agreement with Novation for purchase
and sale of our digital radiographic systems. The agreement takes
effect January 15, 2002. The agreement covers our EPEX and RADEX
direct-to-digital systems for general radiographic applications, and
also designates us as one of only two providers of digital chest X-
ray systems.
We complement our U.S. distribution channel with a direct sales force,
which as of November 30, 2001 was comprised of over 40 people. In addition, we
have two national account managers focused on obtaining purchasing contracts
from large purchasing entities, such as managed care organizations and
government healthcare facilities. The rise of these large purchasing
organizations has significantly altered the way we organize ourselves. We
believe that our success in capturing managed care accounts will have a
significant impact on our growth. We currently believe that we have made
excellent progress penetrating these key accounts as evidenced by contracts
obtained from Consorta, Catholic Resource Partners, Broadlane, Heath Trust
Purchasing Group, Novation and the U.S. Department of Veterans Affairs.
We sell our systems in international markets through a network of
independent distributors, as well as a direct sales force in the Benelux
countries. In addition to the restructuring of our domestic sales channel, we
have recently restructured our operations in Europe. Since the end of fiscal
2001, we entered into strategic alliances, which include exclusive distribution
rights, with Stephanix, one of the leading French manufacturers of medical X-ray
equipment, and Radiologia, S.A., the oldest X-ray equipment manufacturer in
Spain, for sales of our product lines in France, Spain and Portugal. We offer
our broad range of products in Latin America, including Argentina, Brazil and
Chile, and into Pacific Rim countries, including Japan, Australia, The Peoples
Republic of China, South Korea and Taiwan, by working with local sales
representatives and distributors or entering into strategic marketing alliances
in those territories. In fiscal 1999, 2000 and 2001, foreign sales accounted for
approximately 37%, 33% and 28% of our product sales, respectively. See Note 11
of Notes to Consolidated Financial Statements for geographical information
concerning those sales.
Competition
The healthcare industry in general, and the market for imaging and bone
assessment products in particular, is highly competitive and characterized by
continual change and improvement in technology, and multiple technologies that
have been or are under development. A number of companies have developed, or are
expected to develop, products that compete or will compete with our products.
Many of these competitors offer a range of products in areas other than those in
which we compete, which may make such competitors more attractive to hospitals,
radiology clients, general purchasing organizations and other potential
customers. In addition, many of our competitors and potential competitors are
larger and have greater financial resources than we do and offer a range of
products broader than our products. Some of the companies with which we now
compete or may compete in the future have or may have more extensive research,
marketing and manufacturing capabilities and significantly greater technical and
personnel resources than we do, and may be better positioned to continue to
improve their technology in order to compete in an evolving industry. Some of
the companies in this industry that have significantly greater resources and
product breadth than we do include General Electric Medical Systems (GE),
Siemens, Philips and Toshiba. Competitors may develop superior products or
products of similar quality for sale at the same or lower prices. Moreover, our
products could be rendered obsolete by new industry standards or changing
technology. We cannot assure that we will be able to compete successfully with
existing or new competitors.
The primary competitor for our bone assessment products is GE, which
manufactures a competing line of dual-energy X-ray and other bone assessment
products to measure bone density of the hip and spine. Other companies have
developed
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competing products as well, including lower priced X-ray based and other systems
that assess bone status of peripheral sites, such as the heel, hand or wrist. We
believe that competition in the field of dual-energy X-ray bone densitometry is
based upon product versatility and features, price, precision, speed of
measurement, reputation, cost and ease of operation, product reliability and
quality of service. While we are generally not the lowest cost provider of dual-
energy X-ray systems, we believe that we have been able to compete effectively
because of our advanced technology and product features. We offer our Sahara
ultrasound bone analyzer for the more price sensitive segment of the bone
assessment market. We believe that competition in the field of ultrasound
systems is based on price, precision, speed of measurement, cost and ease of
operation, reputation, product reliability and quality of service. We believe
that advantages of our Sahara ultrasound bone analyzer system include the
system's dry operation, simple single-button operation, and a compact and self-
contained design that does not require the use of a separate computer. We
believe that ultrasound systems also compete with dual-energy X-ray systems in
the diagnostic market for initial screening of patients. However, we believe
that because ultrasound systems can only measure peripheral skeletal sites and
do not have the precision of dual-energy X-ray systems, dual-energy X-ray
systems will continue to be the predominant means of monitoring bone density for
patients being treated for or at high risk for osteoporosis.
Our direct-to-digital imaging products compete with traditional X-ray
systems as well as indirect-conversion systems, such as computed radiography
systems, which are less expensive than our products. Many of these competitors
have established relationships with hospitals and other of our potential
customers in our targeted markets. The larger competitors in these markets
include GE, Siemens, Kodak, Canon and Varian. GE and Kodak have received FDA
clearance to market a digital general radiography X-ray system. The Kodak system
currently incorporates our DirectRay detector. We have only recently introduced
our direct-to-digital imaging products, and have had only limited sales of these
products. As a result, the markets for these products are unproven. There is a
significant installed base of conventional X-ray imaging products in hospitals
and radiological practices. The use of our direct-to-digital X-ray imaging
products would require these potential customers to either modify or replace
their existing X-ray imaging equipment. Because of the early stage of the
markets for these products, it is likely that our evaluation of the potential
markets for these products will materially vary with time. We cannot assure that
any significant market will develop for our direct-to-digital imaging products.
Our mammography systems compete with products offered by a number of
competitors, including GE, Siemens, Instrumentarium and Fischer Imaging. GE and
Fischer Imaging received FDA approval to commercialize their own indirect
conversion digital mammography systems in January 2000 and September 2001,
respectively. While we offer a broad product line of breast imaging products,
we compete most effectively in the high-end segment of the mammography market.
We attribute this success in large part to our patented HTC technology that
enables our products incorporating that technology to deliver high contrast and
resolution. We believe that our continued success will depend upon our ability
to improve and enhance our technology, including our ability to obtain FDA
approval for our direct-to-digital mammography product currently under
development. We believe that our mammography products compete primarily on the
basis of image quality, product features, cost and ease of operation, price,
reputation, product reliability and quality of service. Our minimally invasive
breast biopsy systems compete with products offered by GE, Philips and Fischer
Imaging and with conventional surgical biopsy procedures. We believe that
competition for our mammography and breast biopsy products is based largely on
image quality, product features, product reliability and reputation as well as
price and service.
Our mini c-arm products compete directly with mini c-arms manufactured and
sold by a limited number of companies including GE and XiTec. We also compete
with manufacturers of conventional c-arm image intensifiers including Philips,
Siemens, GE, Fischer Imaging and Picker International. We believe that
competition for our mini c-arm systems is based largely on price, quality,
reputation, service and production capabilities. We believe that advantages of
our mini c-arm systems include low levels of radiation, low costs, mobility,
quality and durability.
Manufacturing
Following the closing of our Littleton facility, we will manufacture
all of our systems, other than our mammography and breast biopsy systems, at our
headquarters in Bedford, Massachusetts. We manufacture our
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mammography and breast biopsy systems at our manufacturing facilities in
Danbury, Connecticut. Manufacturing operations for our systems consist primarily
of assembly, test, burn-in and quality control. We purchase a major portion of
the parts and peripheral components for these products, and manufacture some
subsystems, such as high-voltage X-ray power supply, from raw materials. Parts
and materials for these systems are generally readily available from several
supply sources. However, we rely on one supplier for the HTC grid, an important
component for our more advanced mammography systems. In addition, several key
components of our mini c-arm systems are manufactured by only one or a small
number of suppliers, including the X-ray tube, image intensifier, video camera
and fiberoptic taper.
We manufacture our direct radiography plates at our manufacturing facility
in Newark, Delaware and our EPEX and RADEX systems at our facility in Bedford,
Massachusetts. Our manufacture of DirectRay plates consists primarily of vapor
deposition in clean rooms, assembly, test, burn-in and quality control. We rely
on one or only a limited number of suppliers for key components or subassemblies
for our plates. In particular we have only one source of supply for our
transistor plates and only one source of supply for the coating of those plates.
The supplier for the plate coating is Analogic Corporation, which is also a
customer as well as a potential competitor. The manufacture of our direct
radiography detectors is highly complex and requires precise high quality
manufacturing that is difficult to achieve. We have experienced difficulties
manufacturing these detectors. Following our recent development of an improved
design for our transistor plates, we experienced unacceptably high levels of
defects for the newly designed plates. While the manufacturer has resolved the
problem, and is now producing the plates to our satisfaction, we could again
encounter production problems with future shipments. Moreover, further changes
in design for our direct radiography detectors, including for our mammography
detectors under development, could result in other unanticipated production
problems. Our initial difficulties led to a delay in our ability to ship our new
digital radiography systems. Our manufacture of the EPEX and RADEX systems
differ from the process for manufacture of the plate, and consists primarily of
assembly, test, burn-in and quality control. Parts and materials for these
systems are generally readily available from several supply sources.
Obtaining alternative sources of supply of components or systems that are
available from only one or a limited number of suppliers could involve
significant delays and other costs, and these supplies may not be available to
us on reasonable terms, if at all.
Backlog
Our backlog as of November 30, 2001 totaled $40.5 million and as of
November 30, 2000 totaled $39.5 million. Backlog consists of purchase orders
for which a delivery schedule within the next twelve months has been specified
by the customer. Orders included in backlog may be canceled or rescheduled by
customers without significant penalty. Backlog as of any particular date should
not be relied upon as indicative of our net revenues for any future period.
Research and Development
Our research and development efforts are focused on enhancing our existing
products and developing new products. Our current emphasis is development of
digital plates, including a new mammography digital plate, the engineering and
system design of new end-use digital radiography products, and software
improvements for our existing products. This research and development includes
refining and continuing Trex Medical's research on the full field digital
mammography system. Our research and development personnel also are involved in
establishing protocols, monitoring, and interpreting and submitting test data to
the FDA and other regulatory agencies to obtain the requisite clearances and
approvals for our products. Our research and product development expenses,
without consideration of purchased in-process research and development, were
approximately $23.3 million in fiscal 2001, $17.2 million in fiscal 2000, and
$12.7 million in fiscal 1999.
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Patents and Proprietary Rights
We rely primarily on a combination of trade secrets, patents, copyright and
trademark laws, and confidentiality procedures to protect our technology. Due to
the rapid technological change that characterizes the medical device industry,
we believe that the improvement of existing products, reliance upon trade
secrets and unpatented proprietary know-how and the development of new products
are generally as important as patent protection in establishing and maintaining
a competitive advantage. Nevertheless, we have obtained patents and will
continue to make efforts to obtain patents, when available, in connection with
our product development program.
As of November 30, 2001, we have obtained 46 United States patents relating
to our densitometry technology, 34 patents relating to our direct radiography
technology, four patents relating to our mini c-arm technology, and 21 patents
relating to the Lorad mammography business which we acquired from Trex Medical.
These patents have expiration dates ranging from 2003 to 2017. In addition, we
have applied for an additional 48 U.S. patents on these technologies. Also, we
license patents from others on a variety of terms and hold approximately 57
additional U. S. patents acquired from Trex Medical relating to other matters.
We have obtained or applied for corresponding patents and patent applications
for some of our patents in selected foreign countries. Two of our ultrasound
patents, one owned and one licensed, are being challenged in connection with a
lawsuit that we brought against McCue PLC and Norland Medical Systems, its
distributor, for infringement of those patents.
In January 2000, in connection with the merger of Vivid Technologies, Inc.
with and into PerkinElmer, Inc., Vivid paid us $2.0 million for a fully-paid up
exclusive license to our existing patents and technology for the development,
manufacture and sale of X-ray screening security systems for explosives, drugs,
currency and other contraband. All other licenses and arrangements between
Vivid and us were terminated upon completion of the merger.
We had been involved in extensive patent litigation with Lunar Corporation,
which has since been acquired by GE. This litigation was settled by agreement
dated November 22, 1995. The agreement provides that neither party will engage
the other party in patent litigation for a period of ten years following the
date of the agreement, regardless of the infringement claimed and regardless of
whether the technology in question currently exists or is developed or acquired
by the other party in the future. Neither party is required to disclose to the
other any of its technology during this ten year period or otherwise.
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
connection with this arrangement, Trex Medical is continuing to defend this
lawsuit. Recently, Fischer Imaging filed a lawsuit against us in the United
States in connection with our sales of this product. We have also become aware
that Fischer Imaging may be contemplating similar action in Europe. The lawsuits
filed by Fischer in the United States seek to enjoin Trex Medical and us from
further violation of Fischer Imaging's patents, unspecified damages of up to
three times the amount found or assessed, and attorneys' fees. Trex Medical and
Thermo Electron have agreed to indemnify us, and to defend the recently filed
United States lawsuit on the same basis as the previously existing lawsuit. If
Trex Medical is unsuccessful in defending these lawsuits, we may be prohibited
from manufacturing and selling the existing prone breast biopsy system without a
license from Fischer Imaging and Fischer Imaging could be awarded significant
damages. If required, a license from Fischer Imaging to manufacture or sell the
existing prone breast biopsy system may not be available, or may not be
available on commercially reasonable terms. Moreover, if Fischer Imaging were
awarded damages, indemnification from Trex Medical and Thermo Electron, if any,
may be insufficient to cover the award. A significant award above the
indemnification amount actually received could harm our business and prospects.
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There has been substantial litigation regarding patent and other
intellectual property rights in the medical device and related industries. We
have been, and may be in the future, notified that we may be infringing
intellectual property rights possessed by other third parties. If any such
claims are asserted against us or our products, we may seek to enter into
royalty or licensing arrangements. There is a risk in these situations that no
license will be available or that a license will not be available on reasonable
terms. Alternatively, we may decide to litigate such claims or to design around
the patented technology. These actions could be costly and would divert the
efforts and attention of our management and technical personnel. As a result,
any infringement claims by third parties or other claims for indemnification by
customers resulting from infringement claims, whether or not proven to be true,
may harm our business and prospects.
Regulation
The medical devices manufactured and marketed by us are subject to
regulation by the FDA and, in many instances, by foreign governments. Under the
Federal Food, Drug and Cosmetic Act, known as the FD & C Act, manufacturers of
medical devices must comply with certain regulations governing the design,
testing, manufacturing, packaging and marketing of medical devices. Our products
are also subject to the Radiation Control for Health and Safety Act,
administered by the FDA, which imposes performance standards and record keeping,
reporting, product testing and product labeling requirements for devices using
radiation, such as X-rays.
The FDA generally must clear the commercial sale of new medical devices.
Commercial sales of our medical devices within the United States must be
preceded by either a premarket notification filing pursuant to Section 510(k) of
the FDA Act or the granting of a premarket approval. The 510(k) notification
filing must contain information that establishes that the device is
substantially equivalent to an existing device that has been continuously
marketed since May 28, 1976.
The premarket approval procedure involves a more complex and lengthy
testing and review process by the FDA than the 510(k) premarket notification
procedure and often requires at least several years to obtain. We must first
obtain an investigational device exemption, known as an IDE, for the product to
conduct extensive clinical testing of the device to obtain the necessary
clinical data for submission to the FDA. The FDA will thereafter only grant
premarket approval if, after evaluating this clinical data, it finds that the
safety and efficacy of the product has been sufficiently demonstrated. This
approval may restrict the number of devices distributed or require additional
patient follow-up for an indefinite period of time. We believe that the direct-
to-digital mammography system that our Lorad division is developing will require
the more rigorous premarket approval. We anticipate filing this submission in
the first half of 2002.
Our systems are also subject to approval by certain foreign regulatory and
safety agencies. Some of our technology, including that used in some of our
Fluoroscan Systems, is governed by the International Traffic in Arms Regulations
of the United States Department of State. As a result, the export of
Fluoroscan Systems to some countries may be limited or prohibited.
We cannot assure that the FDA or foreign regulatory agencies will give the
requisite approvals or clearances for any of our medical devices under
development on a timely basis, if at all. Moreover, after clearance is given,
these agencies can later withdraw the clearance or require us to change the
device or its manufacturing process or labeling, to supply additional proof of
its safety and effectiveness, or to recall, repair, replace or refund the cost
of the medical device, if it is shown to be hazardous or defective. The process
of obtaining clearance to market products is costly and time-consuming and can
delay the marketing and sale of our products.
As a manufacturer of medical devices, we are subject to additional FDA
regulations, including the Radiation Control for Health and Safety Act of 1968,
which specifically regulates radiation-emitting products. In addition, our
manufacturing processes and facilities are subject to continuing review by the
FDA. Most states and many other foreign countries monitor and require licensing
of X-ray devices. Federal, state and foreign regulations regarding the
manufacture and sale of medical devices are subject to future change. We cannot
predict what impact, if any, such changes might have on our business.
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Reimbursement
In the United States, the Health Care Finance Administration, known as
HCFA, establishes guidelines for the reimbursement of healthcare providers
treating Medicare and Medicaid patients. Under current HCFA guidelines, varying
reimbursement levels have been established for bone density assessment,
mammography and other imaging and diagnostic procedures performed by our
products. The actual reimbursement amounts are determined by individual state
Medicare carriers and, for non-Medicare and Medicaid patients, private insurance
carriers. There are often delays between the reimbursement approvals by HCFA
and by a state Medicare carrier and private insurance carriers. Moreover,
states as well as private insurance carriers may choose not to follow the HCFA
reimbursement guidelines. The use of our products outside the United States are
similarly affected by reimbursement policies adopted by foreign regulatory and
insurance carriers.
Employees
As of November 30, 2001, we had 780 full-time employees, including 367 in
manufacturing operations, 33 in research and development, 264 in marketing,
sales and support services, and 116 in finance and administration. In connection
with our planned closure of our Littleton manufacturing facility we are
eliminating approximately 80 employees. None of our employees are represented
by a union.
Item 2. Properties
We own and lease the real property identified below. We believe that we
have adequate space for our anticipated needs and that suitable additional space
will be available at commercially reasonable prices as needed.
Owned Real Property
We own our headquarters and manufacturing facility located in Bedford,
Massachusetts. The facility has approximately 200,000 square feet of space. We
lease approximately 40,000 square feet of the facility to three tenants, Tech
Online, Enmed, and Phonetic Systems, Inc. under leases which expire in May 2005,
July 2003, and July 2002, respectively.
In connection with the acquisition of DRC, we purchased a 168,000 square
foot research and development, manufacturing and administrative site in Newark,
Delaware at which DRC conducts its research and development and plate
manufacture. We currently occupy approximately 63,000 square feet of this
building, which houses our plate manufacturing facility, including both a class
1 and a class 2 clean room. We lease approximately 45,000 square feet of the
facility to Agfa under a lease which expires in April 2005. The remaining space
in the facility, approximately 60,000 square feet, is leased to Dade Behring
under a lease which expires in July 2010. The property is subject to a mortgage
to Foothill Capital Corporation.
In connection with the acquisition of the U.S. assets of Trex Medical, we
acquired a 62,500 square foot office and Lorad manufacturing facility in
Danbury, Connecticut. As part of the purchase price for the medical imaging
assets of Trex Medical we issued a note in the principal amount of $25 million.
This note is secured by a mortgage on the property we own in Danbury,
Connecticut and in Bedford, Massachusetts.
Leased Real Property
During our third fiscal quarter we relocated our Fluoroscan operations from
a leased facility in Northbrook, Illinois to our corporate headquarters in
Bedford, Massachusetts, and therefore, we no longer lease the Illinois facility.
We maintain a leased sales and service office in Belgium and a leased support
office in France.
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<PAGE>
In connection with our acquisition of the U.S. assets of Trex Medical, we
also acquired a lease to a 156,000 square foot office and manufacturing facility
in Littleton, Massachusetts and a lease to a 60,000 square foot office and
manufacturing facility in Danbury, Connecticut. These leases expire in May 2010
and November 2006, respectively. We have announced the closure of the Littleton
facility and have negotiated the termination of that lease, effective April
2003.
Item 3. Legal Proceedings
Fischer Imaging Corporation.
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 seeks 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 connection with this arrangement, Trex Medical
is continuing to defend this lawsuit. On November 13, 2001, Fischer Imaging
filed a lawsuit against us in the United States District Court, District of
Massachusetts. The complaint alleges that our Lorad MultiCare Stereotactic
Breast Biopsy System infringes a Fischer Imaging patent. The lawsuit seeks to
enjoin us from further violation of Fischer Imaging's patent, unspecified
damages of up to three times the amount found or assessed, and attorneys' fees.
This lawsuit is effectively an extension of the ongoing lawsuit by Fischer
Imaging against Trex Medical in the United States District Court, District of
Colorado. Trex Medical has agreed to defend this new lawsuit and provide us with
indemnification for this lawsuit as an extension of the Colorado lawsuit. We
believe, and Trex Medical has advised us that they believe, that they have
meritorious defenses to Fischer Imaging's claims.
Fleet Business Credit, LLC Settlement.
On August 9, 2001 we reached a settlement agreement with Fleet Business
Credit, LLC (Fleet), concerning rights and obligations under a Master Product
Financing Agreement entered into in September 1996. This Settlement Agreement
ends a two-year dispute relating to our Strategic Alliance Program under which
Fleet (formerly Sanwa Business Credit Corp.) acquired our bone densitometry
systems to lease to physicians on a fee-per-scan basis throughout the United
States. Prior to this settlement the matter was pending before the Chancery
Division of the Circuit Court of Cook County, Illinois.
Under the Strategic Alliance Program, which was discontinued in February
1999, we sold approximately $61 million of bone densitometers to Fleet. In mid-
1999, Fleet advised us that it had incurred substantial losses under the program
and sought to shift losses that Fleet faced to us. We filed suit in September
1999 regarding Fleet's failure to fulfill its contractual obligations, and Fleet
subsequently counter-sued us in October 1999.
The settlement agreement provides for all claims to be dismissed with
prejudice, and for us to repay Fleet $3.1 million, comprised of $1.5 million
cash and a note of $1.6 million payable in three years. In addition, we will
continue to be entitled to certain amounts collected over time from customers,
such as scan overages and excess pool deposits. These amounts will be credited
directly against the note payable.
Other Litigation.
We are the subject of additional lawsuits, none of which we believe to be
material to our business or financial condition.
18
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Item 4. Submission of Matters to a Vote of Security Holders.
None.
19
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Information. Our common stock is traded on the Nasdaq National
Market under the symbol "HOLX." The following table sets forth, for the periods
indicated, the high and low sales prices per share of our common stock, as
reported by the Nasdaq National Market.
Fiscal Year Ended September 30, 2000 High Low
First Quarter $6.75 $3.06
Second Quarter 9.81 5.69
Third Quarter 7.81 5.56
Fourth Quarter 8.88 6.88
- --------------------------------------------------------------------------------
Fiscal Year Ended September 29, 2001 High Low
First Quarter $7.06 $4.66
Second Quarter 7.19 4.00
Third Quarter 6.80 4.00
Fourth Quarter 6.60 4.62
- ------------------------------------------------------------------------------
Number of Holders. As of December 7, 2001, there were approximately 1,852
holders of record of our common stock, including multiple beneficial holders at
depositaries, banks and brokers listed as a single holder in the street name of
each respective depositary, bank or broker.
Dividend Policy. We have never declared or paid cash dividends on our
capital stock and do not plan to pay any cash dividends in the foreseeable
future. Our current policy is to retain all of our earnings to finance future
growth. In addition, our existing credit facility with Foothill Capital
Corporation prohibits us from declaring or paying any dividends.
Recent Sales of Unregistered Securities. On November 9, 2000, we granted
6,000 shares of our common stock each to four executive officers. These shares
were granted in connection with the performance of services. We did not
register these securities under the Securities Act of 1933, as amended, in
reliance upon the exemptions from registration set fourth in Sections 3(b) and
4(2) of that act, relating to offers and sales by an issuer not involving any
public offering. None of these transactions, either individually or in the
aggregate, involved a public offering.
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Item 6. Selected Financial Data.
In 1999, we acquired Direct Radiography Corp. and in 2000 we acquired the
U.S. assets of Trex Medical. The purchase accounting method under APB No. 16 was
used for both of these transactions. Included in the fiscal 2000 financial data
are acquisition related pre-tax charges of $13.3 million related to the Trex
Medical acquisition. Included in the fiscal 2001 financial data are (i) a $2.5
million reduction in expenses as a result of the settlement of the final
purchase price and reassessment of reserves from the Trex Medical acquisition,
(ii) the recognition of $2.1 million of other revenue previously deferred and a
$500,000 reduction to cost of product sales due to excess warranty reserves
related to the settlement of the litigation with Fleet Business Credit, LLC,
(iii) restructuring charges of approximately $1.0 million for severance related
expenses resulting from reductions in our workforce and (iv) a $500,000
nonrecurring charge from the relocation of the Fluoroscan mini c-arm
manufacturing facility from Illinois to Massachusetts.
<TABLE>
<CAPTION>
Fiscal Years Ended
September 27, September 26, September 25, September 30, September 29,
1997 1998 1999 2000 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Operations Data (In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales $102,781 $111,498 $ 81,737 $ 90,864 $175,908
Other revenue 3,908 4,066 2,403 2,882 2,583
-------- -------- -------- -------- --------
106,689 115,564 84,140 93,746 178,491
-------- -------- -------- -------- --------
Costs and Expenses:
Cost of product sales 47,492 55,891 50,333 63,604 116,177
Research and development 8,527 9,778 12,664 22,178 23,328
Selling and marketing 19,448 28,589 19,658 23,882 35,422
General and administrative 8,827 10,452 10,963 16,441 20,852
Nonrecurring and restructuring charges --- --- --- --- 1,518
-------- -------- -------- -------- --------
84,294 104,710 93,618 126,105 197,297
-------- -------- -------- -------- --------
Income (loss) from operations 22,395 10,854 (9,478) (32,359) (18,806)
Interest income 5,346 5,998 4,204 3,567 1,027
Interest/other expense (172) (664) (548) (227) (2,902)
-------- -------- -------- -------- --------
Income (loss) before income taxes 27,569 16,188 (5,822) (29,019) (20,681)
Provision (benefit) for income taxes 9,840 5,800 (2,075) (10,400) 169
-------- -------- -------- -------- --------
Net income (loss) $ 17,729 $ 10,388 $ (3,747) $(18,619) $(20,850)
======== ======== ======== ======== ========
Net income (loss) per common share:
Basic $ 1.37 $ .78 $ (.27) $ (1.22) $ (1.35)
======== ======== ======== ======== ========
Diluted $ 1.30 $ .75 $ (.27) $ (1.22) $ (1.35)
======== ======== ======== ======== ========
Weighted average number of common shares outstanding:
Basic 12,986 13,259 13,950 15,320 15,475
======== ======== ======== ======== ========
Diluted 13,672 13,766 13,950 15,320 15,475
======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet Data
Working capital $112,869 $ 99,633 $ 89,823 $ 53,022 $ 44,679
Total assets 144,667 172,597 175,770 219,655 195,119
Long-term debt --- --- --- 25,000 28,416
Total stockholders' equity 126,767 140,382 150,422 131,572 111,807
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read in conjunction with
the "Selected Consolidated Financial Data" and the Consolidated Financial
Statements included elsewhere in this report and the information described under
the caption "Risk Factors" below.
Overview
We are engaged in the development, manufacture and distribution of
proprietary X-ray, digital X-ray and other medical imaging systems. We view our
operations as four business segments: Bone Assessment products;
Mammography/General Radiography products; Digital Imaging products; and Mini
c-arm products.
Our Bone Assessment products primarily consist of dual X-ray bone
densitometry systems and, to a lesser extent, an ultrasound based bone
assessment product. Bone densitometry is the precise measurement of bone
density to assist in the diagnosis and monitoring of osteoporosis and other
metabolic bone diseases that can lead to debilitating bone fractures. Our
Mammography/General Radiography products include a broad product line of breast
imaging products, including mammography systems and breast biopsy systems, as
well as basic general radiography X-ray systems used by hospitals and clinics.
We recently announced, as set forth in further detail below, that we were
discontinuing the manufacture, but continuing the service and support, of most
of our general radiography X-ray product lines. Our Digital Imaging products
include general radiographic systems and a digital component for original
equipment manufacturers to incorporate into their own equipment. Our Mini c-arm
products are low intensity, real-time mini c-arm X-ray systems used primarily
for minimally invasive surgery on a patient's extremities.
Acquisitions, Recent Developments and Restructuring and Nonrecurring Charges
Direct Radiography Corp. Acquisition. In June 1999, we acquired Direct
Radiography Corp. and the land and buildings at which it conducted its business
for approximately $20 million. Direct Radiography Corp. was a development stage
manufacturer of digital X-ray systems for medical imaging and non-destructive
testing applications. During fiscal 2000 we introduced two new general
radiography digital systems, EPEX and RADEX. We began shipping these systems in
the second half of fiscal 2000. We also sell a digital chest system and digital
upgrade package for conventional X-ray systems. In fiscal 2000 and 2001, we
continued to invest heavily in the research and development of the digital
plates and the engineering and system design of new end-use digital radiography
products. Sales of Direct Radiography Corp. digital products and services
accounted for approximately 6% and 7% of our total revenues in fiscal 2000 and
fiscal 2001, respectively.
Trex Medical Acquisition. On September 15, 2000, we acquired the U.S.
business assets of Trex Medical in exchange for approximately $30.0 million in
cash and a note in the amount of $25.0 million. The cash portion of the
purchase price was subject to adjustment based upon the working capital of Trex
Medical as of the closing. Following the acquisition, we disagreed with Trex
Medical's calculation of its working capital as reflected on its closing balance
sheet. In accordance with the dispute resolution procedures set forth in the
purchase agreement, we and Thermo Electron Corporation, sole shareholder of Trex
Medical, jointly sought the assistance of an independent arbitrator to determine
the closing working capital.
In June 2001, the independent arbitrator determined that adjustments of
approximately $2.8 million, in addition to $119,000 of adjustments agreed to by
Thermo Electron Corporation before submission to arbitration, were required to
the closing balance sheet submitted by Trex Medical. This resulted in a payment
of approximately $932,000 to us as an adjustment to the cash portion of the
purchase price.
In addition, we finalized the plan to close the Hologic Systems Division
manufacturing facility located in Littleton, Massachusetts that we had acquired
as part of the Trex Medical acquisition. In connection with the closure of the
Littleton facility, we expect to eliminate approximately 80 employment positions
and incur a restructuring charge, primarily related to severance costs, of
approximately $1.0 million, in the first quarter of fiscal 2002. In addition, we
expect to
22
<PAGE>
incur continuing losses from our conventional general radiography business
through at least the first half of fiscal 2002, as we wind down our
manufacturing operations. Our Littleton operations reported significant losses
during fiscal 2001.
As a result of the arbitration, assessment of acquired assets and accruals
and finalization of the exit strategy for Littleton, we have assessed the
original purchase price allocation as follows:
Current assets $ 49,484
Property plant and equipment 8,098
In-process research and development 5,000
Cost in excess of net assets acquired 15,732
Liabilities assumed (23,246)
--------
$ 55,068
========
Also, as a result of the arbitration settlement, we evaluated the
components of the $2.8 million of adjustments and determined that approximately
$2.1 million of reserves and accruals provided for through charges to earnings
in the fourth quarter of fiscal 2000 should be recorded in our allocation of the
purchase price for this acquisition. Included in our results for the twelve
month period ended September 29, 2001 are expense reductions totaling $2.5
million related to the purchase price reallocation as follows:
. $1.7 million cost of product sales reduction for warranty accrual and
for performance upgrades on prior sales;
. $376,000 selling expense reduction for accrued sales commissions; and
. $428,000 general and administrative expense reduction for various
expense accruals and bad debt expense.
Fleet Business Credit, LLC Litigation Settlement. In August 2001, we
settled our two-year dispute with Fleet Business Credit, LLC relating to our
Strategic Alliance Program under which Fleet, formerly Sanwa Business Credit
Corp., acquired our bone densitometry systems to lease to physicians on a fee-
per-scan basis throughout the United States. This litigation is more fully
described under Part II, Item 1 of this report.
Under the settlement agreement, the parties dismissed their claims and
entered mutual releases. In addition, we paid Fleet $1.5 million in cash and
executed a $1.6 million unsecured note payable. The note bears interest at
Fleet's prime rate plus 1% with the full amount of principal to be paid on
August 10, 2004. We further agreed to continue to assist Fleet in remarketing
returned systems, as requested by Fleet, based on separately negotiated market
rate terms on a prepaid basis. We also continue to be entitled to benefit from
excess lease and other payments made to Fleet under the program, which will
offset amounts due under the note payable.
Under the terms of the original agreement with Fleet's predecessor, Sanwa,
we were contingently liable for a certain amount per system sold under the
agreement. We recorded the amount for which we were contingently liable as
deferred revenue. Based on the settlement, we reduced deferred revenue for the
$1.5 million cash payment and reflected $1.6 million as a long term note
payable in our consolidated balance sheet as of September 29, 2001. We have
also recognized as revenue the remaining deferred revenue amounts of $2.1
million. In addition, we reversed $500,000 of related warranty reserves, which
were no longer necessary as a result of the settlement, through a reduction of
cost of product sales, for a total positive impact on earnings relating to the
Fleet settlement of approximately $2.6 million.
Restructuring and Nonrecurring Charges. In addition to the adjustments and
charges described above, our results for the year ended September 29, 2001
include the following restructuring and nonrecurring charges:
. On August 13, 2001 we announced a restructuring plan focusing primarily on
a company-wide cost savings initiative which includes a planned reduction
of the workforce by 10%, or approximately eighty employees, and otherwise
trimming operating expenses in each of our business units. As a result of
the plan, once completed, we
23
<PAGE>
expect to realize annual cost savings of approximately $10 million. We
incurred a restructuring charge, primarily related to severance costs, of
approximately $1.0 million in fiscal 2001.
. We incurred approximately $500,000 of expenses related to the move of the
Fluoroscan mini c-arm product line to the corporate headquarters in
Bedford, Massachusetts including approximately $200,000 of moving costs,
$100,000 of severance costs, $100,000 to vacate the facility and $100,000
of other costs.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of revenues represented by items as shown in our consolidated statements of
operations.
<TABLE>
<CAPTION>
Fiscal Years Ended
-------------------------------------------------
September 25, September 30, September 29,
- -----------------------------------------------------------------------------------------------------------------------------------
1999 2000 2001
---- ---- ----
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C>
Product sales 97.1% 96.9% 98.6%
Other revenue 2.9 3.1 1.4
- -----------------------------------------------------------------------------------------------------------------------------------
100.0 100.0 100.0
- -----------------------------------------------------------------------------------------------------------------------------------
Cost and expenses:
Cost of product sales 59.8 67.8 65.1
Research and development 15.1 23.7 13.1
Selling and marketing 23.4 25.5 19.8
General and administrative 13.0 17.5 11.7
Nonrecurring and restructuring charges -- -- 0.9
- -----------------------------------------------------------------------------------------------------------------------------------
111.3 134.5 110.6
- -----------------------------------------------------------------------------------------------------------------------------------
Loss from operations (11.3) (34.5) (10.6)
Interest income 5.0 3.8 0.6
Interest/other expense (0.7) (0.2) (1.6)
- -----------------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (7.0) (30.9) (11.6)
(Benefit) provision for income taxes (2.5) (11.1) 0.1
Net loss (4.5)% (19.8)% (11.7)%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Fiscal Year Ended September 29, 2001 Compared to Fiscal Year Ended September 30,
2000
Revenues. Total revenues increased 90.4% to $178.5 million in fiscal 2001
from $93.7 million in fiscal 2000. This increase was primarily due to the
addition of revenues of $86.5 million from sales of mammography and general
radiography products acquired in connection with the Trex Medical acquisition in
September 2000.
Total revenues for our historic businesses, bone assessment, mini c-arm
imaging and digital imaging, increased 3.8% to $92.0 million in fiscal 2001 from
$88.7 million in fiscal 2000. This increase was primarily due to an increase in
the number of digital imaging products sold and an increase in service revenues.
Mini c-arm revenues remained substantially unchanged and bone assessment
revenues decreased slightly to $65.7 million in fiscal 2001 from $66.3 million
in fiscal 2000. The decrease in bone assessment revenues was primarily due to a
decrease in Sahara ultrasound product unit sales in the United States which were
partially offset by an increase in service revenues and an increase in revenues
from our sales of dual-energy X-ray bone densitometers, principally our newly
introduced Delphi product line. Total digital imaging revenues for fiscal 2001
increased 48% to $11.7 million from $7.9 million in fiscal 2000. This increase
was primarily due to an increase in the number of digital imaging systems sold,
primarily in the United States.
24
<PAGE>
Total revenues for the fourth quarter of fiscal 2001 increased 66.9% to
$45.3 million compared to the $27.1 million for the fourth quarter of fiscal
2000. This increase was primarily attributable to the addition of $15.5 million
of revenues from the Lorad mammography and conventional general radiography
businesses acquired in the Trex Medical acquisition at the end of fiscal 2000.
Total revenues for the fourth quarter of fiscal 2001 increased slightly compared
to the $44.9 million in the immediately preceding quarter. The third quarter of
fiscal 2001 revenues included $2.1 million recognized in connection with the
Fleet Business Credit, LLC settlement. Revenues generated from operations in the
third quarter of fiscal 2001, excluding this amount, were $42.8 million. The
increase in our revenues over the immediately preceding quarter, after excluding
the effect of the Fleet settlement, was primarily attributable to increased unit
sales of our bone assessment, mammography and digital radiography products.
In November 2001, we announced that we were closing our conventional X-ray
equipment manufacturing facility and relocating some product lines and our sales
and support personnel to our corporate headquarters. Approximately $27.2 million
of revenues in fiscal 2001 and $5.3 million of revenues in the fourth quarter of
fiscal 2001 related to this operation. These revenues included service revenues
of approximately $6.5 million during the year and $1.5 million in the fourth
quarter. We plan to continue to support all our products, including those that
will be discontinued.
In fiscal 2000 and 2001, other revenue consisted primarily of royalty
revenues from our licensing of technology to Vivid Technologies, Inc. for
explosives detection screening, and additional revenues generated from our
strategic alliance program on a fee-per-scan basis. In fiscal 2001, other
revenue included $2.1 million of revenue attributable to our settlement of the
Fleet Business Credit, LLC litigation. In fiscal 2000, other revenue included
the $2.0 million of royalty revenue we recognized relating to the buy-out by
Vivid Technologies, Inc. of our baggage equipment license. These revenues for
both periods were included in our bone assessment segment revenues. We do not
expect to have significant other revenue in fiscal 2002.
In fiscal 2001, approximately 72% of product sales were generated in the
United States, 14% in Europe and 14% in other international markets. In fiscal
2000, approximately 67% of product sales were generated in the United States,
21% in Europe and 12% in other international markets. We expect that foreign
sales will continue to account for a significant portion of product sales. We
believe that in fiscal 2001, our European sales were adversely affected by the
strength of the dollar in relation to the Euro and other European currencies,
which resulted in increased prices of our products denominated in those
currencies. Additionally, 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.
Cost of Product Sales. The cost of product sales decreased as a percentage
of product sales to 66% in fiscal 2001 from 70% in fiscal 2000. In fiscal 2001,
these costs were reduced by $2.2 million related to the final purchase price
adjustment of the Trex Medical acquisition and the settlement of the Fleet
Business Credit, LLC litigation. Excluding the effects of these reductions, in
fiscal 2001, cost of product sales as a percentage of product revenue would have
been 67% in fiscal 2001. Included in the cost of product sales for Lorad and the
Trex Medical general radiography products in fiscal 2000 was approximately $5.6
million of acquisition related charges. Excluding the effects of these charges,
our costs of product sales as a percentage of product sales would have been 64%
in fiscal 2000.
In fiscal 2001, improvements in margins in the bone assessment and digital
imaging businesses were offset by our increased sales of mammography and general
radiography products acquired from Trex Medical and of digital radiography
products. Margins from our digital imaging products improved in the current year
as compared to the prior year as a result of increased volume. However, margins
on these products continued to be negative reflecting the under absorption of
our manufacturing overhead, as a result of our limited sales of those products,
and inefficiencies relating to new product introduction. Our cost of product
sales as a percentage of product sales for our bone assessment, mini c-arm and
digital imaging businesses increased to 65% in fiscal 2001 from 64% in fiscal
2000. This increase was primarily due to increased manufacturing and service
costs related to digital imaging, which has significant fixed manufacturing
costs and is operating significantly below manufacturing capacity.
25
<PAGE>
Research and Development Expenses. Research and development expenses
increased 5.2% to $23.3 million, 13% of total revenues, in fiscal 2001 from
$22.2 million, 24% of total revenues, in fiscal 2000. The increase, in absolute
dollars, was primarily due to the acquisition of Trex Medical which added
approximately $4.2 million of research and development expenses in fiscal 2001.
Partially offsetting these increases was a reduction in research and development
spending primarily related to our bone densitometry products, following our
introduction of the Delphi product line. In fiscal 2001, approximately $9.8
million of our research and development expenses related to our development of
new digital radiography systems and detectors, compared to approximately $10.2
million of such expenses in fiscal 2000. In addition, in fiscal 2000, our
research and development expense included a $5.0 million charge related to
purchased in-process research and development acquired in connection with the
acquisition of the assets of Trex Medical. As part of the purchase price
allocation, all intangible assets that are a part of the acquisition were
identified and valued. It was determined that technology assets, certain
tradename and assembled workforce had value. As a result of this identification
and valuation process, we allocated approximately $5.0 million of the purchase
price to in-process research and development projects. This allocation
represented the estimated fair value based on risk-adjusted cash flows related
to the incomplete research and development projects. At the date of acquisition,
the development of these projects had not yet reached technological feasibility,
and the research and development in progress had no alternative future uses.
Accordingly, these costs were expensed as of the acquisition date. We expect to
continue our significant research and development spending in fiscal 2002.
Selling and Marketing Expenses. Selling and marketing expenses increased
48.3% to $35.4 million, 20% of product sales, in fiscal 2001 from $23.9 million,
26% of product sales, in fiscal 2000. The increase, in absolute dollars, was
primarily due to incremental selling and marketing expenses of $13.0 million
related to the mammography and general radiography products acquired from Trex
Medical in fiscal 2001, partially offset by a decrease in sales commissions in
our other businesses. The reduced sales commissions were primarily attributable
to the lower sales volume in the primary care market in the United States, where
we generally have higher commission expenses. In fiscal 2001, selling and
marketing expenses were also decreased by approximately $400,000 as a result of
the Trex Medical purchase price settlement, as compared to fiscal 2000 which
included approximately $400,000 of acquisition related charges.
General and Administrative Expenses. General and administrative expenses
increased 26.8% to $20.9 million, 12% of total revenues, in fiscal 2001 from
$16.4 million, 18% of total revenues, in fiscal 2000. The increase, in absolute
dollars, was primarily due to the addition of approximately $7.1 million of
general and administrative expenses related to the acquired Trex Medical
businesses in the current year. Fiscal 2000 results included approximately $2.2
million of general and administrative expenses relating to the acquired Trex
Medical businesses. In fiscal 2001, we had a reduction of approximately $400,000
to our general and administrative expenses relating to the Trex Medical
acquisition to reflect the arbitrated purchase price adjustment. Our increases
in general administrative expenses associated with the Trex Medical acquisition
were partially offset by a decrease in general and administrative expenses in
our historic businesses, primarily due to a reduction in payroll and payroll
related expenses and bad debt expense compared to fiscal 2000.
Restructuring and Nonrecurring Charges. Restructuring and nonrecurring
costs in fiscal 2001 were primarily the result of our ongoing efforts to
streamline operations. In fiscal 2001, as a result of a reduction in our
workforce, we incurred restructuring charges of approximately $1.0 million,
primarily related to severance related expenses. In the third quarter of fiscal
2001 we moved our Fluoroscan operations from a facility in Northbrook, Illinois
to our corporate headquarters in Bedford, Massachusetts. We incurred
approximately $500,000 of expenses in connection with this move. Longer term, we
believe that the move will result in operating efficiencies and reduced overhead
for the Fluoroscan operations. In November 2001 we announced that we are closing
our Littleton manufacturing facility acquired from Trex Medical. In connection
with the closure of that facility, we expect to eliminate approximately 80
employment positions and incur a restructuring charge, primarily related to
severance costs, of approximately $1.0 million, in the first quarter of fiscal
2002. We also expect to incur continuing losses from our conventional general
radiography business through at least the first half of fiscal 2002, as we wind
down our manufacturing operations for that business.
Interest Income. Interest income decreased to $1.0 million in fiscal 2001
from $3.6 million in fiscal 2000. This decrease was due to a lower investment
base than in the prior year, primarily due to the use of cash for the Trex
Medical
26
<PAGE>
acquisition during fiscal 2000 and our continuing investment in research and
development of our digital radiography products.
Interest/Other Expense. We incurred other expense of approximately $2.9
million in fiscal 2001 and $227,000 in fiscal 2000. In fiscal 2001, these
expenses were primarily due to interest costs of approximately $2.8 million per
year on the $25 million note payable issued in connection with the Trex Medical
acquisition. In the first quarter of fiscal 2001, these costs were partially
offset by insurance proceeds received in excess of cost related to storm damage
at Fluoroscan last year. In fiscal 2000, these expenses primarily included
foreign currency transaction losses 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 two foreign
currencies, the French Franc and the Belgian Franc, in which the subsidiaries
currently conduct business to minimize this risk, we cannot assure that we will
be successful or can fully hedge our outstanding exposure. In fiscal 2002, our
other expense will include interest expense incurred in connection with our new
lending arrangements with Foothill Capital Corporation entered into at the end
of the fourth quarter of fiscal 2001.
Provision (Benefit) for Income Taxes. In fiscal 2000, we had a benefit for
income taxes as a result of the loss during the period. We believe the related
deferred tax asset will be realizable in the future. In fiscal 2001, our
effective tax rate was impacted by our establishing a valuation allowance for
the tax benefit associated with our losses arising during that year. We
established valuation allowances in accordance with the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes," under
which we can only recognize a deferred tax asset for future benefit of our tax
losses to the extent that we determine that is "more likely than not" that this
asset will be realized. In determining the realizability of this asset, we
considered numerous factors, including historical profitability, estimated
future taxable income and the industry in which we operate.
Fiscal Year Ended September 30, 2000 Compared to Fiscal Year Ended September 25,
1999
Revenues. Total revenues increased 11.4% to $93.7 million in fiscal 2000
compared to $84.1 million in fiscal 1999. The increase in revenues was primarily
due to the addition of $5.1 million of revenues from the Lorad and Trex Medical
general radiography products acquired in September 2000, a $4.9 million increase
in revenues from sales of our digital X-ray products from Direct Radiography
Corp., an increase in the number of dual X-ray bone densitometer units sold
through our direct sales force, primarily in the United States, and increased
service revenues. The increase in revenues was partially offset by a decrease in
the number of bone densitometer product shipments to the United States primary
care market, including strategic alliance sales to a leasing company, and to a
lesser extent, a decrease in Sahara ultrasound and mini c-arm product sales.
Other revenue increased 19.9% to $2.9 million in fiscal 2000 compared to
$2.4 million in fiscal 1999. Other revenue has historically consisted primarily
of revenue relating to medical data management services provided to
pharmaceutical companies to assist in the collection and monitoring of clinical
trial data, royalty revenues from our licensing of technology to Vivid
Technologies, Inc. for explosives detection screening, and additional revenues
generated from our strategic alliance program on a fee-per-scan basis. The
increase in other revenues in fiscal 2000 was primarily the result of the sale
of a fully paid up license to Vivid Technologies, Inc. for $2.0 million in the
second quarter of fiscal 2000. This increase was partially offset by the
elimination of revenues relating to the medical data management services
division, which we sold to Synarc in June 1999.
Total revenues for the fourth quarter of fiscal 2000 increased 34.7%
compared to the $20.1 million for fourth quarter of fiscal 1999. The increase
over the immediately preceding quarter was primarily attributable to the
addition of $5.1 million of revenues from the Lorad and Trex Medical general
radiography products acquired in September 2000, increased shipments of the new
Delphi bone densitometer and, when compared to the fourth quarter of last year,
an increase in revenues from our digital radiography products. Partially
offsetting these increases was a decrease in revenues from Sahara and, to a
lesser extent, a decrease in mini c-arm revenues.
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In fiscal 2000, approximately 67% of product sales were generated in the
United States, 21% in Europe, 7% in Asia and 5% in other international markets.
In fiscal 1999, approximately 63% of product sales were generated in the United
States, 24% in Europe, 7% in Asia and 6% in other international markets.
Costs and Expenses. The cost of product sales increased as a percentage of
product sales to 70% in fiscal 2000 from 62% in fiscal 1999. These costs
increased as a percentage of product sales primarily due to the addition of
approximately $8.9 million related to Lorad and the Trex Medical general
radiography products sold in the last two weeks of fiscal 2000 and the increase
in manufacturing costs of approximately $6.1 million related to Direct
Radiography Corp., which has significant fixed manufacturing costs and was
operating significantly below manufacturing capacity. Included in the cost of
product sales for Lorad and the Trex Medical general radiography products was
approximately $5.6 million of acquisition related charges and the impact of the
fair value write-up of acquired inventory on equipment sold. Excluding Direct
Radiography Corp., Lorad and Trex Medical general radiography products, cost of
product sales as a percentage of product sales would have decreased to
approximately 58%. The low sales volume of digital imaging plates resulted in
the under absorption of fixed manufacturing costs.
Research and development expenses increased 75.1% to $22.2 million, 24% of
total revenues, in fiscal 2000 from $12.7 million, 15% of total revenues, in
fiscal 1999. This increase was primarily due to the acquisition of Direct
Radiography Corp. in June 1999 and the associated inclusion of a full year of
research and development expenses associated with our direct radiography plates
and systems in fiscal 2000. In addition, in fiscal 2000, our research and
development expense included a $5.0 million charge related to purchased in-
process research and development acquired in connection with the acquisition of
the assets of Trex Medical.
Selling and marketing expenses increased 21.5% to $23.9 million, 26% of
product revenues, in fiscal 2000 from $19.7 million, 24% of product revenues, in
fiscal 1999. The increase in selling and marketing expenses in 2000 was
primarily due to additional selling and marketing expenses of $2.7 million at
Direct Radiography Corp., and approximately $900,000 related to Trex Medical, of
which approximately $400,000 were acquisition related charges.
General and administrative expenses increased 50.0% to $16.4 million, 18%
of total revenues, in fiscal 2000 from $11.0 million, 13% of total revenues, in
fiscal 1999. The increase was primarily due to the addition of $2.2 million of
charges associated with our acquisition of Trex Medical to increase reserves to
their required levels, the addition of approximately $1.5 million of general and
administrative expenses related to Direct Radiography Corp. and, to a lesser
extent, an increase in professional service fees and employee benefit expenses.
Interest Income. Interest income decreased to $3.6 million in fiscal 2000
from $4.2 million in fiscal 1999. This decrease was primarily attributable to a
lower investment base than in the prior year, as a result of the use of cash for
the Direct Radiography Corp. acquisition and building renovations during fiscal
1999.
Other Expense. Other expense decreased to $227,000 in fiscal 2000 from
$548,000 in fiscal 1999. These expenses primarily include foreign currency
transaction losses and interest costs on a bank line of credit used by our
European subsidiaries to borrow funds in their local currencies to pay for all
intercompany sales, thereby reducing the foreign currency exposure on those
transactions.
Provision for Income Taxes. In fiscal 2000 we had a benefit for income
taxes as a result of that year's loss which we believed would be realizable in
the future. Our effective tax rate was 35.8%, which was lower than the statutory
tax rates due primarily to the favorable Federal and state tax treatment
afforded to our foreign sales corporation and the favorable state tax treatment
of a portion of our interest income.
Segment Results of Operations
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Our businesses are reported as four segments: bone assessment;
mammography/general radiography; digital imaging; and mini c-arm imaging. 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 by
segment.
Bone Assessment. Reported operating income for bone assessment was $7.4
million for fiscal 2001 compared to $88,000 in fiscal 2000. The improved
operating income for this business segment was primarily due to an improvement
in gross margins from an increased percentage of sales of the Delphi DXA system,
the $2.6 million of revenue recorded as part of the Fleet Business Credit, LLC
settlement and an overall reduction in operating expenses including the
reassignment of certain research and development personnel to our digital
imaging segment.
Mammography/General Radiography. We acquired this business segment from
Trex Medical on September 15, 2000 and therefore the fiscal year ended September
30, 2000 includes revenues and expenses from the acquired Lorad and Trex Medical
general radiography businesses for only two weeks. In addition, this fiscal 2000
two week period includes pre-tax charges of $13.3 million in connection with the
acquisition. In fiscal 2001, we recognized an operating loss of $5.6 million
from this business segment, primarily attributable to operating losses from
sales of general radiography products that was partially reduced by operating
profits from sales of our mammography products. As a result of the decision to
close our Littleton manufacturing facility, we expect to eliminate approximately
80 employees and take a restructuring charge, primarily related to severance
costs, of approximately $1.0 million, in the first quarter of fiscal 2002.
Digital Imaging. The digital imaging business operating loss increased
4.9% to $21.3 million in fiscal 2001 from $20.3 million in fiscal 2000. This
increase was primarily due to the increase of personnel and related operating
expenses for the development of new digital radiography systems and detectors,
including development of a mammography detector, a single plate general
radiography detector, and improvements to the EPEX and RADEX general radiography
systems. Through September 29, 2001, we had only limited sales of our EPEX and
RADEX systems. Total costs and expenses related to our digital imaging business
totaled approximately $33.0 million in fiscal 2001. We expect to continue to
incur significant costs and expenses in our digital imaging business for the
foreseeable future as we continue to develop and commerce our digital
radiography systems.
Mini C-Arm Imaging. The mini c-arm business reported operating income of
$683,000 for fiscal 2001 compared to operating income of $163,000 in fiscal
2000. This improvement was primarily attributable to an increase in gross
margins due to a reduction of product material and overhead costs and from an
overall reduction in operating expenses, that was partially offset by $500,000
of costs associated with moving our mini c-arm manufacturing facility from
Illinois to our corporate headquarters in Massachusetts.
Acquired In-Process Technology
We incurred in-process research and development charges totaling
approximately $5.0 million in fiscal 2000. These charges related to our
acquisition of Trex Medical. We determined these valuations giving explicit
consideration to the Securities and Exchange Commission's views on purchased in-
process research and development as set forth in its September 9, 1998 letter to
the American Institute of Certified Public Accountants SEC Regulations Committee
(the "AICPA Letter"). These valuations were further based upon appraisals
prepared by an independent appraiser experienced in evaluating in-process
research and development. A description of our valuation methodology used and a
comparison of our actual results through September 29, 2001, and assumptions
used in those valuations are set forth below.
As part of the 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. As result of this
identification
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and valuation process, we allocated approximately $5.0 million of the purchase
price to in-process research and development projects. This allocation
represented the estimated fair value based on risk-adjusted cash flows related
to the incomplete research and development projects. At the date of acquisition,
we believed that the development of these projects had not yet reached
technological feasibility and the research and development in progress had no
alternative futures uses. Accordingly, these costs were expensed as of the
acquisition date.
At the acquisition date, Trex Medical was conducting design, development,
engineering and testing activities associated with the completion of several
research and development projects related to its Mammography and General
Radiography-R/F lines of business. Mammography-related projects included
development efforts on a full field digital mammography system, Lorad M-V, the
I-650 platform to replace the Lorad Elite, and a second-generation mobile X-ray
system. Projects related to the Radiography and R/F division included the next-
generation R/F 3000i, second-generation mobile X-ray system, and the TouchView
user-interface and System HUB research and development efforts.
At the acquisition date, we estimated that the mammography technologies
under development were approximately 46% complete based on engineering man-month
data and technological progress. We estimated that the Radiography and R/F
projects in progress were approximately 60% complete. Trex Medical had spent
approximately $5.7 million on the in-process projects, and expected to spend
approximately $5.1 million to complete all phases of the research and
development. Anticipated completion dates ranged from six to 18 months, at which
times we expected to begin benefiting from the developed technologies.
In making our purchase price allocation, we considered present value
calculations of income, an analysis of project accomplishments and remaining
outstanding items, an assessment of overall contributions, as well as project
risks. The value assigned to purchased in-process technology was determined by
estimating the costs to develop the acquired technology into commercially viable
products, estimating the resulting net cash flows from the projects, and
discounting the net cash flows to their present value. The revenue projection
used to value the in-process research and development was based on estimates of
relevant market sizes and growth factors, expected trends in technology, and the
nature and expected timing of new product introductions by us and our
competitors. The resulting net cash flows from such projects were based on our
estimates of cost of sales, operating expenses, and income taxes from such
projects.
Aggregate revenues for Trex Medical technologies were estimated to grow at
a compounded annual growth rate of approximately 17% for the five years
following the acquisition, assuming the successful completion and market
acceptance of the major acquired research and development programs. The
estimated revenues for the in-process projects were expected to peak
approximately in fiscal 2006 and then decline as other new products and
technologies were expected to enter the market.
The rates utilized to discount the net cash flows to their present value
were based on estimated cost of capital calculations. Due to the nature of the
forecast and the risks associated with the developmental projects, a discount
rate of 25% was used for the in-process research and development. The discount
rate utilized was higher than our weighted average cost of capital due to the
inherent uncertainties surrounding the successful development of the purchased
in-process technology, the useful life of such technology, the profitability
levels of such technology, and the uncertainty of technological advances that
were unknown at that time.
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 September 29, 2001 our expenditures incurred and estimates to
complete our acquired in-process projects related to the Mammography business
were consistent with our initial expectations. 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
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addition, the remaining value of the other acquired intangible assets associated
with this technology may also become impaired.
Liquidity and Capital Resources
At September 29, 2001 we had approximately $44.7 million of working
capital. At that date our cash and cash equivalents totaled $12.8 million. Our
cash, cash equivalents and short-term investments balance decreased
approximately $10.0 million during fiscal 2001 primarily due to the use of cash
in operating activities. Our cash used in operating activities reflected a net
loss of $20.9 million for fiscal 2001 which included non-cash revenues of $3.0
million for the reduction in deferred revenue related to the Fleet Business
Credit, LLC settlement and $2.0 million decrease in accrued expenses as a result
of the arbitrated purchase price adjustment for the Trex Medical acquisition,
that were partially offset by non-cash charges for depreciation and amortization
of $8.7 million. Cash flow from operations due to changes in our current assets
and liabilities included a decrease in accounts receivable of $7.9 million, an
increase in accounts payable of $4.7 million and a decrease in inventories of
$2.3 million, that were partially offset by a decrease in accrued expenses of
$6.4 million and an increase of prepaid expenses and other current assets of
$2.1 million. The decrease in accounts receivable was primarily due to improved
collections at the former Trex Medical businesses. The increase in accounts
payable was primarily due to the timing of payments. The decrease in inventories
was primarily attributable to a decrease in finished goods inventory due to the
increase in product sales in the fourth quarter of fiscal 2001 compared to
fiscal 2000. The decrease in accrued expenses and the increase in prepaid
expenses and other current assets were primarily due to the timing of payments.
In fiscal 2001, we used $4.7 million of cash in investing activities. This
use of cash was primarily attributable to purchases of property and equipment of
$4.3 million, which consisted primarily of computer and information systems
equipment and building improvements, and an increase of other assets of $1.3
million. These uses were partially offset by the $932,000 we received in
connection with the settlement of the Trex Medical acquisition purchase price
adjustment.
In fiscal 2001 financing activities provided us with $4.9 million of cash.
These cash flows included $2.4 million of borrowings under our term loan with
Foothill Capital Corporation and $1.6 million of borrowings under our European
lines of credit.
As of September 29, 2001 we had short term borrowings, including the
current portion of our long term obligations, of $2.5 million and long term
notes payable totaling $28.4 million. The short term borrowings consisted of
$2.0 million borrowed under our European line of credit and $0.5 million
representing 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 $1.9 million borrowed from Foothill Capital Corporation as the
long term portion of our term loan under our credit facility, and the $1.5
million balance due on the note to Fleet Business Credit, LLC.
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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.
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
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 availability is limited to a maximum of $15.0 million until we have
received at least $10.0 million in net proceeds from the sale of our common
stock or other qualifying transaction, and may be further limited based upon
other financial covenants and formulas. Our existing availability under the
revolving line of credit facility as of September 29, 2001 was $19.5 million.
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.
In August 2001, we entered into a settlement agreement with Fleet Business
Credit, LLC relating to a dispute that arose in connection with our strategic
alliance fee-for-scan program. As part of the settlement agreement, we executed
a $1.6 million unsecured note to Fleet. The note bears interest at Fleet's
prime rate plus 1% with the full amount of principal to be paid on August 10,
2004. We continue to be entitled to benefit from excess lease and other
payments made to Fleet under the program, which will offset amounts due under
the note. As of September 29, 2001, the outstanding principal balance of the
note was reduced to $1.53 million, as a result of application of these excess
payments.
We financed some sales to Latin America over a two-to-three year time-
frame. At September 29, 2001, we had total accounts receivable outstanding of
approximately $3.3 million relating to these sales, of which approximately
$425,000 were long-term and included in other assets. As of September 29, 2001,
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
connection with this arrangement, Trex Medical is continuing to defend this
lawsuit. Recently, Fischer Imaging filed a lawsuit against us in the United
States in connection with our sales of this product. We have also become aware
that Fischer Imaging may be contemplating similar action in Europe. The lawsuits
filed by Fischer Imaging in the United States seek to enjoin Trex Medical and us
from further violation of Fischer Imaging's patents, unspecified damages of up
to three times the amount found or assessed, and attorneys' fees. Trex Medical
and Thermo Electron have agreed to indemnify us, and to defend the recently
filed United States lawsuit on the same basis as the previously existing
lawsuit. If Trex Medical is unsuccessful in defending these lawsuits, we may be
prohibited from manufacturing and selling the existing prone breast biopsy
system without a license from Fischer Imaging and Fischer Imaging could be
awarded significant damages. If required, a license from Fischer Imaging to
manufacture or sell the existing prone breast biopsy system may not be
available, or may not be available on commercially reasonable terms. Moreover,
if Fischer Imaging were awarded damages, indemnification from Trex Medical and
Thermo Electron, if any, may be insufficient to cover the award. A significant
award above the indemnification amount actually received could harm our business
and prospects.
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Except as set forth above, we do not have any significant capital
commitments. We are working on several projects, with an emphasis on direct
radiography plates and systems. We believe that we will require additional
funds in order to complete the development, conduct clinical trials and achieve
regulatory approvals of our direct radiography and other products under
development over the next several years. Moreover, we may require additional
funds for the working capital to commence the manufacture and marketing of these
new products in commercial quantities, if and when approved or cleared by the
regulatory authorities. As a result, we anticipate that we will be required to
reduce our losses and obtain additional funding to support these efforts. We
are reviewing various alternatives to obtain additional funding, including a
proposed public offering of our common stock for which a registration statement
on Form S-3 has been filed with the Securities and Exchange Commission, the sale
and lease-back of one of our owned facilities and possible strategic alliances
to help support our ongoing research and development costs. We cannot assure
that additional funds will be available through the proposed public offering, or
otherwise, on favorable terms, if at all, as more fully set forth in the risk
factors set forth below.
Recent Accounting Pronouncements
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition, was issued in
December 1999. On March 24, 2000, the SEC deferred implementation of SAB 101
until the second calendar quarter of 2000, and on June 26, 2000, implementation
was further deferred until the fourth quarter of calendar 2000. We were
required to adopt this new accounting principle through a cumulative charge to
the statement of operations, in accordance with Accounting Principles Board
Opinion No. 20, Accounting Changes, no later than the fourth quarter of fiscal
2001. The adoption of this principle did not have a material effect on our
results of operations, financial position or cash flows.
In July 2001, the FASB issued SFAS No, 141, Business Combinations. SFAS
No. 141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. This statement is effective for all
business combinations initiated after June 30, 2001.
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. We will adopt this statement early, effective the first
quarter in the fiscal year ended September 2002. Accordingly, we will reclassify
the net book value of assembled workforce to goodwill and cease amortization. We
expect this will reduce annual amortization expense by approximately $700.
Management is currently evaluating the impact that this statement will have on
our financial statements in reviewing goodwill for impairment when applying a
fair-value-based test.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement supercedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, and the accounting and reporting provisions of Accounting
Principles Board (APB) Opinion No. 30, Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions. Under this
statement it is required that one accounting model be used for long-lived assets
to be disposed of by sale, whether previously held and used or newly acquired,
and it broadens the presentation of discontinued operations to include more
disposal transactions. The provisions of this statement are effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years, with early adoption permitted.
We are currently evaluating the ultimate impact of this statement on its results
of operations or financial position until such time as its provisions are
applied.
Risk Factors
This report contains forward looking statements that involve risks and
uncertainties, such as statements of our objectives, expectations and
intentions. The cautionary statements made in this report should be read as
applicable to all forward-looking statements wherever they appear in this
report. Our actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include those
discussed below, as well as those discussed elsewhere in this report.
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We are incurring significant losses and cannot assure that we will become
profitable.
We incurred net losses of $18.6 million in fiscal 2000 and $20.9 million in
fiscal 2001. In fiscal 2000, these losses were primarily attributable to the
operations of Direct Radiography Corp. and charges incurred in connection with
our acquisition of substantially all of the U.S. assets of Trex Medical in
September 2000. Similarly, in fiscal 2001, these losses were primarily
attributable to the operations of Direct Radiography Corp. and general
radiography operations of the acquired Trex Medical businesses. Direct
Radiography Corp. has had only limited sales of its products. We intend to incur
significant expenses in connection with the further development and
commercialization of our direct radiography plates and systems. We cannot assure
that we will become profitable or that we can maintain profitability if we
attain it.
Our failure to reduce our losses or obtain additional funding could result in
the delay or limitation of our research and development activities or otherwise
harm our business and prospects.
We are working on the research and development of several long-term
projects, with an emphasis on direct radiography plates and systems. We believe
that we will require significant additional funds in order to complete the
development, conduct clinical trials and achieve regulatory approvals of our
direct radiography and other products under development over the next several
years. Moreover, we may require additional funds for the working capital to
commence the manufacture and marketing of these new products in commercial
quantities, if and when approved or cleared by the regulatory authorities. If
our capital requirements vary materially from those currently planned, we may
require additional financing sooner than anticipated. As a result, we anticipate
that we will be required to reduce our losses or obtain additional funding to
support these efforts. We will need to raise additional capital through
additional equity or debt financings, asset sales, collaborative arrangements or
from other sources. This additional financing may not be available to us on a
timely basis, if at all, or, may not be available on terms acceptable to us. If
we fail to obtain acceptable additional financing, we may be required to reduce
our planned expenditures, including our ongoing research and development
expenditures. Such a reduction could result in the delay or limitation of our
ongoing research and development projects and otherwise harm our business and
prospects. Moreover, additional equity financing may cause dilution to existing
stockholders.
If we are unable to satisfy our financial covenants under our loan agreement our
loan availability may be limited or we may have to obtain alternative sources of
financing.
Our loan agreement with Foothill Capital Corporation contains financial and
other covenants. As a result of recent events, including the 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, we were required to modify some of these covenants. Our loan
availability is also limited to a maximum of $15.0 million until we have
received at least $10.0 million in net proceeds from the sale of our common
stock or other qualifying transaction, and may be further limited based upon
other financial covenants and formulas. If we do not comply with our covenants,
our availability under our loan agreement could be reduced or our lender could
declare a default. In the event of a loan default or a substantial reduction of
loan availability, we would be required to obtain alternative financing, which
could be more expensive than our current arrangement, be dilutive to existing
stockholders and divert management's time and attention. Moreover, we cannot
assure that we would be able to obtain alternative financing on favorable terms
and on a timely basis, if at all. At September 29, 2001 we had borrowed
approximately $2.4 million under our loan agreement. Our failure to meet any of
our covenants under our loan agreement could significantly harm our liquidity
and financial position.
The markets for our direct radiography products are unproven.
In 1998, our subsidiary, Direct Radiography Corp., was the first company to
introduce direct-to-digital X-ray imaging products in the United States. Since
that introduction, Direct Radiography Corp. has had only limited sales of its
products. Moreover, the markets for these products are relatively new and remain
unproven. There is a significant
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installed base of conventional X-ray imaging products in hospitals and
radiological practices. The use of our direct-to-digital X-ray imaging products
in many cases would require these potential customers to either modify or
replace their existing X-ray imaging equipment. Moreover, we believe that a
major factor in the market's acceptance of direct-to-digital X-ray technology is
the trend toward transition by the healthcare industry from conventional film
archiving systems to hospital Picture, Archive and Communication Systems, known
as PACS, to store X-ray images electronically. Because the benefits of our
direct-to-digital technology may not be fully realized by customers until they
install a PACS platform, a large potential market for these products may not
develop until PACS environments are more widely used. Because of the early stage
of the markets for these products, it is likely that our evaluation of the
potential markets for these products will materially vary with time. We cannot
assure that any significant market will develop for our direct radiography
products.
If we fail to achieve and maintain the high manufacturing standards that our
direct radiography products require, we will not be successful in developing and
marketing those products.
The manufacture of our direct radiography detectors is highly complex and
requires precise high quality manufacturing that is difficult to achieve. We
have experienced difficulties manufacturing these detectors.
We obtain transistor plates for our direct radiography detectors from a
sole contract manufacturer. Following our recent development of an improved
design for our transistor plates, we experienced unacceptably high levels of
defects for the newly designed plates. While the manufacturer has resolved the
problem, and is now producing the plates to our satisfaction, we could again
encounter production problems with future shipments. Moreover, further changes
in design for our direct radiography detectors, including for our mammography
detectors under development, could result in other unanticipated production
problems. Our initial difficulties have led to a delay in our ability to ship
our new direct radiography systems and adversely affected our anticipated
revenues and results of operations from sales of those systems. Our failure,
including the failure of our contract manufacturers, to achieve and maintain the
required high manufacturing standards could result in further delays or failures
in product testing or delivery, cost overruns, product recalls or withdrawals,
or other problems that could harm our business and prospects.
Our success depends on new product development.
We have a continuing research and development program designed to develop
new products and to enhance and improve our products. We are expending
significant resources on the development of digital X-ray imaging products,
including a digital mammography product. The successful development of our
products and product enhancements are subject to numerous risks, both known and
unknown, including:
. unanticipated delays;
. access to capital;
. budget overruns;
. technical problems; and
. other difficulties that could result in the abandonment or substantial
change in the design, development and commercialization of these new
products, including, for example, changes requested by the FDA in
connection with pre-market approval applications for our products or
510(k) notification.
Given the uncertainties inherent with product development and introduction,
we cannot assure that any of our product development efforts will be successful
on a timely basis or within budget, if at all. Our failure to develop new
products and product enhancements on a timely basis or within budget could harm
our business and prospects.
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We are undergoing a management transition, which if not successfully implemented
could harm our business and prospects.
On June 21, 2001, S. David Ellenbogen, our co-founder, Chairman and Chief
Executive Officer, unexpectedly passed away. On July 31, 2001, our Board of
Directors named John W. Cumming, as our Chief Executive Officer, President and a
director. Mr. Cumming joined Hologic in August 2000 as Senior Vice President and
President of Lorad, one of our divisions. Steve L. Nakashige, our former
President, Chief Operating Officer and a director, left us in July 2001, and
Thomas Umbel, our former Vice President, Business Development, left us in
September 2001. In addition, Glenn P. Muir, an Executive Vice President and our
Chief Financial Officer, has also been appointed as a director. The management
transition is occurring at a challenging time, given our recent acquisitions,
ongoing development activities and losses, and involves numerous other risks and
uncertainties, including:
. the diversion of management's attention;
. the ability of continuing and new management to work together
effectively;
. the ability of new management to handle its new responsibilities and to
quickly understand and develop and successfully implement effective
strategies for the business; and
. the potential loss of key employees.
The management transition, if not successful, could harm our business and
prospects.
Our business could be harmed if our products contain undetected errors or
defects or do not meet customer specifications.
We are continuously developing new products and improving our existing
products. Newly introduced products can contain undetected errors or defects. In
addition, these products may not meet their performance specifications under all
conditions or for all applications. If, despite our internal testing and testing
by our customers, any of our products contains errors or defects or any of our
products fails to meet customer specifications, then we may be required to
enhance or improve those products or technologies. We may not be able to do so
on a timely basis, if at all, and may only be able to do so at considerable
expense. In addition, any significant reliability problems could result in
adverse customer reaction, negative publicity or legal claims and could harm our
business and prospects.
The general radiography digital market is a new market which is continuing to
develop and our new products for this market may not meet the needs of this
market as it continues to develop.
The general radiography digital market is a new market which is continuing
to develop and for which customer requirements have not been fully specified.
For example, our initial specification for the first two digital products for
general radiography, the EPEX and RADEX, did not fulfill all the needs of some
potential customers for these systems. We have addressed these additional
customer requirements through the development and release of new software for
these systems. Our introduction of our EPEX and RADEX systems has also resulted
in challenges to our direct sales force, which had only limited experience in
marketing general radiography products. We cannot assure that we will be able to
develop a successful strategy for addressing the general radiography market as
it continues to develop. Our failure to do so could harm our business and
prospects.
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Our reliance on one or only a limited number of suppliers for some key
components or subassemblies for our products could harm our business and
prospects.
We rely on one or only a limited number of suppliers for some key
components or subassemblies for our products. In particular we have only one
source of supply for each of the panel and the coating of that panel for our
direct radiography products. The supplier for the panel coating is Analogic
Corporation, which is also a customer as well as a potential competitor. In
addition we have only limited sources of supply for some key components used in
our mini c-arm systems. Obtaining alternative sources of supply of these
components could involve significant delays and other costs, and may not be
available to us on reasonable terms, if at all. The failure of a component
supplier or contract assembler to provide acceptable quality and timely
components or assembly service at an acceptable price, or an interruption of
supplies from such a supplier could harm our business and prospects. Any
disruption of supplies of key components could delay or reduce shipments which
could result in lost or deferred sales.
Our reliance on a customer for a significant portion of our revenues could harm
our business and prospects.
Physician Sales & Service, Inc. and its affiliates, known as PSS, serve as
independent distributors in the United States for many of our product lines.
These distributors owed us a total of approximately $7.0 million as of September
29, 2001 and accounted for approximately 20% of our product sales for fiscal
2001. We do not have a long term agreement with PSS obligating them to purchase
products from us. A reduction or delay in orders from PSS or a delay or default
in the payment of their accounts receivable could harm our business and
prospects.
We may not be able to compete successfully.
A number of companies have developed, or are expected to develop, products
that compete or will compete with our products. Many of these competitors offer
a range of products in areas other than those in which we compete, which may
make such competitors more attractive to hospitals, radiology clients, general
purchasing organizations and other potential customers. In addition, many of our
competitors and potential competitors are larger and have greater financial
resources than we do and offer a range of products broader than our products.
Some of the companies with which we now compete or may compete in the future
have or may have more extensive research, marketing and manufacturing
capabilities and significantly greater technical and personnel resources than we
do, and may be better positioned to continue to improve their technology in
order to compete in an evolving industry. Our failure to compete successfully
could harm our business and prospects.
The primary competitor for our bone densitometry products is General
Electric Medical Systems (GE). Our direct-to-digital imaging products compete
with traditional X-ray systems as well as computed radiography systems, which
are less expensive than our products, and other direct-to-digital systems. The
larger competitors in these markets include GE, Siemens, Kodak, Canon and
Varian. General Electric has received FDA approval to market a digital general
radiography X-ray system. Another company, Fischer Imaging, recently received
FDA marketing approval for its general radiography digital X-ray system. Our
mammography systems compete with products offered by GE, Siemens,
Instrumentarium and Fischer Imaging. Our minimally invasive breast biopsy
systems compete with products offered by Fischer Imaging and with conventional
surgical biopsy procedures. Our mini c-arm products compete directly with
mini c-arms manufactured and sold by a limited number of companies including
GE. We also compete indirectly with manufacturers of conventional c-arm image
intensifiers including Siemens and GE.
Our success depends upon our ability to adapt to rapid changes in technology and
customer requirements.
The market for our products has been characterized by rapid technological
change, frequent product introductions and evolving customer requirements. We
believe that these trends will continue into the foreseeable future. Our success
will depend, in part, upon our ability to enhance our existing products,
successfully develop new products that meet
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increasing customer requirements and gain market acceptance. If we fail to do so
our products may be rendered obsolete or uncompetitive by new industry standards
or changing technology.
We may be unable to successfully integrate the operations of our acquisitions.
We acquired the United States business of Trex Medical in September 2000
and Direct Radiography Corp. in June 1999. Both of these acquisitions involve
numerous risks generally associated with acquisitions, including:
. the diversion of management's attention;
. the assimilation of operations, personnel and products of the acquired
businesses;
. the ability to manage geographically remote units; and
. the potential loss of key employees of the acquired businesses.
We may not be able to successfully integrate the operations of Trex Medical or
Direct Radiography Corp. Failure to do so would harm our business and prospects.
Our failure to manage current or future alliances or joint ventures effectively
may harm our business and prospects.
We are exploring potential alliances, joint ventures or other business
relationships to expand our distribution channels, raise cash or share ongoing
research and development costs. As a result of these efforts we have entered
into a distribution agreement with Siemens for our bone densitometry products
and a letter of intent with respect to the research and development of digital
mammography products. Siemens is a competitor or potential competitor to us in
some of our business segments, as well as a competitor or potential competitor
to some of our customers or potential customers. Our alliance with Siemens or
any other person could enhance their business to our detriment or make it more
difficult for us to enter into advantageous business transactions or
relationships with others. Moreover, we may not be able to:
. identify appropriate candidates for alliances or joint ventures;
. assure that any alliance or joint venture candidate will provide us
with the support anticipated;
. successfully negotiate an alliance or joint venture on terms that are
advantageous to us; or
. successfully manage any alliance or joint venture.
Furthermore, any alliance or joint venture may divert management time and
resources. Our entering into a disadvantageous alliance or joint venture or
failure to manage an alliance or joint venture effectively could harm our
business and prospects.
The uncertainty of healthcare reform could harm our business and prospects.
In recent years, the healthcare industry has undergone significant change
driven by various efforts to reduce costs, including efforts at national
healthcare reform, trends toward managed care, cuts in Medicare, consolidation
of healthcare distribution companies and collective purchasing arrangements by
office-based healthcare practitioners. Healthcare reform proposals and medical
cost containment measures in the United States and in many foreign countries
could:
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. limit the use of our products;
. reduce reimbursement available for such use; or
. adversely affect the use of new therapies for which our products may be
targeted.
These reforms or cost containment measures, including the uncertainty in the
medical community regarding their nature and effect, could harm our business and
prospects and make it difficult for us to raise additional capital on
advantageous terms, if at all.
We depend on third party reimbursement to our customers for market acceptance of
our products. Failure of third party payors to provide appropriate levels of
reimbursement for use of our products could harm our business and prospects.
Sales of medical products largely depend on the reimbursement of patients'
medical expenses by government healthcare programs and private health insurers.
The costs of our products are substantial, and market acceptance of our products
depends upon our customers' ability to obtain appropriate levels of
reimbursement from third-party payors for use of our products. In the United
States, the Health Care Finance Administration, known as HCFA, establishes
guidelines for the reimbursement of healthcare providers treating Medicare and
Medicaid patients. Under current HCFA guidelines, varying reimbursement levels
have been established for dual-energy X-ray and ultrasound bone density
assessment, mammography and other imaging and diagnostic procedures performed by
our products. The actual reimbursement amounts are determined by individual
state Medicare carriers and, for non-Medicare and Medicaid patients, private
insurance carriers. There are often delays between the reimbursement approvals
by HCFA and by a state Medicare carrier and private insurance carriers.
Moreover, states as well as private insurance carriers may choose not to follow
the HCFA reimbursement guidelines. The use of our products outside the United
States is similarly affected by reimbursement policies adopted by foreign
regulatory and insurance carriers. A reduction or other adverse change in
reimbursement policies for the use of our products could harm our business and
prospects.
The future growth of our bone densitometry business depends in large part on the
continued development and more widespread acceptance of complementary therapies.
Our bone densitometers and related products are used to assist physicians
in diagnosing patients at risk for osteoporosis and other bone disorders, and to
monitor the effectiveness of therapies to treat these disorders. As a result,
the future growth of the market for these products and of this business will in
large part be dependent upon the development and more widespread acceptance of
drug therapies to prevent and to treat osteoporosis. Over the last several
years, the FDA has approved a number of drug therapies to treat osteoporosis. We
also understand that a number of other drug therapies are under development.
While sales of our bone densitometry products have benefited from the increased
availability and use of these therapies, most patients who are at risk for
osteoporosis continue to go untreated. We cannot assure that any therapies under
development or in clinical trials will prove to be effective, obtain regulatory
approval, or that any approved therapy will gain wide acceptance. Even if these
therapies gain widespread acceptance, we cannot assure that this acceptance will
increase the sales of our products.
Reductions in revenues could harm our operating results because a high
percentage of our operating expenses is relatively fixed.
A high percentage of our operating expenses is relatively fixed. We likely
will not be able to reduce spending to compensate for adverse fluctuations in
revenues. As a result, shortfalls in revenues are likely to harm our operating
results.
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Our results of operations are subject to significant quarterly variation and
seasonal fluctuation.
Our results of operations have been 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:
. the overall state of healthcare and cost containment efforts;
. the development status and demand for drug therapies to treat
osteoporosis;
. the development status and demand for our direct-to-digital imaging
products;
. economic conditions in our markets;
. foreign exchange rates;
. the timing of orders;
. the timing of expenditures in anticipation of future sales;
. the mix of products sold by us;
. the introduction of new products and product enhancements by us or our
competitors; and
. pricing and other competitive conditions.
We also believe that our sales may be somewhat seasonal, with reduced
orders in the summer months reflecting summer vacation schedules. Customers may
also cancel or reschedule shipments. Production difficulties could also delay
shipments. Any of these factors also could harm our business and prospects.
Our delay or inability to obtain any necessary United States or foreign
regulatory clearances or approvals for our products could harm our business and
prospects.
Our products are medical devices that are the subject of a high level of
regulatory oversight. Our delay or inability to obtain any necessary United
States or foreign regulatory clearances or approvals for our products could harm
our business and prospects. The process of obtaining clearances and approvals
can be costly and time-consuming. There is a risk that any approvals or
clearances, once obtained, may be withdrawn or modified. Medical devices cannot
be marketed in the United States without clearance or approval by the FDA.
Medical devices sold in the United States must also be manufactured in
compliance with FDA Good Manufacturing Practices, which regulate the design,
manufacture, packing, storage and installation of medical devices. Moreover,
medical devices are required to comply with FDA regulations relating to
investigational research and labeling. States may also regulate the manufacture,
sale and use of medical devices, particularly those that employ X-ray
technology. Our products are also subject to approval and regulation by foreign
regulatory and safety agencies.
Fluctuations in the exchange rates of European currencies and the other foreign
currencies in which we conduct our business, in relation to the U.S. dollar,
have harmed and could continue to harm our business and prospects.
Foreign sales accounted for approximately 33% of our product sales in
fiscal 2000 and 28% of our product sales in fiscal 2001. We maintain a sales and
service office in Belgium and a support office in France. The expenses and sales
of these offices are denominated in local currencies. We anticipate that foreign
sales and sales denominated in foreign
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currencies will continue to account for a significant portion of our total
sales. Fluctuations in the value of local currencies have caused, and are likely
to continue to cause, amounts translated into U.S. dollars to fluctuate in
comparison with previous periods. In particular, the strength in value of the
U.S. dollar to the Euro and other European currencies has resulted in an
increase in price for products denominated in those currencies. We believe that
these price increases have harmed our ability to compete in these markets.
Conversely, an increase in the value of the local currencies in which we have
offices would likely increase our expenses relative to U.S. dollar sales and
could also harm our operating results. We have hedged our foreign currency
exposure by borrowing funds in local European currencies to pay the expenses of
our foreign offices. There is a risk that these hedging activities will not be
successful in mitigating our foreign exchange risk exposure.
We conduct our business worldwide, which exposes us to a number of difficulties
in coordinating our international activities and dealing with multiple
regulatory environments.
We sell our products to customers throughout the world. Our worldwide
business may be harmed by:
. difficulties in staffing and managing operations in multiple locations;
. greater difficulties in trade accounts receivable collection;
. possible adverse tax consequences;
. governmental currency controls;
. changes in various regulatory requirements;
. political and economic changes and disruptions;
. export/import controls; and
. tariff regulations.
We have experienced difficulties in collecting accounts receivable in Latin
America, which as of September 29, 2001 totaled $3.3 million, including $425,000
of long-term accounts receivable included in other assets.
Our business could be harmed if we are unable to protect our proprietary
technology.
We rely primarily on a combination of trade secrets, patents, copyright and
trademark laws and confidentiality procedures to protect our technology. Despite
these precautions, unauthorized third parties may infringe, copy or reverse
engineer portions of our technology. We do not know if current or future patent
applications will be issued with the scope of the claims sought, if at all, or
whether any patents issued will be challenged or invalidated. In addition, we
have obtained or applied for corresponding patents and patent applications in
several foreign countries for some of our patents and patent applications. There
is a risk that these patent applications will not be granted or that the patent
or patent application will not provide significant protection for our products
and technology. Our competitors may independently develop similar technology
that our patents do not cover. In addition, because patent applications in the
United States are not publicly disclosed until the patent is issued,
applications may have been filed which relate to our technology. Moreover, there
is a risk that foreign intellectual property laws will not protect our
intellectual property rights to the same extent as United States intellectual
property laws. In the absence of significant patent protection, we may be
vulnerable to competitors who attempt to copy our products, processes or
technology.
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Our business could be harmed if we infringe upon the intellectual property
rights of others.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device and related industries. We
have been, and may be in the future, notified that we may be infringing
intellectual property rights possessed by third parties. If any such claims are
asserted against our intellectual property rights, we may seek to enter into
royalty or licensing arrangements. There is a risk in these situations that no
license will be available or that a license will not be available on reasonable
terms. Alternatively, we may decide to litigate such claims or to design around
the patented technology. These actions could be costly and would divert the
efforts and attention of our management and technical personnel. As a result,
any infringement claims by third parties or claims for indemnification by
customers resulting from infringement claims, whether or not proven to be true,
may harm our business and prospects.
We may be prohibited from manufacturing and selling our existing Lorad prone
breast biopsy system and be required to pay significant damages if Fischer
Imaging Corporation succeeds in its lawsuit against Trex Medical and us that
alleges that the system infringes two Fischer Imaging patents.
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
connection with this arrangement, Trex Medical is continuing to defend this
lawsuit. Recently, Fischer Imaging filed a lawsuit against us in the United
States in connection with our sales of this product. We have also become aware
that Fischer Imaging may be contemplating similar action in Europe. The lawsuits
filed by Fischer Imaging in the United States seek to enjoin Trex Medical and us
from further violation of Fischer Imaging's patents, unspecified damages of up
to three times the amount found or assessed and attorneys' fees. Trex Medical
and Thermo Electron have agreed to indemnify us, and to defend the recently
filed United States lawsuit on the same basis as the previously existing
lawsuit. If Trex Medical is unsuccessful in defending these lawsuits, we may be
prohibited from manufacturing and selling the existing prone breast biopsy
system without a license from Fischer Imaging and Fischer Imaging could be
awarded significant damages. If required, a license from Fischer Imaging to
manufacture or sell the existing prone breast biopsy system may not be available
or may not be available on commercially reasonable terms. Moreover, if Fischer
Imaging were awarded damages, indemnification from Trex Medical and Thermo
Electron, if any, may be insufficient to cover the award. A significant award
above the indemnification amount actually received could harm our business and
prospects.
Our future success will depend on the continued services of our key personnel.
The loss of any of our key personnel, particularly our key research and
development personnel, could harm our business and prospects. Our success will
also depend upon our ability to attract and retain other qualified managerial
and technical personnel. Competition for such personnel, particularly software
engineers and other technical personnel, is intense. We may not be able to
attract and retain personnel necessary for the development of our business. We
do not have any key man life insurance for any of our officers or other key
personnel.
There is a risk that our insurance will not be sufficient to protect us from
product liability claims, or that in the future product liability insurance will
not be available to us at a reasonable cost, if at all.
Our business involves the risk of product liability claims inherent to the
medical device business. We maintain product liability insurance subject to
deductibles and exclusions. There is a risk that our insurance will not be
sufficient to protect us from product liability claims, or that product
liability insurance will not be available to us at a reasonable cost, if at all.
An underinsured or uninsured claim could harm our operating results or financial
condition.
We use hazardous materials and products.
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Our research and development involves the controlled use of hazardous
materials, such as toxic and carcinogenic chemicals and various radioactive
compounds. Although we believe that our safety procedures for handling and
disposing of such materials comply with the standards prescribed by federal,
state and local regulations, we cannot completely eliminate the risk of
accidental contamination or injury from these materials. In the event of this
type of accident, we could be held liable for any resulting damages, and any
such liability could be extensive. We are also subject to substantial regulation
relating to occupational health and safety, environmental protection, hazardous
substance control, and waste management and disposal. The failure to comply with
such regulations could subject us to, among other things, fines and criminal
liability.
Provisions in our Certificate of Incorporation and By-laws and our stockholder
rights plan may have the effect of discouraging advantageous offers for our
business or common stock and limit the price that investors might be willing to
pay in the future for shares of our common stock.
Our Certificate of Incorporation, By-laws and the provisions of Delaware
corporate law include provisions that may have the effect of discouraging or
preventing a change in control. In addition, we have a stockholder rights plan
that may have the effect of discouraging or preventing a change in control.
These provisions could limit the price that our stockholders might receive in
the future for shares of our common stock.
Our stock price is volatile.
The market price of our common stock has been, and may continue to be,
highly volatile. We believe that a variety of factors could cause the price of
our common stock to fluctuate, perhaps substantially, including:
. announcements and rumors of developments related to our business, or the
industry in which we compete;
. quarterly fluctuations in our actual or anticipated operating results and
order levels;
. general conditions in the worldwide economy;
. announcements of technological innovations;
. new products or product enhancements by us or our competitors;
. developments in patents or other intellectual property rights and
litigation; and
. developments in our relationships with our customers and suppliers.
In addition, in recent years the stock market in general and the markets
for shares of small capitalization and "high-tech" companies in particular, have
experienced extreme price fluctuations which have often been unrelated to the
operating performance of affected companies. Any such fluctuations in the future
could adversely affect the market price of our common stock, and the market
price of our common stock may decline.
Item 7A. Quantitative and Qualitative Disclosures 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 European line of credit at the
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Europe Interbank Offered Rate. At September 29, 2001, our outstanding borrowings
under the line of credit were approximately $2.0 million, at a weighted average
interest rate of approximately 6.1%.
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 harm our business, results of operations or
financial condition.
Item 8. Financial Statements and Supplementary Data.
The consolidated Financial Statements and Supplementary Data of Hologic
are listed under Part IV, Item 14, in this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
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PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item is incorporated by reference to the
sections entitled "Election of Directors" and "Executive Officers" in our
Definitive Proxy Statement for our annual meeting of stockholders to be filed
with the Securities and Exchange Commission within 120 days after the close of
our fiscal year.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference to the
sections entitled "Executive Compensation" in our Definitive Proxy Statement for
our annual meeting of stockholders to be filed with the Securities and Exchange
Commission within 120 days after the close of our fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to the
section entitled "Share Ownership of Directors, Officers and Certain Beneficial
Owners" in our Definitive Proxy Statement for its annual meeting of stockholders
to be filed with the Securities and Exchange Commission within 120 days after
the close of our fiscal year.
Item 13. Certain Relationships and Related Transactions.
Prior to joining us, John Cumming, our Chief Executive Officer, President
and director, was the President and Managing Director of Health Care Markets
Group, a strategic advisory and investment banking firm which he founded in
1984. During Mr. Cumming's tenure with them, Health Care Markets Group served
as our financial advisor in connection with our acquisition of Direct
Radiography Corp. and of the U.S. assets of Trex Medical. During each of fiscal
2000 and 1999, we paid Health Care Markets Group $260,000 in advisory fees in
connection with those transactions. In addition, in connection with these
consulting activities, in June 1999, we granted Mr. Cumming a stock option to
acquire 30,000 shares of our common stock at $5.00 per share. Until recently,
Mr. Cumming held a 33% equity interest in Health Care Markets Group. He now
owns a 25% interest.
In addition, to assist Mr. Cumming in the purchase of a local primary
residence in connection with his initial relocation to Danbury, Connecticut to
take on the position of Senior Vice President and President of Lorad, we loaned
Mr. Cumming the principal amount of $300,000 pursuant to a promissory note. The
note bears interest at the rate of 7.0% per year. The principal and interest of
the note become payable each quarter commencing on January 10, 2002 until paid
in full no later than January 10, 2005. In the event that we undergo a change of
control, the balance of the note will be forgiven. In the event Mr. Cumming's
employment with us is terminated, either voluntarily or for cause, Mr. Cumming
has agreed to repay the balance of the note.
In connection with Mr. Cumming's recent move to our Massachusetts
headquarters in order to assume the position of Chief Executive Officer and
President, we loaned Mr. Cumming an additional principal amount of $200,000
which has been consolidated with the original loan into one $500,000 promissory
note on the same terms. As of the date of this report, an aggregate of $500,000
of principal on this loan remains outstanding.
Additional information required by this Item may be incorporated by
reference to the section entitled "Certain Transactions" in our Definitive Proxy
Statement for our annual meeting of stockholders to be filed with the Securities
and Exchange Commission within 120 days after the close of its fiscal year.
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements
Report of Independent Public Accountants
Consolidated Balance Sheets as of September 30, 2000
and September 29, 2001
Consolidated Statements of Operations for the years
ended September 25, 1999, September 30, 2000 and September 29, 2001
Consolidated Statements of Stockholders' Equity for the years ended
September 25, 1999, September 30, 2000 and September 29, 2001
Consolidated Statements of Cash Flows for the years ended September
25, 1999, September 30, 2000 and September 29, 2001
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
The following financial statement schedules are filed as part of
this report and should be read in conjunction with the consolidated
financial statements:
Schedule
--------
Report of Independent Public Accountants on Schedule II,
Valuation and Qualifying Accounts
All other schedules have been omitted because they are not required or
because the required information is given in the Consolidated Financial
Statements or Notes thereto.
(3) Listing of Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Reference
- ---------- ---------
<S> <C>
2.01 Securities Purchase Agreement dated April 28, 1999, as amended on June 3, 1999, by and among M-1
Hologic, Sterling Diagnostic Imaging, Inc., and SDI Investments, L.L.C.
2.02 Contract of Sale dated April 28, 1999, as amended on June 3, 1999, by and between Hologic and M-2
Glasgow Land Company, L.L.C.
2.03 Asset Purchase and Sale Agreement Among Trex Medical Systems Corporation, Trex Medical Corporation, O-2
ThermoTrex Corporation and Thermo Electron Corporation and Hologic, Inc. dated August 13, 2000
3.01 Certificate of Incorporation of Hologic A-3.01
3.02 By-laws of Hologic A-3.02
4.01 Specimen certificate for shares of Hologic's Common Stock B-1
4.02 Description of capital stock (contained in the Certificate of Incorporation of Hologic, filed as A-3.01
</TABLE>
46
<PAGE>
<TABLE>
<S> <C>
Exhibit 3.01).
4.03 Rights Agreement dated December 22, 1992 C-1
4.04 Form of Rights Certificate C-2
4.05 Amendment No. 1 to Rights Agreement, dated as of December 13, 1995 H-4.01
4.06 Amendment No. 2 to Rights Agreement, dated as of December 9, 1996 H-4.02
4.07 Amendment No. 3 to Rights Agreement, dated as of April 25, 1999 L-4.03
10.01 1986 Combination Stock Option Plan, as amended E-10.07*
10.02 Amended and Restated 1990 Non-Employee Director Stock Option Plan F-10.08*
10.03 1995 Combination Stock Option Plan F-10.10*
10.04 Amended and Restated 1999 Equity Incentive Plan K-10*
10.05 2000 Acquisition Equity Incentive Plan filed herewith
10.06 Form of Indemnification Agreement for directors and certain officers of Hologic A-10.12*
10.07 Employment Agreement with an officer of Hologic D-10.22*
10.08 Severance Agreement with an officer of Hologic P-10.08*
10.09 Severance Agreement with an officer of Hologic P-10.09*
10.10 Severance Agreement with an officer of Hologic P-10.11*
10.11 Severance Agreement with an officer of Hologic filed herewith*
10.12 Employment Letter to an officer of Hologic filed herewith*
10.13 Promissory Note to an officer of Hologic filed herewith*
10.14 Form of Officer Separation Agreement including list of officers to whom provided filed herewith*
10.15 License Agreement by and between Hologic and Vivid Technologies, Inc. A-10.18
10.16 Amendment No.1 to the License Agreement by and between Hologic and Vivid Technologies, Inc. G-10.25
10.17 Termination Agreement to the License Agreement by and between Hologic and Vivid Technologies, Inc. P-10.16
10.18 Secured Promissory Note R-10.23
10.19 Mortgage, Security Agreement and assignment of Leases and Rents (Danbury) R-10.24
10.20 Mortgage, Security Agreement and assignment of Leases and Rents (Bedford) R-10.25
10.21 Guaranty R-10.26
10.22 Supply Agreement R-10.27
10.23 Facility Lease (Littleton) Q-10.89
10.24 Facility Lease (Danbury) Q-10.14
10.25 Loan and Security Agreement filed herewith
10.26 Parent Pledge Agreement filed herewith
10.27 Guaranty and Security Agreement filed herewith
10.28 Mortgage and Security Agreement filed herewith
10.29 First Amendment to the Loan and Security Agreement filed herewith
21.01 Subsidiaries of the Company filed herewith
23.01 Consent of Arthur Andersen LLP filed herewith
</TABLE>
_________________________
* Management compensation plan or arrangement
A We previously filed this exhibit on January 24, 1990 with the referenced
exhibit number as an exhibit to our Registration Statement on Form S-1
(Registration No. 33-33128), and the previously filed exhibit is
incorporated herein by reference.
B We previously filed this exhibit on January 31, 1990 with the referenced
exhibit number as an exhibit to our Registration Statement on Form 8-A, and
the previously filed exhibit is incorporated herein by reference.
C We previously filed this exhibit on January 29, 1993 with the referenced
exhibit number as an exhibit to our Registration Statement on Form 8-A, and
the previously filed exhibit is incorporated herein by reference.
D We previously filed this exhibit on December 22, 1993 with the referenced
exhibit number as an exhibit to our 1993 Annual Report on Form 10-K (SEC
File No. 000-18281) for the fiscal year ended September 25, 1993, and the
previously filed exhibit is incorporated herein by reference.
47
<PAGE>
E We previously filed this exhibit on December 22, 1994 with the referenced
exhibit number as an exhibit to our 1994 Annual Report on Form 10-K (SEC
File No. 000-18281) for the fiscal year ended September 24, 1994, and the
previously filed exhibit is incorporated herein by reference.
F We previously filed this exhibit on December 26, 1995, with the referenced
exhibit number as an exhibit to our 1995 Annual Report on Form 10-K (SEC
File No. 000-18281) for the fiscal year ended September 30, 1995, and the
previously filed exhibit is incorporated herein by reference.
G We previously filed this exhibit on December 27, 1996 with the referenced
exhibit number as an exhibit to our 1996 Annual Report on Form 10-K (SEC
File No. 000-18281) for the fiscal year ended September 28, 1996, and the
previously filed exhibit is incorporated herein by reference.
H We previously filed this exhibit on January 17, 1997 with the referenced
exhibit number as an exhibit to our Registration Statement on Form 8-A/A,
and the previously filed exhibit is incorporated herein by reference.
I We previously filed this exhibit on August 7, 1998 with the referenced
exhibit number as an exhibit to our 1998 Third Quarter Report on Form 10-Q
(SEC File No. 000-18281) for the quarter ended June 27, 1998, and the
previously filed exhibit is incorporated herein by reference.
J We previously filed this exhibit on December 23, 1998 with the referenced
exhibit number as an exhibit to our 1998 Annual Report on Form 10-K (SEC
File No. 000-18281) for the fiscal year ended September 26, 1998, and the
previously filed exhibit is incorporated herein by reference.
K We previously filed this exhibit on May 11, 1999 with the referenced
exhibit number as an exhibit to our 1999 Second Quarter Report on Form 10-Q
(SEC File No. 000-18281) for the quarter ended March 27, 1999, and the
previously filed exhibit is incorporated herein by reference.
L We previously filed this exhibit on May 20, 1999 with the referenced
exhibit number as an exhibit to our Registration Statement on Form 8-A/A,
and the previously filed exhibit is incorporated herein by reference.
M We previously filed this exhibit on June 18, 1999 with the referenced
exhibit number as an exhibit to our Current Report on Form 8-K (SEC File
No. 000-18281) dated as of June 3, 1999, and the previously filed exhibit
is incorporated herein by reference.
N We previously filed this exhibit on October 1, 1999 with the referenced
exhibit number as an exhibit to our Current Report on Form 8-K (SEC File
No. 000-18281) dated as of September 29, 1999, and the previously filed
exhibit is incorporated herein by reference.
O We previously filed this exhibit on October 2, 2000 with the referenced
exhibit number as an exhibit to our Current Report on Form 8-K (SEC File
No. 000-18281) dated as of September 15, 2000, and the previously filed
exhibit is incorporated herein by reference.
P We previously filed this exhibit on December 23, 1999 with the referenced
exhibit number as an exhibit to our Annual Report on Form 10-K (SEC File
No. 000-18281) for the fiscal year ended September 25, 1999, and the
previously filed exhibit is incorporated by reference.
Q Trex Medical Corporation previously filed this exhibit with the referenced
exhibit number as an Exhibit to its Registration Statement on Form S-1
(Reg. No. 333-2926), and the previously filed exhibit is incorporated by
reference.
R We previously filed this exhibit on December 22, 2000 with the referenced
exhibit number as an exhibit to our Annual Report on Form 10-K (SEC File
No. 000-18281) for the fiscal year ended September 30, 2000, and the
previously filed exhibit is incorporated by reference.
48
<PAGE>
(b) Reports on Form 8-K.
The following Current Report on Form 8-K was filed by the registrant
during the last quarter of the period covered by this report:
Current Report on Form 8-K filed on August 2, 2001 regarding management
changes.
(d) Financial Statement Schedules:
The financial statement schedules required are included as part of Item
(2) above.
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HOLOGIC, INC.
By: /s/ John W. Cumming
-----------------------------------------
JOHN W. CUMMING
Chief Executive Officer and President
Dated: December 11, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John W. Cumming Director, Chief Executive December 11, 2001
- ---------------------------- Officer and President
JOHN W. CUMMING (Principal Executive Officer)
/s/ Glenn P. Muir Director, Executive Vice President December 11, 2001
- ---------------------------- Finance and Administration and
GLENN P. MUIR Treasurer (Principal Financial Officer)
/s/ Jay A. Stein Chairman of the Board and December 11, 2001
- ---------------------------- Chief Technical Officer
JAY A. STEIN
/s/ Robert H. Lavallee Controller December 11, 2001
- ---------------------------- (Principal Accounting Officer)
ROBERT H. LAVALLEE
/s/ Irwin Jacobs Director December 11, 2001
- ----------------------------
IRWIN JACOBS
/s/ William A. Peck Director December 11, 2001
- ----------------------------
WILLIAM A. PECK
/s/ Gerald Segel Director December 11, 2001
- ----------------------------
GERALD SEGEL
/s/ Elaine Ullian Director December 11, 2001
- ----------------------------
ELAINE ULLIAN
</TABLE>
50
<PAGE>
Hologic, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of September 30, 2000
and September 29, 2001 F-2
Consolidated Statements of Operations for the Years
Ended September 25, 1999, September 30, 2000 and
September 29, 2001 F-3
Consolidated Statements of Stockholders' Equity for the
Years Ended September 25, 1999, September 30, 2000
and September 29, 2001 F-4
Consolidated Statements of Cash Flows for the Years
Ended September 25, 1999, September 30, 2000 and
September 29, 2001 F-5
Notes to Consolidated Financial Statements F-6
<PAGE>
Report of Independent Public Accountants
To Hologic, Inc.:
We have audited the accompanying consolidated balance sheets of Hologic, Inc. (a
Delaware corporation) and subsidiaries as of September 30, 2000 and September
29, 2001, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended September
29, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Hologic, Inc. and subsidiaries as of September 30, 2000 and September 29, 2001,
and the results of their operations and their cash flows for each of the three
years in the period ended September 29, 2001, in conformity with accounting
principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
December 8, 2001
F-1
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
September 30, September 29,
------------------------------
2000 2001
------------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 22,778 $ 12,754
Accounts receivable, less reserves of $7,923 and $4,668, respectively 50,580 42,227
Inventories 39,706 39,285
Prepaid expenses and other current assets 3,041 5,309
-------------- --------
Total current assets 116,105 99,575
============== ========
Property and Equipment, at cost:
Land 12,203 12,203
Buildings and improvements 35,919 36,556
Equipment 21,568 23,191
Furniture and fixtures 3,918 3,678
Leasehold improvements 636 1,571
-------------- --------
74,244 77,199
Less--Accumulated depreciation and amortization 11,450 17,143
-------------- --------
62,794 60,056
-------------- --------
Intangible Assets:
Patented technology, net of accumulated amortization of $2,404 and $3,402,
respectively 4,490 3,741
Developed technology and know-how, net of accumulated amortization of $40 and $991, respectively 11,760 8,160
Assembled workforce, net of accumulated amortization of $20 and $504, respectively 2,980 1,586
Goodwill, net of accumulated amortization of $23 and $88, respectively 4,397 4,403
-------------- --------
23,627 17,890
-------------- --------
Deferred Income Taxes, net 16,809 16,516
Other Assets, net 320 1,082
-------------- --------
Total assets $ 219,655 $195,119
============== ========
Current Liabilities:
Lines of credit $ 388 $ 1,998
Current portion of note payable - 485
Accounts payable 16,414 18,152
Accrued expenses 32,639 25,507
Deferred revenue 13,642 8,754
-------------- --------
Total current liabilities 63,083 54,896
-------------- --------
Notes Payable, net of current portion (Note 3b) 25,000 28,416
Commitments and Contingencies (Notes 9 and 13)
Stockholders' Equity:
Preferred stock, $0.01 par value-
Authorized--1,623 shares
Issued--0 shares - -
Common stock, $0.01 par value-
Authorized--30,000 shares
Issued--15,417 and 15,670 shares, respectively 154 157
Capital in excess of par value 110,233 111,300
Retained earnings 23,821 2,971
Accumulated other comprehensive loss (2,172) (2,157)
Treasury stock, at cost--45 shares in 2000 and 2001 (464) (464)
-------------- --------
Total stockholders' equity 131,572 111,807
-------------- --------
Total liabilities and stockholders' equity $ 219,655 $195,119
============== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In Thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended
September 25, September 30, September 29,
-----------------------------------------------
1999 2000 2001
-----------------------------------------------
<S> <C> <C> <C>
Revenues:
Product sales $ 81,737 $ 90,864 $175,908
Other revenue 2,403 2,882 2,583
--------- -------- --------
84,140 93,746 178,491
--------- -------- --------
Costs and Expenses:
Cost of product sales 50,333 63,604 116,177
Research and development 12,664 17,178 23,328
In-process research and development - 5,000 -
Selling and marketing 19,658 23,882 35,422
General and administrative 10,963 16,441 20,852
Restructuring and nonrecurring charges (Note 14) - - 1,518
--------- -------- --------
93,618 126,105 197,297
--------- -------- --------
Loss from operations (9,478) (32,359) (18,806)
Interest Income 4,204 3,567 1,027
Interest/Other Expense (548) (227) (2,902)
--------- -------- --------
Loss before (benefit) provision for income taxes (5,822) (29,019) (20,681)
(Benefit) Provision for Income Taxes (2,075) (10,400) 169
--------- -------- --------
Net loss $ (3,747) $(18,619) $(20,850)
========= ======== ========
Net Loss per Common Share:
Basic and diluted $ (0.27) $ (1.22) $ (1.35)
========= ======== ========
Weighted Average Number of Common Shares Outstanding:
Basic and diluted 13,950 15,320 15,475
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(In Thousands)
<TABLE>
<CAPTION>
Common Stock Capital in Treasury Stock
Number of $0.01 Excess of Retained Number of Amount
Shares Par Value Par Value Earnings Shares
<S> <C> <C> <C> <C> <C> <C>
Balance, September 26, 1998 13,376 $ 134 $ 95,100 $ 46,187 45 $ (464)
Exercise of stock options 30 - 131 - - -
Stock issued for employee compensation 11 - 144 - - -
Issuance of common stock under employee
stock purchase plan 27 - 163 - - -
Issuance of shares related to acquisition 1,857 19 13,910 - - -
Compensation for grants of stock options to
nonemployees - - 133 - - -
Tax benefit from stock options exercised - - 43 - - -
Net loss - - - (3,747) - -
Translation adjustments - - - - - -
------- ----- -------- -------- -------- ------
Comprehensive loss
Balance, September 25, 1999 15,301 153 109,624 42,440 45 (464)
Exercise of stock options 13 - 49 - - -
Stock issued for employee compensation 12 - 61 - - -
Issuance of common stock under employee
stock purchase plan 91 1 499 - - -
Net loss - - - (18,619) - -
Translation adjustments - - - - - -
------- ----- -------- -------- -------- ------
Comprehensive loss
Balance, September 30, 2000 15,417 $ 154 $110,233 $ 23,821 45 $ (464)
Exercise of stock options 128 1 469 - - -
Stock issued for employee compensation 25 1 165 - - -
Issuance of common stock under employee
stock purchase plan 100 1 433 - - -
Net loss - - - (20,850) - -
Translation adjustments - - - - - -
------- ----- -------- -------- -------- ------
Comprehensive loss
Balance, September 29, 2001 15,670 $ 157 $111,300 $ 2,971 45 $ (464)
======= ===== ======== ======== ======== ======
<CAPTION>
Accumulated Total
Other
Comprehensive Stockholders' Comprehensive
Loss Equity Income (Loss)
<S> <C> <C> <C>
Balance, September 26, 1998 $ (575) $ 140,382 $ -
Exercise of stock options - 131 -
Stock issued for employee compensation - 144 -
Issuance of common stock under employee
stock purchase plan - 163 -
Issuance of shares related to acquisition - 13,929 -
Compensation for grants of stock options
nonemployees - 133 -
Tax benefit from stock options exercised - 43 -
Net loss - (3,747) (3,747)
Translation adjustments (756) (756) (756)
---------- ---------- ---------
Comprehensive loss $ (4,503)
=========
Balance, September 25, 1999 (1,331) 150,422 -
Exercise of stock options - 49 -
Stock issued for employee compensation - 61 -
Issuance of common stock under employee
stock purchase plan - 500 -
Net loss - (18,619) (18,619)
Translation adjustments (841) (841) (841)
---------- ---------- ---------
Comprehensive loss $ (19,460)
=========
Balance, September 30, 2000 $ (2,172) $ 131,572
Exercise of stock options - 470
Stock issued for employee compensation - 166
Issuance of common stock under employee
stock purchase plan - 434
Net loss - (20,850) (20,850)
Translation adjustments 15 15 15
---------- ---------- ---------
Comprehensive loss $ (20,835)
=========
Balance, September 29, 2001 $ (2,157) $ 111,807
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Years Ended
September 25, September 30, September 29,
-----------------------------------------------
1999 2000 2001
-----------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (3,747) $(18,619) $(20,850)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities-
Depreciation and amortization 3,474 4,420 8,735
Reversal of previously recorded Trex reserves - - (2,004)
Deferred income taxes (2,128) (10,546) 293
Acquired in-process research and development - 5,000 -
Compensation expense related to issuance of common stock and stock options 243 105 166
Changes in assets and liabilities, net of impact of businesses acquired in 1999
and 2000, respectively
Accounts receivable 4,010 2,190 7,859
Inventories 6,130 836 2,310
Prepaid expenses and other current assets (81) 4,605 (2,098)
Accounts payable (200) 3,104 4,698
Accrued expenses (3,006) 6,189 (6,371)
Deferred revenue (2,388) 2,039 (2,989)
-------- -------- --------
Net cash provided by (used in) operating activities 2,307 (677) (10,251)
-------- -------- --------
Cash Flows from Investing Activities:
Purchases of held-to-maturity investments (40,848) (20,938) -
Proceeds from maturities of investment securities 46,675 50,074 -
Proceeds from settlement of Trex purchase price - - 932
Purchase of businesses, net of cash acquired (7,972) (30,198) -
Purchase of property and equipment, net (8,879) (5,821) (4,330)
Increase in other assets (107) (5,218) (1,259)
-------- -------- --------
Net cash used in investing activities (11,131) (12,101) (4,657)
-------- -------- --------
Cash Flows from Financing Activities:
Borrowings (repayments) under lines of credit (2,695) (715) 1,610
Issuance of note payable - - 2,360
Repayments of note payable - - (9)
Net proceeds from sale of common stock 294 549 904
Tax benefit from stock options exercised 43 - -
-------- -------- --------
Net cash (used in) provided by financing activities (2,358) (166) 4,865
-------- -------- --------
Effect of Exchange Rate Changes on Cash (733) (786) 19
-------- -------- --------
Net Decrease in Cash and Cash Equivalents (11,915) (13,730) (10,024)
Cash and Cash Equivalents, beginning of period 48,423 36,508 22,778
-------- -------- --------
Cash and Cash Equivalents, end of period $ 36,508 $ 22,778 $ 12,754
======== ======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for income taxes $ 2,592 $ 199 $ 166
======== ======== ========
Cash paid during the period for interest $ 229 $ 38 $ 2,933
======== ======== ========
Supplemental Disclosure of Noncash Financing Activities:
Stock issued for employee compensation $ 144 $ 61 $ 166
======== ======== ========
Issuance of Note Payable to Fleet Business Credit Corp. for litigation
settlement $ - $ - $ 1,550
======== ======== ========
Purchase of Businesses, net of cash acquired:
Fair value of assets acquired $ 23,423 $ 57,050 $ -
Liabilities assumed (1,522) (25,270) -
Cost in excess of net assets acquired - 19,220 -
In-process research and development cost acquired - 5,000 -
Cash paid (7,216) (30,000) -
Acquisition costs incurred (756) (1,000) -
-------- -------- --------
Fair value of stock/note payable issued $ 13,929 $ 25,000 $ -
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands, except per share data)
(1) OPERATIONS
Hologic, Inc. and subsidiaries (the Company or Hologic) is engaged in the
development, manufacture and distribution of diagnostic and medical imaging
systems primarily serving the healthcare needs of women. The Company's core
women's healthcare business units are focused on bone densitometry,
mammography and breast biopsy and on developing a direct-to-digital X-ray
mammography system.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of certain accounting policies as described in this note and elsewhere in
the accompanying consolidated financial statements.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and all of its wholly owned subsidiaries. All
material intercompany accounts and transactions have been eliminated
in consolidation.
(b) Fiscal Year
The Company's fiscal year ends on the last Saturday in September.
Fiscal 1999, 2000 and 2001 ended on September 25, 1999, September 30,
2000 and September 29, 2001, respectively.
(c) Management's Estimates and Uncertainties
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
The Company is subject to a number of risks similar to those of other
companies of similar size in its industry, including recurring losses,
increased debt, rapid technological changes, competition, customer
concentration, integration of acquisitions, government regulations,
management of international activities and dependence on key suppliers
and key individuals.
(d) Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less at the time of acquisition to be cash
equivalents. Included in cash equivalents at September 30, 2000 and
September 29, 2001 are approximately $2,500 and $541, respectively, of
securities purchased under
F-6
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands, except per share data)
agreements to resell. The securities purchased under agreements to
resell are collateralized by U.S. government securities.
(e) Concentration of Credit Risk
Statement of Financial Accounting Standards (SFAS) No. 105, Disclosure
of Information about Financial Instruments with Off-Balance-Sheet Risk
and Financial Instruments with Concentrations of Credit Risk, requires
disclosure of any significant off-balance-sheet and credit risk
concentrations. Financial instruments that subject the Company to
credit risk primarily consists of cash, short-term investments, trade
accounts receivable and long-term receivables. The Company's credit
risk is managed by investing its cash in high-quality money market
instruments and securities of the U.S. government and its agencies.
The Company has not experienced any material losses related to
receivables from individual customers or groups of customers in the X-
ray and medical devices industry. Due to these factors, no additional
credit risk, beyond amounts provided for, is believed by management to
be inherent in the Company's accounts receivable.
The Company utilizes a distributor in the United States for certain
product lines. This distributor had amounts due to the Company of
approximately $6,969 as of September 29, 2001 and accounted for 20.3%
of revenues for fiscal 2001. There were no other customers with
balances greater than 10% of accounts receivable as of September 29,
2001 or customers with greater than 10% of the Company's revenues for
fiscal 2001. During the years ended September 25, 1999 and September
30, 2000, no individual customers represented greater than 10% of
revenue.
The Company finances certain sales to Latin American customers over
two to three years. The economic and currency related uncertainties in
these countries may increase the likelihood of nonpayment. As a
result, the Company increased its bad debt reserve during fiscal 2000;
no additional amounts were required in fiscal 2001.
The Company had sold its systems to a leasing company, which in turn
leased the systems to third parties. The leasing company accounted for
5% of product sales for fiscal 1999. There have been no such sales for
any period thereafter (see Notes 10 and 13).
(f) Disclosure of Fair Value of Financial Instruments
The Company's financial instruments mainly consist of cash, accounts
receivable, lines of credit, accounts payable and notes payable. The
carrying amounts of the Company's cash, accounts receivable, lines of
credit and accounts payable approximate fair value due to the short-
term nature of these instruments. The note payable to Trex Medical
Corporation has a fixed rate of interest and will be subject to
fluctuations in fair value during its term. The notes payable to
Foothill Capital Corporation and Fleet Business Credit, LLC have a
variable interest rate and, therefore, fluctuate based on market
conditions. As of September 29, 2001, the fair values of the notes
payable
F-7
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands, except per share data)
approximate their carrying amounts based on comparable market terms
and conditions.
(g) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of the following:
September 30, September 29,
2000 2001
Raw materials and work-in-process $24,742 $27,421
Finished goods 14,964 11,864
------- -------
$39,706 $39,285
======= =======
Work-in-process and finished goods inventories consist of materials,
labor and manufacturing overhead.
(h) Depreciation and Amortization
The Company provides for depreciation and amortization by charges to
operations, using the straight-line method, which allocate the cost of
property and equipment over the following estimated useful lives:
Asset Classification Estimated
Useful Life
Building and improvements 40 years
Equipment 3-5 years
Furniture and fixtures 5-7 years
Leasehold improvements Life of lease
F-8
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands, except per share data)
(i) Long-Lived Assets
The Company assesses the realizability of its long-lived assets, including
intangible assets, in accordance with SFAS No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. To date, the Company has not identified any impairments requiring
adjustment.
(j) Deferred Financing Costs
Included in other assets in the accompanying balance sheet are deferred
financing costs of approximately $393 related to the Company's closing of
the credit facility with Foothill Capital Corporation (see Note 4.) The
Company is amortizing these amounts to interest expense over a three-year
period, which approximates the level yield method.
(k) Foreign Currency Translation
The Company translates the financial statements of its foreign subsidiaries
in accordance with SFAS No. 52, Foreign Currency Translation. In
translating the accounts of the foreign subsidiaries into U.S. dollars,
assets and liabilities are translated at the rate of exchange in effect at
year-end, while stockholders' equity is translated at historical rates.
Revenue and expense accounts are translated using the weighted average
exchange rate in effect during the year. Gains and losses from foreign
currency translation are credited or charged to cumulative translation
adjustment, included in stockholders' equity, in the accompanying
consolidated balance sheets.
Transaction gains and losses in fiscal 1999, 2000 and 2001 were not
significant.
(l) Revenue Recognition
The Company recognizes 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, the Company entered into a remarketing agreement whereby
it agreed to perform certain remarketing activities on a best efforts
basis. The Company 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 the Company. The Company had reserved for
potential losses under these contracts by deferring revenue in an amount
equal to 10%
F-9
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands, except per share data)
of the contracts funded. This program was terminated in fiscal 1999 (see
Notes 10 and 13).
Maintenance contract revenues are recognized over the term of the contract.
(m) Research and Development and Software Development Costs
Research and development costs have been charged to operations as incurred.
SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold,
Leased or Otherwise Marketed, requires the capitalization of certain
computer software development costs incurred after technological
feasibility is established. The Company believes that once technological
feasibility of a software product has been established, the additional
development costs incurred to bring the product to a commercially
acceptable level are not significant.
(n) Net Loss Per Share
Basic and diluted net loss per share are presented in conformity with SFAS
No. 128, Earnings per Share. Basic net loss per share is computed by
dividing net loss by the weighted average number of common shares
outstanding during the period. Diluted net loss per share in 1999, 2000 and
2001 is computed in the same way as basic, as all common equivalent shares
are considered antidilutive due to the Company's net loss position.
Dilutive weighted average shares outstanding do not include 2,130, 2,712
and 3,367 common-equivalent shares for the end of fiscal years 1999, 2000
and 2001, respectively, as their effect would have been antidilutive.
(o) Derivative Financial Instruments
At September 30, 2000 and September 29, 2001, the Company had no
instruments.
(p) Reclassifications
Certain prior-period amounts have been reclassified to conform with the
current-period presentation.
(q) Recently Issued Accounting Standards
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition, was issued in
December 1999. On March 24, 2000, the Securities and Exchange Commission
(SEC) deferred implementation of SAB No. 101 until the second calendar
quarter of 2000, and on June 26, 2000, implementation was further deferred
until the fourth quarter of calendar 2000. The Company was required to
adopt this new accounting principle in the fourth quarter of fiscal 2001.
The adoption of this principle did not have a material effect on the
Company's results of operations, financial position or cash flows.
F-10
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands, except per share data)
In July 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 141, Business Combinations. SFAS No. 141 requires
all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. This statement is
effective for all business combinations initiated after June 30,
2001.
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 will early adopt
this statement effective the first quarter in the fiscal year
ended September 2002. Accordingly, the Company will reclassify
the net book value of assembled workforce to goodwill and cease
amortization. The Company expects this will reduce annual
amortization expense by approximately $700. Management is
currently evaluating the impact that this statement will have on
the Company's financial statements in reviewing goodwill for
impairment when applying a fair-value-based test.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement
supercedes SFAS No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of, and
certain accounting and reporting provisions of Accounting
Principles Board (APB) Opinion No. 30, Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. Under this statement it is required that
one accounting model be used for long-lived assets to be disposed
of by sale, whether previously held and used or newly acquired,
and it broadens the presentation of discontinued operations to
include more disposal transactions. The provisions of this
statement are effective for financial statements issued for
fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years, with early adoption permitted.
The Company is currently evaluating the ultimate impact of this
statement on its results of operations or financial position
until such time as its provisions are applied.
(3) ACQUISITIONS
(a) Direct Radiography Corporation
On June 3, 1999, pursuant to a securities purchase agreement dated
April 28, 1999, as amended (the Securities Purchase Agreement),
between Hologic, Sterling Diagnostic Imaging, Inc., a Delaware
corporation (SDI) and SDI Investments, LLC, a Delaware limited
liability company (SDI Investments), Hologic purchased 100% of the
issued and outstanding shares of capital stock of Direct Radiography
Corporation Holding Corp., the parent company of Direct Radiography
Corp. (DRC), a manufacturer of digital X-ray systems for medical
imaging and non-destructive testing applications. On June 3, 1999,
pursuant to a contract of sale (the Contract of Sale) with Glasgow
Land Company, a Delaware limited liability company and a wholly-owned
subsidiary of SDI Investments, Hologic also purchased the land and
building
F-11
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands, except per share data)
In Glasgow, Delaware, at which DRC conducted its business,
Hologic paid approximately $21,145 for DRC and the real estate,
of which approximately $7,216 was paid in cash and of which
approximately $13,929 was paid by delivery of 1,857 shares of
Hologic's common stock, par value $0.01 per share (the Purchase
Price). In connection with the acquisition, Hologic incurred $756
of acquisition costs. The Acquisition was accounted for as a
purchase in accordance with APB Opinion No. 16. Accordingly, the
results of the operations of DRC have been included in the
accompanying consolidated financial statements from the date of
acquisition. In accordance with APB Opinion No. 16, the Company
allocated the purchase price of the acquisition based on the fair
value of the assets acquired and liabilities assumed.
The aggregate purchase price of $21,901 including acquisition
costs was allocated as follows:
Current assets $ 4,788
Property, plant and equipment 18,635
Liabilities assumed (1,522)
--------
$ 21,901
========
Unaudited pro forma operating results for the Company, assuming
the acquisition of DRC occurred on September 27, 1998 are as
follows:
1999
Net sales $ 86,466
Net loss (9,114)
Net loss per share-
Basic (0.60)
Diluted (0.60)
(b) Trex Medical Systems Corporation
On September 15, 2000, pursuant to an Asset Purchase and Sale
Agreement between Hologic, Inc. (Hologic) and Trex Medical
Systems Corporation (Trex Medical) (the Purchase Agreement),
dated August 13, 2000, Hologic acquired the U.S. business assets
of Trex Medical in exchange for $30,000 in cash and a note in the
amount of $25,000. The note has a term of three years, bears
interest at a rate of 11.5% per annum and requires the full
amount of principal be repaid on September 13, 2003. The note is
secured by a mortgage on Hologic's principal office in Bedford,
Massachusetts, as well as the facility in Danbury, Connecticut,
which was acquired from Trex Medical. The Company recorded
interest expense related to this note payable of $109 and $2,875
for the years ended September 30, 2000 and September 29, 2001,
respectively, in the accompanying consolidated statement of
operations.
The initial aggregate purchase price for Trex Medical was
approximately $56,000, which included approximately $1,000
related to acquisition fees and expenses. The purchase price was
subject to an adjustment based upon the working capital position
of the business as of September 15, 2000. The Trex Medical
acquisition has been accounted for as a purchase in accordance
with APB Opinion No. 16 and,
F-12
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands, except per share data)
accordingly, the results of the operations of Trex Medical have
been included in the accompanying consolidated financial
statements from the date of acquisition. In accordance with APB
Opinion No. 16, the purchase price has been allocated to the
acquired assets and assumed liabilities of Trex Medical based on
their fair value.
In connection with the allocation of the purchase price to the
acquired assets and assumed liabilities of Trex Medical based on
their estimated fair value, management determined that the
balance of certain reserves and accruals at the closing date were
not sufficient to cover the estimated economic exposure.
Therefore, the Company increased the balance of the applicable
reserves and accruals to reflect management's estimated economic
exposure through charges to earnings in the period after
acquisition in accordance with the guidance provided under SAB
No. 100, Restructuring and Impairment. As a result, in the period
the acquisition occurred, the Company recorded pre-tax charges
totaling $6,800 to increase the reserve for bad debts, warranty
accruals and other liabilities.
In June, 2001, an independent arbitrator determined that
adjustments of $2,839 in addition to $119 of adjustments agreed
to by Thermo Electron Corporation before submission to
arbitration, were required to the closing balance sheet submitted
by Trex Medical. This resulted in a payment of approximately $932
to the Company as an adjustment to the purchase price. In
addition, as a result of this arbitration settlement, the Company
evaluated the components of the approximate $2,900 of adjustments
and determined that approximately $2,100 of reserves and accruals
provided for through charges to earnings in the fourth quarter of
fiscal 2000 should have been recorded in the allocation of the
purchase price for this acquisition. The remaining $700 related
to items that were recorded in the original purchase price
allocation.
As a result of the above adjustments and other purchase
accounting adjustments made during the year, the Company's
results for the year ended September 29, 2001 include expense
reductions totaling $2,526 relating to the purchase price
reallocation as follows:
. $1,722 cost of product sales reduction for warranty accrual
and for performance upgrades on prior sales; and
. $376 selling expense reduction for accrued sales commissions
and $428 general and administrative expense reduction for
various expense accruals and bad debt expense.
As part of the purchase price allocation, all intangible assets
that are a part of the acquisition were identified and valued. It
was determined that technology assets and assembled workforce had
separately identifiable values. As a result of this
identification and valuation process, the Company allocated
approximately $5,000 of the purchase price to in-process research
and development projects. This allocation represented the
estimated fair value based on risk-adjusted cash flows related to
the incomplete research and development projects. At the date of
acquisition, the development of these projects had not yet
reached technological feasibility, and the
F-13
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands, except per share data)
research and development in progress had no alternative future
uses. Accordingly, these costs were expensed as of the
acquisition date.
In addition, the Company allocated approximately $11,800 and
$3,000 to developed technology and assembled workforce,
respectively. Developed technology represents patented and
unpatented technology and know-how related to the Trex X-ray
mammography, breast biopsy and radiography systems. Developed
technology is expected to be amortized over a period of 10 years.
Assembled workforce is the presence of a skilled workforce that
is knowledgeable about company procedures and possesses expertise
in certain fields that are important to profitability and growth
of a company. Assembled workforce is expected to be amortized
over a period of five years (see Note 2(g)).
The excess of the purchase price over the fair value of
identifiable intangible and tangible net assets, as of September
30, 2000, of approximately $4,420 was allocated to goodwill,
which is expected to be amortized over a period of 15 years (see
Note 2(g)).
Also, in conjunction with the acquisition, the Company committed
to dispose of the acquired Trexnet product line. Trex Medical had
existing obligations under contractual agreements with customers
related to this product line which were assumed by the Company in
the acquisition. The Company has begun to solicit offers on this
product line from likely buyers. Based on the current level of
interest and interaction with potential buyers, the Company has
estimated that it will likely be required to pay a buyer
approximately $2,000 in order to transfer these obligations,
along with the assets and other liabilities associated with that
product line. Such amount has been accrued as part of the
purchase price allocation.
The aggregate purchase price of $55,068 including acquisition
costs was allocated as follows:
Current assets $ 49,484
Property, plant and equipment 8,098
In-process research and development 5,000
Cost in excess of net assets acquired 15,732
Liabilities assumed (23,246)
--------
$ 55,068
========
Unaudited pro forma operating results for the Company, assuming
the acquisition of Trex Medical occurred on September 27, 1998
and September 26, 1999 are as follows:
F-14
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands, except per share data)
Years Ended
September 25, September 30,
1999 2000
Net sales $257,877 $ 196,655
Net loss (38,167) (121,132)
Net loss per share-
Basic and diluted $ (2.74) $ (7.91)
On November 13, 2001, the Company announced the definitization of an exit
strategy to close the general radiography manufacturing facility in
Littleton, Massachusetts that the Company had acquired from Trex Medical
and indicated that it would relocate certain of its product lines and sales
and support personnel to its corporate headquarters in Bedford,
Massachusetts. The Company has accrued costs of approximately $3,500
related to the closing as part of the final purchase price allocation in
the fourth quarter of fiscal 2001. These costs include amounts for lease
abandonment, as well as for the write-off of certain fixed assets and
accounts receivable. The Company anticipates a restructuring charge of
approximately $1,000 in the first quarter of fiscal 2002 primarily
comprised of severance costs related to the termination of employees at the
Littleton location.
(4) CREDIT FACILITIES
The Company maintains an unsecured line of credit with a bank for the
equivalent of $3,000, which bears interest at the Europe Interbank Offered
Rate (3.79% at September 29, 2001) plus 1.50%. As of September 29, 2001,
$1,998 was outstanding. The borrowings under this line are primarily used
by the Company's European subsidiaries to settle intercompany sales and are
denominated in the respective local currencies of its European
subsidiaries. The line of credit may be canceled by the bank with 30 days
notice. The average outstanding balance during fiscal 2001 was
approximately $1,483 and the weighted average interest rate for fiscal 2001
was 6.13%. Interest expense on this line of credit of approximately $82,
$23 and $95 has been included in interest/other expenses in the
accompanying consolidated statements of operations for 1999, 2000 and 2001,
respectively.
On September 21, 2001, the Company signed a Loan and Security Agreement
with Foothill Capital Corporation (the Foothill Agreement). The Foothill
Agreement provided for a term loan at execution, in the amount of $2,360,
payable monthly in equal installments over five years. The term loan
accrues interest daily at an annual rate equal to the prime rate (6.0% at
September 29, 2001) plus 1.25%. The Company also has the ability to receive
letters of credit under the Foothill Agreement. The Company must pay a fee
related to any letters of credit equal to 1% per annum on the daily balance
of the undrawn amount of all outstanding letters of credit.
The Foothill Agreement also allows for revolver advances equal to the
lesser of (i) the Maximum Revolver Amount ($25,000 less amounts
outstanding related to letters of credit) or (ii) the Borrowing Base, as
defined, less the letter of credit usage. The revolver advances accrue
interest daily at an annual rate equal to the prime rate plus 0.5%. The
Company has the option to increase the Maximum Revolver Amount
F-15
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands, except per share data)
to $30,000 during the term of the Foothill Agreement. The Company must pay
monthly an Unused Line Fee in an amount equal to 0.5% times the result of
(i) the maximum revolver amount less the sum of the average daily balance
of advances, as defined, during the preceding month plus (ii) the average
daily balance of the letter of credit usage, as defined, during the
preceding month.
The Company's ability to borrow under such line of credit is conditional
upon the Company's compliance with certain financial and non-financial
covenants. The line of credit is collateralized by substantially all of the
assets of the Company, excluding real estate, and expires on September 21,
2004.
On December 8, 2001, the Company executed an amendment to the Foothill
Agreement. The amendment (i) limits all advances to a maximum of $15,000
and (ii) allows Foothill Capital Corporation to establish an additional
$8,500 reserve against the Borrowing Base, until such time as the Company
completes an equity financing resulting in at least $10,000 of proceeds.
The amendment also adjusts certain financial covenants as of September 29,
2001 with which the Company was in compliance.
(5) INCOME TAXES
The Company provides for income taxes under the liability method in
accordance with SFAS No. 109, Accounting for Income Taxes.
The provision (benefit) for income taxes in the accompanying consolidated
statements of operations consists of the following:
<TABLE>
<CAPTION>
------------- Years Ended ------------------------
September 25, September 30, September 29,
1999 2000 2001
<S> <C> <C> <C>
Federal-
Current $ - $ - $ -
Deferred (1,953) (9,963) -
------------- -------------- -----------
(1,953) (9,963) -
State-
Current 53 134 150
Deferred (175) (583) -
------------- -------------- -----------
(122) (449) 150
Foreign-
Current - 12 19
------------- -------------- -----------
$ (2,075) $ (10,400) $ 169
============= ============== ===========
</TABLE>
F-16
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands, except per share data)
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
<TABLE>
<CAPTION>
------------------------Years Ended------------------------
September 25, September 30, September 29,
1999 2000 2001
<S> <C> <C> <C>
Income tax provision at federal statutory rate (35.0)% (35.0)% (35.0)%
Increase (decrease) in tax resulting from-
Increase in valuation allowance and net effect of 2.7 1.3 40.6
losses of foreign subsidiaries not benefited
State tax provision (benefit), net of federal (0.9) (1.3) (1.2)
benefit
Research and development tax credit - - (2.5)
Effect of not providing U.S. taxes on exempt FSC - (0.1) -
income
Other (2.4) (0.7) (1.1)
------ ------ ------
(35.6)% (35.8)% 0.8%
====== ====== ======
</TABLE>
The components of domestic and foreign loss before the provision (benefit)
for income taxes are as follows:
<TABLE>
<CAPTION>
-----------------------Years Ended-------------------------
September 25, September 30, September 29,
1999 2000 2001
<S> <C> <C> <C>
Domestic $(5,368) $(27,942) $(20,561)
Foreign (454) (1,077) (120)
------- -------- --------
$(5,822) $(29,019) $(20,681)
======= ======== ========
</TABLE>
During fiscal 1999, the Company realized tax benefits of approximately $43
relating to the exercise of certain stock options. These benefits are
reflected as a component of capital in excess of par value. A benefit was
not realized in either fiscal 2000 or 2001.
The components of the net deferred tax asset recognized in the accompanying
consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
September 30, September 29,
2000 2001
<S> <C> <C>
Deferred tax assets $17,400 $25,508
Valuation allowance (591) (8,992)
------- -------
$16,809 $16,516
======= =======
</TABLE>
F-17
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands, except per share data)
The Company generated significant tax loss carryforwards during fiscal 2000
and 2001, which can be carried forward for 19 and 20 years, respectively.
Under SFAS No. 109, the Company can only recognize a deferred tax asset for
future benefit of its tax loss carryforward to the extent that it is "more
likely than not" that these assets will be realized. In determining the
realizability of these assets, the Company considered numerous factors,
including historical profitability, estimated future taxable income and the
industry in which it operates.
The Company has recorded a valuation allowance against a portion of its
deferred tax assets. The valuation allowance primarily relates to the net
loss generated in the current fiscal year and certain deferred tax assets
in foreign jurisdictions, for which realization is uncertain.
The approximate income tax effect of each type of temporary difference and
carryforward before allocation of the valuation allowance is approximately
as follows:
<TABLE>
<CAPTION>
September 30, September 29,
2000 2001
<S> <C> <C>
Net operating loss carryforwards $ 8,792 $19,040
Nondeductible accruals 1,191 1,147
Nondeductible reserves 4,005 4,079
Other temporary differences (396) 696
Research credit - 508
Deferred revenue 3,808 38
------- -------
$17,400 $25,508
======= =======
</TABLE>
The following table summarizes the expiration dates of the net operating
loss and R&D credit carryforwards:
<TABLE>
<CAPTION>
Expires Expires Expires
in 2019 in 2020 in 2021 Total
<S> <C> <C> <C> <C>
Net Operating Loss $ 5,165 $ 14,497 $ 31,868 $ 51,530
R&D Credit $ - $ - $ 508 $ 508
</TABLE>
(6) COMMON STOCK
(a) Stock Option Plans
The Company's 1986 Combination Stock Option Plan (the 1986 Plan) is
administered by the Board of Directors. Under the terms of the 1986
Plan, the Company granted employees either incentive stock options
or nonqualified stock options to purchase shares of the Company's
common stock at a price not less than fair market value at the date
of grant. In addition, the Company granted nonqualified options to
other participants. During fiscal 1996, the 1986 Plan was
terminated. Options granted under the 1986 Plan vest over a five-
year period and are exercisable at varying dates.
F-18
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands, except per share data)
The Company's 1994 Stock Option Plan (the 1994 Plan) and the 1995
Stock Option Plan (the 1995 Plan), both of which were originally
adopted by FluoroScan and assumed by the Company upon its combination
with Fluoroscan, are administered by the Board of Directors. As of
September 29, 2001, there were options to purchase 276 shares of the
Company's common stock outstanding under these plans. The Company does
not intend to grant any additional options under these plans.
In June 1995, the Board of Directors adopted the 1995 Combination
Stock Option Plan (the 1995 Combination Plan), pursuant to which the
Company is authorized to issue 1,100 options to purchase shares of
common stock. Under the terms of the 1995 Combination Plan, the
Company may grant employees either incentive stock options or
nonqualified stock options to purchase shares of the Company's common
stock at a price not less than the fair market value at the date of
grant. In addition, the Company may grant nonqualified options to
other participants, such as consultants and advisors. As of September
29, 2001, the Company had 115 shares available for future grant under
this plan.
The Company's 1990 Nonemployee Director Stock Option Plan (the
Directors' Plan) allowed for eligible directors to receive options to
purchase 10 shares of common stock upon election as a director. The
options vest ratably over a five-year period. In addition, eligible
directors were entitled to annual option grants to purchase eight
shares of common stock, which vest after six months. Option grants
under the Directors' Plan were made at not less than fair market value
on the date of grant. The Company reserved 200 shares of common stock
for issuance under the Directors' Plan. As of September 29, 2001, the
Company had no shares available for future grant.
In May 1997, the Board of Directors adopted the 1997 Employee Equity
Incentive Plan (the 1997 Plan), pursuant to which the Company is
authorized to issue 1,100 shares of common stock. Under the terms of
the 1997 Plan, the Company may grant employees, consultants and
advisors who are not executive officers or directors of the Company
either nonqualified stock options, stock appreciation rights,
performance shares, restricted stock, or stock units. As of September
29, 2001, the Company had 303 shares available for future grant under
this plan.
In March 1999, the Board of Directors adopted the 1999 Equity
Incentive Plan (the 1999 Plan), pursuant to which the Company is
authorized to issue 300 shares, plus an annual increase, as defined,
on the first day of each fiscal year following the adoption of the
1999 Plan. Under these provisions, the total number of shares the
Company is authorized to issue under the 1999 Plan increased from 680
shares as of September 30, 2000 to 1,440 shares as of September 29,
2001. Under the terms of the 1999 Plan, the Company may grant
employees either incentive stock options or nonqualified stock
options. In addition, the Company may grant non-employee directors
non-qualified stock options. The exercise price of the options granted
under this plan may not be less than the fair market value of the
Company's stock on the date on which the option was granted. As of
September 30, 2000 and September 29,
F-19
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands, except per share data)
2001, the Company had 12 and 453 shares, respectively, available
for future grant under this plan.
In April 2001, the Board of Directors adopted the 2000 Acquisition
Equity Incentive Plan (the 2000 Plan), pursuant to which the
Company is authorized to issue 1,000 shares of common stock. Under
the terms of the 2000 Plan, the Company may grant employees,
consultants and advisors of newly acquired businesses either
nonqualified stock options, stock appreciation rights, performance
shares or restricted stock. As of September 29, 2001, the Company
had 518 shares available for future grant under this plan.
The following table summarizes all stock option activity under all
of the plans for the three years in the period ended September 29,
2001:
Number Exercise Weighted
of Shares Price per Average
Share Exercise Price
Outstanding, September 26, 1998 1,569 $ 1.81-49.00 $ 15.52
Granted 1,396 4.13-15.88 9.86
Terminated (805) 1.94-49.00 21.62
Exercised (30) 1.94-11.00 4.41
------ ------------ -------------
Outstanding, September 25, 1999 2,130 1.81-44.25 9.66
Granted 754 3.19- 9.81 5.46
Terminated (159) 2.81-15.88 7.77
Exercised (13) 1.94- 6.81 3.77
------ ------------ -------------
Outstanding, September 30, 2000 2,712 1.81-44.25 $ 8.63
------ ------------ -------------
Granted 1,537 4.00- 7.19 5.38
Terminated (753) 1.94-14.94 7.20
Exercised (129) 1.94- 6.81 3.68
------ ------------ -------------
Outstanding, September 29, 2001 3,367 $1.81-$44.25 $ 7.65
===== ============ =============
Exercisable, September 29, 2001 1,555 $1.81-$44.25 $ 9.29
===== ============ =============
Exercisable, September 30, 2000 1,262 $1.81-$44.25 $ 9.75
===== ============ =============
Exercisable, September 25, 1999 1,009 $1.81-$44.25 $ 9.61
===== ============ =============
F-20
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands, except per share data)
The range of exercise prices for options outstanding and options exercisable
at September 29, 2001 are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------
Range of Options Weighted Average Weighted Average Options Weighted Average
Exercise Price Outstanding Remaining Exercise Price Exercisable Exercise Price
Contractual Life
(Years)
<S> <C> <C> <C> <C> <C>
$ 1.81 - $ 3.94 323 5.81 $ 3.28 167 $ 2.67
$ 4.00 - $ 5.00 757 9.08 4.97 180 4.99
$ 5.06 - $ 5.63 157 8.13 5.42 68 5.46
$ 5.68 - $ 5.78 341 9.68 5.78 16 5.75
$ 5.85 - $ 6.81 440 8.01 6.45 145 6.55
$ 6.88 - $ 8.25 513 5.91 7.85 368 7.95
$ 8.44 - $11.00 472 6.34 10.36 315 10.60
$ 11.38 - $28.13 356 6.14 17.25 288 17.93
$ 28.16 - $44.25 8 4.48 30.50 8 30.50
---- ---- ------ ----- ------
$ 1.81 - $44.25 3,367 7.46 $ 7.65 1,555 $ 9.29
===== ==== ====== ===== ======
</TABLE>
The weighted average grant date fair value under the Black-Scholes option
pricing model of options granted during the years ended September 25, 1999,
September 30, 2000 and September 29, 2001 under the various plans is $6.59,
$3.37 and $3.30 per share, respectively. As of September 25, 1999, September
30, 2000 and September 29, 2001, the weighted average remaining contractual
life of outstanding options under these plans is 7.58, 7.26 and 7.46 years,
respectively.
The Company accounts for its stock-based compensation plans under APB Opinion
No. 25, Accounting for Stock Issued to Employees. The stock-based
compensation recorded in each of the three-years ended September 29, 2001 is
the result of awarding restricted common shares to certain key employees.
The value of these shares, as measured based on the market value of the
Company's common stock on the date of award, is being amortized on a
straight-line basis over the period in which the restrictions lapse. All
restrictions related to these shares lapsed in fiscal 2000. Stock-based
compensation related to these restricted shares was $210 and $47 for the
years ended September 25, 1999 and September 30, 2000, respectively.
In October 1995 the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which established a fair-value-based method of accounting for
stock-based compensation plans. The Company has adopted the disclosure-only
alternative under SFAS No. 123 that requires disclosure of the pro forma
effects on net loss and loss per share as if SFAS No. 123 had been adopted,
as well as certain other information.
F-21
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands, except per share data)
The Company has computed the pro forma disclosures required under SFAS
No. 123 for all stock options and stock issuances under the employee
stock purchase plan of the Company in fiscal years ended September 25,
1999, September 30, 2000 and September 29, 2001, using the Black-
Scholes option pricing model prescribed by SFAS No. 123. The
assumptions used to calculate the SFAS No. 123 pro forma disclosure
and the weighted average information for the fiscal years ended
September 25, 1999, September 30, 2000 and September 29, 2001 are as
follows:
1999 2000 2001
Risk-free interest rate 6.12% 6.00% 5.50%
Expected dividend yield - - -
Expected lives 6 years 6 years 6 years
Expected volatility 70% 72% 72%
The pro forma effect of applying SFAS No. 123 for all options granted,
stock issuances under the employee stock purchase plan and warrants
granted to employees of the Company in fiscal years ended September
25, 1999, September 30, 2000 and September 29, 2001 would be as
follows:
1999 2000 2001
Net loss as reported $(3,747) $(18,619) $(20,850)
Pro forma net loss (5,388) (21,052) (24,150)
Diluted net loss per share, as reported $ (0.27) $ (1.22) $ (1.35)
Pro forma diluted net loss per share $ (0.39) $ (1.37) $ (1.56)
(b) Employee Stock Purchase Plan
In December 1994, the Company adopted the 1995 Employee Stock Purchase
Plan (the ESP Plan) in compliance with Section 423 of the Internal
Revenue Code. Employees who have completed three consecutive months or
1,000 hours, whether or not consecutive, of employment with the
Company are eligible to participate in the ESP Plan. The ESP Plan
allows participants to purchase common stock of the Company at 85% of
the fair market value, as defined. The Company may issue up to 200
shares under the ESP Plan. During fiscal 1999, 2000 and 2001, the
Company issued 27, 91 and 29 shares, respectively, under the ESP Plan.
At September 29, 2001 the Company has 0 shares available for purchase
under the ESP Plan.
In April 2001, the Company adopted the 2000 Employee Stock Purchase
Plan (the 2000 ESP Plan) in compliance with Section 423 of the
Internal Revenue Code. Employees who have completed three consecutive
months, or two years, whether or not consecutive, of employment with
the Company or any of its participating subsidiaries are eligible to
participate in the 2000 ESP Plan. The 2000 ESP Plan allows
participants to purchase common stock of the Company at 85% of the
fair market value, as defined. The Company may issue up to 300 shares
under the 2000 ESP Plan. During the fiscal year
F-22
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands, except per share data)
ended September 29, 2001, the Company issued 71 shares under the 2000
ESP Plan. At September 29, 2001, there are 229 shares available for
purchase under the 2000 ESP Plan.
(c) Rights Agreement
In December 1992, the Company adopted a shareholder rights plan. The
Company amended the plan in December 1995, December 1996 and April
1999. The plan is intended to protect shareholders from unfair or
coercive takeover practices. In accordance with the plan, the Board
of Directors declared a dividend distribution of one common stock
purchase right for each share of common stock outstanding until the
rights become detachable. Each right entitles the registered holder
to purchase from the Company one share of common stock for $90,
adjusted for certain events. In the event that the Company is
acquired in a merger or other business combination transaction or
more than 50% of its assets or earning power is sold, each holder
shall thereafter have the right to receive, upon exercise of each
right, that number of shares of common stock of the acquiring company
that, at the time of such transaction, would have a market value of
two times the $90 per share exercise price. The rights will not be
detachable or exercisable until certain events occur. The Board of
Directors may elect to terminate the rights under certain
circumstances.
(7) PROFIT SHARING 401(K) PLAN
The Company has a qualified profit sharing plan covering substantially all
of its employees. Contributions to the plan are at the discretion of the
Company's Board of Directors. The Company has recorded approximately $440,
$301 and $849 as a provision for the profit sharing contribution for
fiscal 1999, 2000 and 2001, respectively.
(8) RELATED PARTY TRANSACTIONS
(a) Note Receivable from Officer
In fiscal 2000 and 2001, the Company loaned an officer an aggregate of
$500,000, which will be repaid quarterly beginning in January 2002
through January 2005. In the event of a change in control, as defined,
the amounts outstanding will be forgiven. The note is unsecured and
bears interest at 7% per annum.
F-23
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands, except per share data)
(b) License and Technology Agreement
The Company had an agreement with Vivid whereby Vivid obtained a
perpetual, exclusive worldwide license to utilize certain of the
Company's technology and patents for the sole purpose of developing
baggage and inspection security systems (the Exclusive License). In
September 1996, this license was amended to grant Vivid a nonexclusive
license to utilize these patents and technology for certain new product
development for other applications (the Nonexclusive License). Royalty
payments to the Company under the Exclusive License were due based on
Vivid's product sales, as defined. In the first quarter of fiscal 2000,
Vivid and PerkinElmer entered into a merger agreement (the Merger) and
Hologic and Vivid entered into a termination agreement dated October
4, 1999. Under this termination agreement, the license fee terminated
upon the effective date of the Merger. As part of the termination
agreement, Vivid paid Hologic $2,000 in January 2000. The Company
recognized approximately $378 of royalty revenue under the Exclusive
License in fiscal 1999 and recognized $2,000 under the termination
agreement in fiscal 2000.
(9) COMMITMENTS
(a) Operating Leases
Certain subsidiaries of the Company conduct their operations in leased
facilities under operating lease agreements that expire through fiscal
2007. The Company and its subsidiaries lease certain equipment under
operating lease agreements that expire through fiscal 2007. Future
minimum lease payments under the operating leases are approximately as
follows:
Fiscal Years Ending Amount
September 28, 2002 $2,310
September 27, 2003 1,804
September 25, 2004 1,044
September 24, 2005 960
September 30, 2006 281
Thereafter 12
------
$6,411
======
Rental expense was approximately $297, $724 and $2,479 for fiscal
1999, 2000 and 2001, respectively.
(10) FEE PER SCAN PROGRAM
The Company had a fee per scan program with a leasing company whereby the
Company sold its systems to the leasing company, which, in turn, leased the
systems to third parties. Under the terms of the agreement, the Company was
contingently liable for a certain amount per system, up to a maximum of the
greater of (i) the sale price of four systems or (ii) 10% of the aggregate
value of systems sold
F-24
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands, except per share data)
under the program. The Company recorded the amount for which it was
contingently liable as deferred revenue. During fiscal 1999, the Company
and the leasing company commenced claims against each other regarding this
program and in fiscal 2001 such claims were settled (see Note 13).
(11) BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
Effective for the fiscal year ended September 25, 1999, the Company has
adopted SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information. SFAS No. 131 establishes standards for reporting
information regarding operating segments in annual financial statements and
requires selected information for those segments to be presented in interim
financial reports issued to stockholders. SFAS No. 131 also establishes
standards for related disclosures about products and services and
geographic areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information is available
for evaluation by the chief operating decision maker, or decision making
group, in making decisions how to allocate resources and assess
performance. The Company's chief decision-maker, as defined under SFAS No.
131, is the chief operating officer. To date, the Company has viewed its
operations and manages its business as principally four operating segments:
the manufacture and sale of Bone Assessment products, Mini-C Arm Imaging
products, Digital Imaging products and Mammography/General Radiography
products. The Company evaluates the performance of its operating segments
based revenues and operating income. Intersegment sales and transfers are
not significant.
F-25
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands, except per share data)
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on the sales, operating costs, net income and total
assets. Segment information for fiscal years ended 1999, 2000 and 2001 is
as follows:
<TABLE>
<CAPTION>
Years Ended
September 25, September 30, September 29,
1999 2000 2001
<S> <C> <C> <C>
Total revenues-
Bone Assessment $ 67,949 $ 66,298 $ 65,679
Mini C-Arm Imaging 15,075 14,498 14,623
Digital Imaging 1,116 7,864 11,719
Mammography/General Radiography - 5,086 86,470
-------- -------- --------
$ 84,140 $ 93,746 $178,491
======== ======== ========
Operating income (loss)-
Bone Assessment $ (4,725) $ 88 $ 7,357
Mini C-Arm Imaging 1,076 163 683
Digital Imaging (5,829) (20,327) (21,252)
Mammography/General Radiography - (12,283) (5,594)
-------- -------- --------
$ (9,478) $(32,359) $(18,806)
======== ======== ========
Net income (loss)-
Bone Assessment $ (647) $ 2,472 $ 8,157
Mini C-Arm Imaging 576 57 972
Digital Imaging (3,676) (13,290) (21,374)
Mammography/General Radiography - (7,858) (8,605)
-------- -------- --------
$ (3,747) $(18,619) $(20,850)
======== ======== ========
Identifiable assets-
Bone Assessment $137,835 $110,425 $117,796
Mini C-Arm Imaging 17,280 17,539 15,402
Digital Imaging 20,655 10,038 1,108
Mammography/General Radiography - 81,653 60,813
-------- -------- --------
$175,770 $219,655 $195,119
======== ======== ========
Depreciation and amortization-
Bone Assessment $ 2,458 $ 2,959 $ 3,422
Mini C-Arm Imaging 239 233 173
Digital Imaging 777 1,085 1,499
Mammography/General Radiography - 143 3,641
-------- -------- --------
$ 3,474 $ 4,420 $ 8,735
======== ======== ========
Capital expenditures, net-
Bone Assessment $ 7,747 $ 2,890 $ 1,279
Mini C-Arm Imaging 741 318 162
Digital Imaging 391 2,593 1,744
Mammography/General Radiography - 20 1,145
-------- -------- --------
$ 8,879 $ 5,821 $ 4,330
======== ======== ========
</TABLE>
Export sales from the United States to unaffiliated customers primarily in
Europe, Asia and Latin America during fiscal 1999, 2000 and 2001 totaled
approximately $13,378, $25,334 and $38,177, respectively.
F-26
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands, except per share data)
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, including sales to European subsidiaries, as a
percentage of total product sales are as follows:
Years Ended
September 25, September 30, September 29,
1999 2000 2001
Europe 24% 21% 14%
Asia 7 7 8
All others 6 5 6
---- ---- ----
37% 33% 28%
==== ==== ====
(12) ACCRUED EXPENSES
Accrued expenses consist of the following:
September 30, September 29,
2000 2001
Accrued payroll and employee benefits $ 5,961 $ 4,757
Accrued commissions 5,913 3,521
Accrued income taxes 112 176
Accrued warranty 9,670 6,480
Accrued tradeshow 1,142 980
Accrued acquisition reserve 2,000 1,708
Other accrued expenses 7,841 7,885
------- -------
$32,639 $25,507
======= =======
(13) LITIGATION
On August 9, 2001, the Company and Fleet Business Credit, LLC. (Fleet)
reached an agreement to settle the litigation between the parties. Under
the terms of the $3,050 settlement, Hologic made a cash payment of $1,500
and issued a note payable to Fleet 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 September 29, 2001, there was approximately $1,528
outstanding on this note.
Under the terms of the Master Product Financing Agreement, the Company was
contingently liable for a certain amount per system sold under the
agreement. The Company recorded the amount for which it was contingently
liable as deferred revenue. As a result of the settlement, the Company has
recognized the amount deferred in excess of the settlement totaling $2,147
as revenue. In addition, the Company reversed $500 of related warranty
reserves which were no longer necessary through a reduction of cost of
product sales.
F-27
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands, except per share data)
In connection with the Trex Medical acquisition, 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, for any damages up to the adjusted purchase price
for the Trex Medical assets. In connection with this arrangement, Trex
Medical is continuing to defend this lawsuit. In November 2001, Fischer
Imaging filed a lawsuit against the Company in connection with our sales of
this product. Trex Medical and Thermo Electron have agreed to indemnify us
in connection with, and to defend, this lawsuit. If Trex Medical is
unsuccessful in defending these lawsuits, the Company may be prohibited
from manufacturing and selling the prone-breast biopsy system without a
license from Fischer Imaging and Fischer Imaging could be awarded
significant damages. If a license were required, Hologic cannot assure that
it would be able to obtain one on commercially reasonably terms, if at all.
Moreover, if Fischer were awarded damages, the Company cannot assure that
its indemnification from Trex Medical and Thermo Electron, if any, would be
sufficient to cover the amount of the award. A significant award above the
indemnification amount actually received could harm the Company's business
and prospects.
In the ordinary course of business, the Company is party to various types
of litigation. The Company believes it has meritorious defenses to all
claims, and, in its opinion, all litigation currently pending or threatened
will not have a material effect on the Company's financial position or
results of operations.
(14) RESTRUCTURING AND NONRECURRING CHARGES
In April 2001, Fluoroscan operations moved from the facility in Northbrook,
Illinois to corporate headquarters in Bedford, Massachusetts. Approximately
$500 of expenses were incurred in connection with this move, which included
approximately $200 of moving costs, $100 of severance costs, $100 to vacate
the facility and $100 of other costs. In addition, the Company reduced
positions at other facilities in fiscal 2001, incurring approximately
$1,018 of restructuring charges, primarily comprised of severance costs
related to the termination of employees.
F-28
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands, except per share data)
(15) QUARTERLY STATEMENT OF OPERATIONS INFORMATION (UNAUDITED)
The following table presents a summary of quarterly results of operations
for 1999, 2000 and 2001:
<TABLE>
<CAPTION>
------------------------------1999------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
<S> <C> <C> <C> <C>
Total revenue $ 24,632 $ 19,362 $ 20,008 $ 20,138
Gross profit 11,123 7,264 7,210 5,817
Net income (loss) 2,037 (1,088) (1,533) (3,163)
Diluted net income (loss) per 0.15 (0.08) (0.11) (0.23)
common and common equivalent
share
------------------------------2000------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
Total revenue $ 21,295 $ 23,252 $ 22,083 $ 27,117
Gross profit 8,040 7,383 7,948 3,887
Net loss (2,870) (2,184) (2,643) (10,922)
Diluted net loss per common and (0.19) (0.14) (0.17) (0.71)
common equivalent share
------------------------------2001------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
Total revenue $ 44,551 $ 43,741 $ 44,938 $ 45,261
Gross profit 13,271 14,469 18,648 15,926
Net loss (6,765) (7,945) (1,213) (4,927)
Diluted net loss per common and (0.44) (0.51) (0.08) (0.32)
common equivalent share
</TABLE>
The significant increase in the reported net loss in the fourth quarter of
fiscal 2000 is directly attributable to the charges related to the Trex
Medical acquisition discussed in Note 3(b).
The significant decrease in the net loss in the third quarter of fiscal
2001 is directly attributable to the settlement of the litigation with
Fleet discussed in Note 13 and the arbitration settlement related to the
Trex Medical acquisition discussed in Note 3(b).
F-29
<PAGE>
HOLOGIC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In Thousands, except per share data)
(16) VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and Acquired Write-offs/ End of
of Period Expenses Reserves Payments Period
<S> <C> <C> <C> <C> <C>
Allowance for Uncollectible Amounts
Period Ended:
September 25, 1999 $ 2,100 $ 1,393 $ - $ (13) $ 3,480
September 30, 2000 $ 3,480 $ 1,965 $ 3,226 $ (748) $ 7,923
September 29, 2001 $ 7,923 $ 1,021 $ (1,702) $ (2,574) $ 4,668
Accrued Acquisition Reserve
Period Ended:
September 25, 1999 $ - $ - $ - $ - $ -
September 30, 2000 $ - $ 2,000 $ - $ - $ 2,000
September 29, 2001 $ 2,000 $ (1,708) $ 1,416 $ - $ 1,708
Allowance for Sales Returns
Period Ended:
September 25, 1999 $ - $ - $ - $ - $ -
September 30, 2000 $ - $ 252 $ 285 $ - $ 537
September 29, 2001 $ 537 $ 50 $ - $ (332) $ 255
Restructuring Accrual
September 25, 1999 $ - $ - $ - $ - $ -
September 30, 2000 $ - $ - $ - $ - $ -
September 29, 2001 $ - $ 1,018 $ - $ (234) $ 784
</TABLE>
(17) SUBSEQUENT EVENTS
On November 16, 2001, the Company filed a shelf registration statement
on Form S-3, as amended November 28, 2001, with the SEC covering an
offering by it of up to 3,000 shares of common stock. Included in the
shelf registration statement is a prospectus for a public offering of
2,500 shares of common stock plus 375 shares to cover over-allotments.
The Company plans to use the net proceeds from the offering to fund
the continued development of its Direct-to-Digital Mammography System,
including conducting clinical trials and working toward regulatory
approvals, as well as fund research and development and for general
corporate purposes and working capital.
F-30
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Reference
- ------- ---------
<S> <C>
2.01 Securities Purchase Agreement dated April 28, 1999, as amended on June 3, 1999, by and among M-1
Hologic, Sterling Diagnostic Imaging, Inc., and SDI Investments, L.L.C.
2.02 Contract of Sale dated April 28, 1999, as amended on June 3, 1999, by and between Hologic and M-2
Glasgow Land Company, L.L.C.
2.03 Asset Purchase and Sale Agreement Among Trex Medical Systems Corporation, Trex Medical Corporation, O-2
ThermoTrex Corporation and Thermo Electron Corporation and Hologic, Inc. dated August 13, 2000
3.01 Certificate of Incorporation of Hologic A-3.01
3.02 By-laws of Hologic A-3.02
4.01 Specimen certificate for shares of Hologic's Common Stock B-1
4.02 Description of capital stock (contained in the Certificate of Incorporation of Hologic, filed as A-3.01
4.03 Rights Agreement dated December 22, 1992 C-1
4.04 Form of Rights Certificate C-2
4.05 Amendment No. 1 to Rights Agreement, dated as of December 13, 1995 H-4.01
4.06 Amendment No. 2 to Rights Agreement, dated as of December 9, 1996 H-4.02
4.07 Amendment No. 3 to Rights Agreement, dated as of April 25, 1999 L-4.03
10.01 1986 Combination Stock Option Plan, as amended E-10.07*
10.02 Amended and Restated 1990 Non-Employee Director Stock Option Plan F-10.08*
10.03 1995 Combination Stock Option Plan F-10.10*
10.04 Amended and Restated 1999 Equity Incentive Plan K-10*
10.05 2000 Acquisition Equity Incentive Plan filed herewith
10.06 Form of Indemnification Agreement for directors and certain officers of Hologic A-10.12*
10.07 Employment Agreement with an officer of Hologic D-10.22*
10.08 Severance Agreement with an officer of Hologic P-10.08*
10.09 Severance Agreement with an officer of Hologic P-10.09*
10.10 Severance Agreement with an officer of Hologic P-10.11*
10.11 Severance Agreement with an officer of Hologic filed herewith*
10.12 Employment Letter to an officer of Hologic filed herewith*
10.13 Promissory Note to an officer of Hologic filed herewith*
10.14 Form of Officer Separation Agreement including list of officers to whom provided filed herewith*
10.15 License Agreement by and between Hologic and Vivid Technologies, Inc. A-10.18
10.16 Amendment No.1 to the License Agreement by and between Hologic and Vivid Technologies, Inc. G-10.25
10.17 Termination Agreement to the License Agreement by and between Hologic and Vivid Technologies, Inc. P-10.16
10.18 Secured Promissory Note R-10.23
10.19 Mortgage, Security Agreement and assignment of Leases and Rents (Danbury) R-10.24
10.20 Mortgage, Security Agreement and assignment of Leases and Rents (Bedford) R-10.25
10.21 Guaranty R-10.26
10.22 Supply Agreement R-10.27
10.23 Facility Lease (Littleton) Q-10.89
10.24 Facility Lease (Danbury) Q-10.14
10.25 Loan and Security Agreement filed herewith
10.26 Parent Pledge Agreement filed herewith
10.27 Guaranty and Security Agreement filed herewith
10.28 Mortgage and Security Agreement filed herewith
10.29 First Amendment to the Loan and Security Agreement filed herewith
21.01 Subsidiaries of the Company filed herewith
23.01 Consent of Arthur Andersen LLP filed herewith
</TABLE>
_________________________
* Management compensation plan or arrangement
A We previously filed this exhibit on January 24, 1990 with the referenced
exhibit number as an exhibit to our Registration Statement on Form S-1
(Registration No. 33-33128), and the previously filed exhibit is
incorporated herein by reference.
B We previously filed this exhibit on January 31, 1990 with the referenced
exhibit number as an exhibit to our Registration Statement on Form 8-A, and
the previously filed exhibit is incorporated herein by reference.
C We previously filed this exhibit on January 29, 1993 with the referenced
exhibit number as an exhibit to our Registration Statement on Form 8-A, and
the previously filed exhibit is incorporated herein by reference.
D We previously filed this exhibit on December 22, 1993 with the referenced
exhibit number as an exhibit to our 1993 Annual Report on Form 10-K (SEC
File No. 000-18281) for the fiscal year ended September 25, 1993, and the
previously filed exhibit is incorporated herein by reference.
<PAGE>
E We previously filed this exhibit on December 22, 1994 with the referenced
exhibit number as an exhibit to our 1994 Annual Report on Form 10-K (SEC
File No. 000-18281) for the fiscal year ended September 24, 1994, and the
previously filed exhibit is incorporated herein by reference.
F We previously filed this exhibit on December 26, 1995, with the referenced
exhibit number as an exhibit to our 1995 Annual Report on Form 10-K (SEC
File No. 000-18281) for the fiscal year ended September 30, 1995, and the
previously filed exhibit is incorporated herein by reference.
G We previously filed this exhibit on December 27, 1996 with the referenced
exhibit number as an exhibit to our 1996 Annual Report on Form 10-K (SEC
File No. 000-18281) for the fiscal year ended September 28, 1996, and the
previously filed exhibit is incorporated herein by reference.
H We previously filed this exhibit on January 17, 1997 with the referenced
exhibit number as an exhibit to our Registration Statement on Form 8-A/A,
and the previously filed exhibit is incorporated herein by reference.
I We previously filed this exhibit on August 7, 1998 with the referenced
exhibit number as an exhibit to our 1998 Third Quarter Report on Form 10-Q
(SEC File No. 000-18281) for the quarter ended June 27, 1998, and the
previously filed exhibit is incorporated herein by reference.
J We previously filed this exhibit on December 23, 1998 with the referenced
exhibit number as an exhibit to our 1998 Annual Report on Form 10-K (SEC
File No. 000-18281) for the fiscal year ended September 26, 1998, and the
previously filed exhibit is incorporated herein by reference.
K We previously filed this exhibit on May 11, 1999 with the referenced
exhibit number as an exhibit to our 1999 Second Quarter Report on Form 10-Q
(SEC File No. 000-18281) for the quarter ended March 27, 1999, and the
previously filed exhibit is incorporated herein by reference.
L We previously filed this exhibit on May 20, 1999 with the referenced
exhibit number as an exhibit to our Registration Statement on Form 8-A/A,
and the previously filed exhibit is incorporated herein by reference.
M We previously filed this exhibit on June 18, 1999 with the referenced
exhibit number as an exhibit to our Current Report on Form 8-K (SEC File
No. 000-18281) dated as of June 3, 1999, and the previously filed exhibit
is incorporated herein by reference.
N We previously filed this exhibit on October 1, 1999 with the referenced
exhibit number as an exhibit to our Current Report on Form 8-K (SEC File
No. 000-18281) dated as of September 29, 1999, and the previously filed
exhibit is incorporated herein by reference.
O We previously filed this exhibit on October 2, 2000 with the referenced
exhibit number as an exhibit to our Current Report on Form 8-K (SEC File
No. 000-18281) dated as of September 15, 2000, and the previously filed
exhibit is incorporated herein by reference.
P We previously filed this exhibit on December 23, 1999 with the referenced
exhibit number as an exhibit to our Annual Report on Form 10-K (SEC File
No. 000-18281) for the fiscal year ended September 25, 1999, and the
previously filed exhibit is incorporated by reference.
Q Trex Medical Corporation previously filed this exhibit with the referenced
exhibit number as an Exhibit to its Registration Statement on Form S-1
(Reg. No. 333-2926), and the previously filed exhibit is incorporated by
reference.
R We previously filed this exhibit on December 22, 2000 with the referenced
exhibit number as an exhibit to our Annual Report on Form 10-K (SEC File
No. 000-18281) for the fiscal year ended September 30, 2000, and the
previously filed exhibit is incorporated by reference.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.05
<SEQUENCE>3
<FILENAME>dex1005.txt
<DESCRIPTION>2000 ACQUISITION EQUITY INCENTIVE PLAN
<TEXT>
<PAGE>
EXHIBIT 10.05
HOLOGIC, INC.
2000 ACQUISITION EQUITY INCENTIVE PLAN
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Section 1. Purpose
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The purpose of the Hologic, Inc. 2000 Acquisition Equity Incentive Plan
(the "Plan") is to attract and retain (a) employees, consultants and advisors,
of newly acquired businesses who have been or are being hired as employees,
consultants or advisors of Hologic, Inc., or any of its consolidated
subsidiaries (collectively, the "Company"), and (b) employees, consultants and
advisors, of the Company who have or are anticipated to provide significant
assistance in connection with the acquisition of a newly acquired business or
its integration with the Company, and to provide such persons an incentive for
them to achieve long-range performance goals, and to enable them to participate
in the long-term growth of the Company.
Section 2. Definitions
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(a) "Affiliate" means any business entity which is included in the Hologic,
Inc. consolidated group for financial reporting purposes in accordance with
U.S. general accepted accounting principles as then in effect.
(b) "Award" means any Option, Stock Appreciation Right, Performance or Award
Share, or Restricted Stock awarded under the Plan.
(c) "Award Share" means a share of Common Stock awarded to a Participant
without payment therefor.
(d) "Board" means the Board of Directors of the Company.
(e) "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
(f) "Committee" means the Compensation or Stock Option Committee of the Board,
or such other committee of the Board appointed by the Board to administer
the Plan.
(g) "Common Stock" or "Stock" means the Common Stock, par value $.01 per share,
of the Company.
(h) "Company" means Hologic, Inc.
(i) "Designated Beneficiary" means the beneficiary designated by a Participant,
in a manner determined by the Board, to receive amounts due or exercise
rights of the Participant in the event of the Participant's death. In the
absence of an effective designation by a Participant, Designated
Beneficiary shall mean the Participant's estate.
(j) "Fair Market Value" means, with respect to Common Stock or any other
property, the fair market value of such property as determined by the Board
in good faith or in the manner established by the Board from time to time.
(k) "Nonqualified Stock Option" means an option to purchase shares of Common
Stock, awarded to a Participant under Section 6, which is not intended to
comply as an incentive stock option under Section 422 of the Code or any
successor provision.
(l) "Option" means a Nonqualified Stock Option.
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(m) "Participant" means a person eligible pursuant to Section 4 hereof and
selected by the Board to receive an Award under the Plan.
(n) "Performance Cycle" or "Cycle" means the period of time selected by the
Board during which performance is measured for the purpose of determining
the extent to which an award of Performance Shares has been earned.
(o) "Performance Shares" mean shares of Common Stock which may be earned by the
achievement of performance goals, awarded to a Participant under Section 8.
(p) "Restricted Period" means the period of time selected by the Board during
which an award of Restricted Stock may be forfeited to the Company.
(q) "Restricted Stock" means shares of Common Stock subject to forfeiture,
awarded to a Participant under Section 9.
(r) "Stock Appreciation Right" or "SAR" means a right to receive any excess in
value of shares of Common Stock over the exercise price, awarded to a
Participant under Section 7.
(s) "Stock Unit" means an award of Common Stock and/or other rights granted as
units that are valued in whole or in part by reference to, or otherwise
based on, the value of Common Stock, awarded to a Participant under Section
10.
Section 3. Administration
--------------
The Plan shall be administered by the Board or the Committee, at the
discretion of the Board. The Board shall have authority to adopt, alter and
repeal such administrative rules, guidelines and practices governing the
operation of the Plan as it shall from time to time consider advisable, and to
interpret the provisions of the Plan. The Board's decisions shall be final and
binding. To the extent permitted by applicable law, the Board may delegate to
the Committee the power to make Awards to Participants and all determinations
under the Plan with respect thereto.
Section 4. Eligibility
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(a) Except as set forth in subsection 4(b), any (i) employees, consultants or
advisors, of a newly acquired business who have been or are being hired as
employees, consultants or advisors of the Company or (ii) employees, consultants
or advisors, of the Company who have or are anticipated to provide significant
assistance in connection with the acquisition of a newly acquired business or
its integration with the Company, all as determined by the Board or the
Committee, as applicable, are eligible to participate in the Plan.
(b) Notwithstanding the foregoing, no officers or directors of Hologic, Inc.
shall be eligible to receive an Award under the Plan, except for an officer who
is being granted an Award as an inducement essential to the individual's
entering into the employment of the Company.
Section 5. Stock Available for Awards
--------------------------
(a) A maximum of 1,000,000 shares of Common Stock may be issued under this
Plan. If any Award in respect of shares of Common Stock expires or is
terminated unexercised or is forfeited for any reason or settled in a
manner that results in fewer shares outstanding than were initially
awarded, including without limitation the surrender of shares in payment
for the Award or any tax obligation thereon, the shares subject to such
Award or so surrendered, as the case may be, to the extent of such
expiration, termination, forfeiture or decrease, shall again be available
for award under the Plan. Common Stock issued through the assumption
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<PAGE>
or substitution of outstanding grants from an acquired Company shall not
reduce the shares available for Awards under the Plan. Shares issued under
the Plan may consist in whole or in part of authorized but unissued shares
or treasury shares.
(b) In the event that the Board determines that any stock dividend,
extraordinary cash dividend, creation of a class of equity securities,
recapitalization, reorganization, merger, consolidation, split-up, spin-
off, combination, exchange of shares, warrants or rights offering to
purchase Common Stock at a price substantially below fair market value, or
other similar transaction affects the Common Stock such that an adjustment
is required in order to preserve the benefits or potential benefits
intended to be made available under the Plan, then the Board, shall
equitably adjust any or all of (i) the number and kind of shares in respect
of which Awards may be made under the Plan, (ii) the number and kind of
shares subject to outstanding Awards, and (iii) the award, exercise or
conversion price with respect to any of the foregoing, and if considered
appropriate, the Board may make provision for a cash payment with respect
to an outstanding Award, provided that the number of shares subject to any
Award shall always be a whole number.
Section 6. Stock Options
-------------
(a) Subject to the provisions of the Plan, the Board may award Nonqualified
Stock Options and determine the number of shares to be covered by each
Option, the option price therefor and the conditions and limitations
applicable to the exercise of the Option.
(b) The Board shall establish the option price at the time each Option is
awarded.
(c) Each Option shall be exercisable at such times and subject to such terms
and conditions as the Board may specify in the applicable Award or
thereafter. The Board may impose such conditions with respect to the
exercise of Options, including conditions relating to applicable federal or
state securities laws, as it considers necessary or advisable.
(d) No shares shall be delivered pursuant to any exercise of an Option until
payment in full of the option price therefor is received by the Company.
Such payment may be made in whole or in part in cash or, to the extent
permitted by the Board at or after the award of the Option, by delivery of
a note or shares of Common Stock owned by the optionholder, including
Restricted Stock, valued at their Fair Market Value on the date of
delivery, by the reduction of the shares of Common Stock that the
optionholder would be entitled to receive upon exercise of the Option, such
shares to be valued at their Fair Market Value on the date of exercise,
less their option price (a so-called "cashless exercise"), or such other
lawful consideration as the Board may determine. In addition, an
optionholder may engage in a successive exchange (or series of exchanges)
in which the shares of Common Stock that such optionholder is entitled to
receive upon the exercise of an Option may be simultaneously utilized as
payment for the exercise of an additional Option or Options.
(e) The Board may provide for the automatic award of an Option upon the
delivery of shares to the Company in payment of an Option for up to the
number of shares so delivered.
Section 7. Stock Appreciation Rights
-------------------------
Subject to the provisions of the Plan, the Board may award SARs in tandem
with an Option (at or after the award of the Option), or alone and unrelated to
an Option. SARs in tandem with an Option shall terminate to the extent that the
related Option is exercised, and the related Option shall terminate to the
extent that the tandem SARs are exercised.
Section 8. Performance Shares
------------------
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<PAGE>
(a) Subject to the provisions of the Plan, the Board may award Performance
Shares and determine the number of such shares for each Performance Cycle
and the duration of each Performance Cycle. There may be more than one
Performance Cycle in existence at any one time, and the duration of
Performance Cycles may differ from each other. The payment value of
Performance Shares shall be equal to the Fair Market Value of the Common
Stock on the date the Performance Shares are earned or, in the discretion
of the Board, on the date the Board determines that the Performance Shares
have been earned.
(b) The Board shall establish performance goals for each Cycle, for the purpose
of determining the extent to which Performance Shares awarded for such
Cycle are earned, on the basis of such criteria and to accomplish such
objectives as the Board may from time to time select. During any Cycle,
the Board may adjust the performance goals for such Cycle as it deems
equitable in recognition of unusual or non-recurring events affecting the
Company, changes in applicable tax laws or accounting principles, or such
other factors as the Board may determine.
(c) As soon as practicable after the end of a Performance Cycle, the Board
shall determine the number of Performance Shares which have been earned on
the basis of performance in relation to the established performance goals.
The payment values of earned Performance Shares shall be distributed to the
Participant or, if the Participant has died, to the Participant's
Designated Beneficiary, as soon as practicable thereafter. The Board shall
determine, at or after the time of award, whether payment values will be
settled in whole or in part in cash or other property, including Common
Stock or Awards.
Section 9. Restricted Stock
----------------
(a) Subject to the provisions of the Plan, the Board may award shares of
Restricted Stock and determine the duration of the Restricted Period during
which, and the conditions under which, the shares may be forfeited to the
Company and the other terms and conditions of such Awards. Shares of
Restricted Stock may be issued for no cash consideration or such minimum
consideration as may be required by applicable law.
(b) Shares of Restricted Stock may not be sold, assigned, transferred, pledged
or otherwise encumbered, except as permitted by the Board, during the
Restricted Period. Shares of Restricted Stock shall be evidenced in such
manner as the Board may determine. Any certificates issued in respect of
shares of Restricted Stock shall be registered in the name of the
Participant and unless otherwise determined by the Board, deposited by the
Participant, together with a stock power endorsed in blank, with the
Company. At the expiration of the Restricted Period, the Company shall
deliver such certificates to the Participant or if the Participant has
died, to the Participant's Designated Beneficiary.
Section 10. Stock Units
-----------
(a) Subject to the provisions of the Plan, the Board may award Stock Units
subject to such terms, restrictions, conditions, performance criteria,
vesting requirements and payment rules as the Board shall determine.
(b) Shares of Common Stock awarded in connection with a Stock Unit Award shall
be issued for no cash consideration or such minimum consideration as may be
required by applicable law. Such shares of Common Stock may be designated
as Award Shares by the Board.
Section 11. General Provisions Applicable to Awards
---------------------------------------
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<PAGE>
(a) Documentation. Each Award under the Plan shall be evidenced by a writing
-------------
delivered to the Participant specifying the terms and conditions thereof
and containing such other terms and conditions not inconsistent with the
provisions of the Plan as the Board considers necessary or advisable to
achieve the purposes of the Plan or comply with applicable tax and
regulatory laws and accounting principles.
(b) Board Discretion. Each type of Award may be made alone, in addition to or
----------------
in relation to any other type of Award. The terms of each type of Award
need not be identical, and the Board need not treat Participants uniformly.
Except as otherwise provided by the Plan or a particular Award, any
determination with respect to an Award may be made by the Board at the time
of award or at any time thereafter. Without limiting the foregoing, an
Award may be made by the Board, in its discretion, to any 401(k), savings,
pension, profit sharing or other similar plan of the Company in lieu of or
in addition to any cash or other property contributed or to be contributed
to such plan.
(c) Settlement. The Board shall determine whether Awards are settled in whole
----------
or in part in cash, Common Stock, other securities of the Company, Awards
or other property. The Board may permit a Participant to defer all or any
portion of a payment under the Plan, including the crediting of interest on
deferred amounts denominated in cash and dividend equivalents on amounts
denominated in Common Stock.
(d) Dividends and Cash Awards. In the discretion of the Board, any Award under
-------------------------
the Plan may provide the Participant with (i) dividends or dividend
equivalents payable currently or deferred with or without interest, and
(ii) cash payments in lieu of or in addition to an Award.
(e) Termination of Employment. The Board shall determine the effect on an
-------------------------
Award of the disability, death, retirement or other termination of
employment of a Participant and the extent to which, and the period during
which, the Participant's legal representative, guardian or Designated
Beneficiary may receive payment of an Award or exercise rights thereunder.
(f) Change in Control. In order to preserve a Participant's rights under an
-----------------
Award in the event of a change in control of the Company, the Board in its
discretion may, at the time an Award is made or at any time thereafter,
take one or more of the following actions: (i) provide for the acceleration
of any time period relating to the exercise or realization of the Award,
(ii) provide for the purchase of the Award upon the Participant's request
for an amount of cash or other property that could have been received upon
the exercise or realization of the Award had the Award been currently
exercisable or payable, (iii) adjust the terms of the Award in a manner
determined by the Board to reflect the change in control, (iv) cause the
Award to be assumed, or new rights substituted therefor, by another entity,
or (v) make such other provision as the Board may consider equitable and in
the best interests of the Company.
(g) Withholding. The Participant shall pay to the Company, or make provision
-----------
satisfactory to the Board for payment of, any taxes required by law to be
withheld in respect of Awards under the Plan no later than the date of the
event creating the tax liability. In the Board's discretion, such tax
obligations may be paid in whole or in part in shares of Common Stock,
including shares retained from the Award creating the tax obligation,
valued at their Fair Market Value on the date of delivery. The Company and
its Affiliates may, to the extent permitted by law, deduct any such tax
obligations from any payment of any kind otherwise due to the Participant.
(h) Amendment of Award. The Board may amend, modify or terminate any
------------------
outstanding Award, including substituting therefor another Award of the
same or a different type, changing the date of exercise or realization,
provided that the Participant's consent to such action shall be
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<PAGE>
required unless the Board determines that the action, taking into account
any related action, would not materially and adversely affect the
Participant.
Section 12. Miscellaneous
-------------
(a) No Right To Employment. No person shall have any claim or right to be
----------------------
granted an Award, and the grant of an Award shall not be construed as
giving a Participant the right to continued employment. The Company
expressly reserves the right at any time to dismiss a Participant free from
any liability or claim under the Plan, except as expressly provided in the
applicable Award.
(b) No Rights As Shareholder. Subject to the provisions of the applicable
------------------------
Award, no Participant or Designated Beneficiary shall have any rights as a
shareholder with respect to any shares of Common Stock to be distributed
under the Plan until he or she becomes the holder thereof. A Participant
to whom Common Stock is awarded shall be considered the holder of the Stock
at the time of the Award except as otherwise provided in the applicable
Award.
(c) Effective Date. The Plan shall be effective on September 19, 2000.
--------------
(d) Amendment of Plan. The Board may amend, suspend or terminate the Plan or
-----------------
any portion thereof at any time.
(e) Governing Law. The provisions of the Plan shall be governed by and
-------------
interpreted in accordance with the laws of the State of Delaware.
(f) Indemnity. Neither the Board nor the Committee, nor any members of either,
---------
nor any employees of the Company or any parent, subsidiary, or other
affiliate, shall be liable for any act, omission, interpretation,
construction or determination made in good faith in connection with their
responsibilities with respect to this Plan, and the Company hereby agrees
to indemnify the members of the Board, the members of the Committee, and
the employees of the Company and its parent or subsidiaries in respect of
any claim, loss, damage, or expense (including reasonable counsel fees)
arising from any such act, omission, interpretation, construction or
determination to the full extent permitted by law.
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</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.11
<SEQUENCE>4
<FILENAME>dex1011.txt
<DESCRIPTION>SEVERANCE AGREEMENT WITH AN OFFICER
<TEXT>
<PAGE>
EXHIBIT 10.11
AGREEMENT
AGREEMENT by and between HOLOGIC, INC., a Delaware corporation (the
"Company"), and John W. Cumming (the "Executive"), dated as of the 31st day of
July, 2001.
The Board of Directors of the Company (the "Board"), has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication of the Executive, notwithstanding the
possibility, threat, or occurrence of a Change of Control (as defined below) of
the Company. The Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change of Control and to encourage the
Executive's full attention and dedication to the Company currently and in the
event of any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and which are competitive with those of other corporations.
Therefore, in order to accomplish these objectives, the Board has caused the
Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions. (a) The "Effective Date" shall be the first date
-------------------
during the "Change of Control Period" (as defined in Section 1(b)) on which a
Change of Control occurs. Anything in this Agreement to the contrary
notwithstanding, if the Executive's employment with the Company is terminated or
the Executive ceases to be an officer of the Company prior to the date on which
a Change of Control occurs, and it is reasonably demonstrated that such
termination of employment (1) was at the request of a third party who has taken
steps reasonably calculated to effect the Change of Control or (2) otherwise
arose in connection with or anticipation of the
<PAGE>
Change of Control, then for all purposes of this Agreement the "Effective Date"
shall mean the date immediately prior to the date of such termination of
employment.
(b) The "Change of Control Period" is the period commencing on the date
hereof and ending on the third anniversary of such date; provided, however that
commencing on the date one year after the date hereof, and on each annual
anniversary of such date (such date and each annual anniversary thereof is
hereinafter referred to as the "Renewal Date"), the Change of Control Period
shall be automatically extended without any further action by the Company or the
Executive so as to terminate three years from such Renewal Date; provided,
however, that if the Company shall give notice in writing to the Executive, at
least 60 days prior to the Renewal Date, stating that the Change of Control
Period shall not be extended, then the Change of Control Period shall expire
three years from the last effective Renewal Date.
2. Change of Control. For the purpose of this Agreement, a "Change of
-----------------
Control" shall mean:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock"); provided, however, that any
acquisition by the Company or its subsidiaries, or any employee benefit
plan (or related trust) of the Company or its subsidiaries of 20% or more
of Outstanding Company Common Stock shall not constitute a Change in
Control; and provided, further, that any acquisition by a corporation with
respect to which, following such acquisition, more than 50% of
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<PAGE>
the then outstanding shares of common stock of such corporation, is then
beneficially owned, directly or indirectly, by all or substantially all of
the individuals and entities who were the beneficial owners of the
Outstanding Company Common Stock immediately prior to such acquisition in
substantially the same proportion as their ownership, immediately prior to
such acquisition, of the Outstanding Company Common Stock, shall not
constitute a Change in Control; or
(b) Any transaction which results in the Continuing Directors (as
defined in the Certificate of Incorporation of the Company) constituting
less than a majority of the Board of Directors of the Company; or
(c) Approval by the stockholders of the Company of (i) a
reorganization, merger or consolidation, in each case, with respect to
which all or substantially all of the individuals and entities who were the
beneficial owners of the Outstanding Company Common Stock immediately prior
to such reorganization, merger or consolidation do not, following such
reorganization, merger or consolidation, beneficially own, directly or
indirectly, more than 50% of the then outstanding shares of common stock of
the corporation resulting from such a reorganization, merger or
consolidation, (ii) a complete liquidation or dissolution of the Company or
(iii) the sale or other disposition of all or substantially all of the
assets of the Company, excluding a sale or other disposition of assets to a
subsidiary of the Company.
Anything in this Agreement to the contrary notwithstanding, if an event
that would, but for this paragraph, constitute a Change of Control results from
or arises out of a purchase or other
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<PAGE>
acquisition of the Company, directly or indirectly, by a corporation or other
entity in which the Executive has a greater than ten percent (10%) direct or
indirect equity interest, such event shall not constitute a Change of Control.
3. Employment Period. Subject to the terms and conditions hereof, the
-----------------
Company hereby agrees to continue the Executive in its employ, and the Executive
hereby agrees to remain in the employ of the Company, for the period commencing
on the Effective Date and ending on the last day of the thirty-sixth month
following the month in which the Effective Date occurs (the "Employment
Period").
4. Terms of Employment. (a) Position and Duties. (i) During the
------------------- -------------------
Employment Period, (A) the Executive's position (including status, offices,
titles and reporting requirements), authority, duties and responsibilities shall
be at least commensurate in all material respects with the most significant of
those held, exercised and assigned at any time during the 90-day period
immediately preceding the Effective Date and (B) the Executive's services shall
be performed at the location where the Executive was employed immediately
preceding the Effective Date or any office or location less than 35 miles from
such location.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive agrees
to devote his full business time to the business and affairs of the Company and,
to the extent necessary to discharge the responsibilities assigned to the
Executive hereunder, to use the Executive's reasonable best efforts to perform
faithfully and efficiently such responsibilities. During the Employment Period
it shall not be a violation of this Agreement for the Executive to (A) serve on
corporate, civic or charitable boards or committees, (B) deliver lectures,
fulfill speaking engagements or teach at educational institutions and (C) manage
personal investments, so long as such activities do not
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<PAGE>
significantly interfere with the performance of the Executive's responsibilities
as an employee of the Company in accordance with this Agreement. It is expressly
understood and agreed that to the extent that any such activities have been
conducted by the Executive prior to the Effective Date, the continued conduct of
such activities (or the conduct of activities similar in nature and scope
thereto) subsequent to the Effective Date, including, without limitation,
activities with respect to Vivid Technologies, Inc., shall not thereafter be
deemed to interfere with the performance of the Executive's responsibilities to
the Company.
(b) Compensation. (i) Base Salary. During the Employment Period, the
------------ -----------
Executive shall receive an annual base salary ("Annual Base Salary"), which
shall be paid at a monthly rate, at least equal to twelve times the highest
monthly base salary paid or payable to the Executive by the Company and its
affiliated companies in respect of the twelve-month period immediately preceding
the month in which the Effective Date occurs. During the Employment Period, the
Annual Base Salary shall be reviewed at least annually and shall be increased at
any time and from time to time as shall be substantially consistent with
increases in base salary awarded in the ordinary course of business to other
peer executives of the Company and its affiliated companies. Any increase in
Annual Base Salary shall not serve to limit or reduce any other obligation to
the Executive under this Agreement. Annual Base Salary shall not be reduced
after any such increase and the term Annual Base Salary as utilized in this
Agreement shall refer to Annual Base Salary as so increased. As used in this
Agreement, the term "affiliated companies" includes any company controlled by,
controlling or under common control with the Company.
(iii) Annual Bonus. In addition to Annual Base Salary, the Executive
------------
shall be awarded, for each fiscal year during the Employment Period, an annual
bonus (the "Annual Bonus") in cash at least equal to the average annualized (for
any fiscal year consisting of less
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<PAGE>
than twelve full months or with respect to which the Executive has been employed
by the Company for less than twelve full months) bonus (the "Average Annual
Bonus") paid or payable to the Executive by the Company and its affiliated
companies in respect of the three fiscal years immediately preceding the fiscal
year in which the Effective Date occurs. Each such Annual Bonus shall be paid no
later than the end of the third month of the fiscal year next following the
fiscal year for which the Annual Bonus is awarded, unless the Executive shall
elect to defer the receipt of such Annual Bonus pursuant to deferral plans of
the Company.
(iv) Special Bonus. In addition to Annual Base Salary and Annual
-------------
Bonus payable as hereinabove provided, if the Executive remains employed with
the Company and/or its affiliated companies through the first anniversary of the
Effective Date, the Company shall pay to the Executive a special bonus (the
"Special Bonus") in recognition of the Executive's services during the crucial
one-year transition period following the Change of Control in cash equal to the
sum of (A) the Executive's Annual Base Salary and (B) the greater of (x) the
Annual Bonus paid or payable (and annualized for any fiscal year consisting of
less than twelve full months or for which the Executive has been employed for
less than twelve full months) to the Executive for the most recently completed
fiscal year during the Employment Period, if any, and (y) the Average Annual
Bonus (such greater amount hereafter referred to as the "Highest Annual Bonus").
The Special Bonus shall be paid no later than 30 days following the first
anniversary of the Effective Date.
(v) Incentive, Savings and Retirement Plans. In addition to Annual
---------------------------------------
Base Salary and Annual Bonus payable as hereinabove provided, the Executive
shall be entitled to participate during the Employment Period in all incentive,
savings and retirement plans, practices, policies and programs applicable to
other peer executives of the Company and its affiliated companies,
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<PAGE>
but in no event shall such plans practices, policies and programs provide the
Executive with incentive, savings and retirement benefits opportunities, in each
case, less favorable, in the aggregate, than the most favorable of those
provided by the Company and its affiliated companies for the Executive under
such plans, practices, policies and programs as in effect at any time during the
one-year immediately preceding the Effective Date, or, if more favorable to the
Executive, those provided generally at any time after the Effective Date to
other peer executives of the Company and its affiliated companies.
(vi) Welfare Benefit Plans. During the Employment Period, the
---------------------
Executive and/or the Executive's family, as the case may be, shall be eligible
for participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, salary continuance, employee life, group life, accidental death and
travel accident insurance plans and programs) and applicable to other peer
executives of the Company and its affiliated companies, but in no event shall
such plans, practices, policies and programs provide benefits which are less
favorable, in the aggregate, than the most favorable of such plans, practices,
policies and programs in effect at any time during the one-year period
immediately preceding the Effective Date, or, if more favorable to the
Executive, those provided generally at any time after the Effective Date to
other peer executives of the Company and its affiliated companies.
(vii) Expenses. During the Employment Period, the Executive shall be
--------
entitled to receive prompt reimbursement for all reasonable expenses incurred by
the Executive upon submission of appropriate accountings in accordance with the
most favorable policies, practices and procedures of the Company and its
affiliated companies in effect at any time during the one-
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<PAGE>
year period immediately preceding the Effective Date or, if more favorable to
the Executive, as in effect at any time thereafter with respect to other peer
executives of the Company and its affiliated companies.
(viii) Fringe Benefits. During the Employment Period, the Executive
---------------
shall be entitled to fringe benefits in accordance with the most favorable
plans, practices, programs and policies of the Company and its affiliated
companies in effect at any time during the one-year period immediately preceding
the Effective Date or, if more favorable to the Executive, as in effect at any
time thereafter with respect to other peer executives of the Company and its
affiliated companies.
(ix) Office and Support Staff. During the Employment Period, the
------------------------
Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to exclusive personal secretarial and
other assistance, at least equal to the most favorable of the foregoing provided
to the Executive by the Company and its affiliated companies at any time during
the one-year period immediately preceding the Effective Date or, if more
favorable to the Executive, as provided at any time thereafter with respect to
other peer executives of the Company and its affiliated companies.
(x) Vacation. During the Employment Period, the Executive shall be
--------
entitled to paid vacation in accordance with the most favorable plans, policies,
programs and practices of the Company and its affiliated companies as in effect
at any time during the one-year period immediately preceding the Effective Date
or, if more favorable to the Executive, as in effect at any time thereafter with
respect to other peer incentives of the Company and its affiliated companies.
-8-
<PAGE>
5. Termination of Employment. (a) Death or Disability. The Executive's
------------------------- -------------------
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Company determines in good faith that the Disability
of the Executive has occurred during the Employment Period (pursuant to the
definition of "Disability" set forth below), it may give to the Executive
written notice in accordance with Section 12(b) of this Agreement of its
intention to terminate the Executive's employment. In such event, the
Executive's employment with the Company shall terminate effective on the 30th
day after receipt of such notice by the Executive (the "Disability Effective
Date"), provided that, within the 30 days after such receipt, the Executive
shall not have returned to full-time performance of the Executive's duties. For
purposes of this Agreement, "Disability" means the absence of the Executive from
the Executive's duties with the Company on a full-time basis for 180 consecutive
business days as a result of incapacity due to mental or physical illness which
is determined to be total and permanent by a physician selected by the Company
or its insurers and acceptable to the Executive or the Executive's legal
representative (such agreement as to acceptability not to be withheld
unreasonably).
(b) Cause. The Company may terminate the Executive's employment during
-----
the Employment Period for "Cause". For purposes of this Agreement, "Cause" means
(i) an act or acts of personal dishonesty taken by the Executive and intended to
result in substantial personal enrichment of the Executive at the expense of the
Company, (ii) repeated violations by the Executive of the Executive's
obligations under Section 4(a) of this Agreement (other than as a result of
incapacity due to physical or mental illness) which are demonstrably willful and
deliberate on the Executive's part, which are committed in bad faith or without
reasonable belief that such violations are in the best interests of the Company
and which are not remedied in a
-9-
<PAGE>
reasonable period of time after receipt of written notice from the Company or
(iii) the conviction of the Executive of a felony involving moral turpitude.
(c) Good Reason. The Executive's employment may be terminated during the
-----------
Employment Period by the Executive for Good Reason. For purposes of this
Agreement, "Good Reason" means:
(i) the assignment to the Executive of any duties inconsistent
in any respect with the Executive's position (including status, offices,
titles and reporting requirements), authority, duties or responsibilities
as contemplated by Section 4(a) of this Agreement, or any other action by
the Company which results in a diminution in such position, authority,
duties or responsibilities, excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given by
the Executive;
(ii) any failure by the Company to comply with any of the
provisions of Section 4(b) of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith and which
is remedied by the Company promptly after receipt of notice thereof given
by the Executive;
(iii) the Company's requiring the Executive to be based at any
office or location other than that described in Section 4(a)(i)(B) hereof;
(iv) any purported termination by the Company of the
Executive's employment otherwise than as expressly permitted by this
Agreement; or
(v) any failure by the Company to comply with and satisfy
Section 11(c) of this Agreement.
-10-
<PAGE>
For purposes of this Section 5(c), any good faith determination of "Good
Reason" made by the Executive shall be conclusive.
(d) Notice of Termination. Any termination by the Company for Cause or by
---------------------
the Executive for Good Reason shall be communicated by Notice of Termination to
the other party hereto given in accordance with Section 12(b) of this Agreement.
For purposes of this Agreement, a "Notice of Termination" means a written notice
which (i) indicates the specific termination provision in this Agreement relied
upon, (ii) to the extent applicable, sets forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) if the Date of Termination
(as defined below) is other than the date of receipt of such notice, specifies
the termination date (which date shall be not more than fifteen days after the
giving of such notice). The failure by the Executive or the Company to set
forth in the Notice of Termination any fact or circumstance which contributes to
a showing of Good Reason or Cause shall not waive any right of the Executive or
the Company hereunder or preclude the Executive or the Company from asserting
such fact or circumstance in enforcing the Executive's or the Company's rights
hereunder.
(e) Date of Termination. "Date of Termination" means the date of receipt
-------------------
of the Notice of Termination or any later date specified therein, as the case
may be; provided however, that (i) if the Executive's employment is terminated
by the Company other than for Cause, death or Disability, the Date of
Termination shall be the date on which the Company notifies the Executive of
such termination and (ii) if the Executive's employment is terminated by reason
of death or Disability, the Date of Termination shall be the date of death of
the Executive or the Disability Effective Date, as the case may be.
6. Obligations of the Company upon Termination.
-------------------------------------------
-11-
<PAGE>
(a) Death. If the Executive's employment is terminated by reason of the
-----
Executive's death during the Employment Period, this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement, other than for (i) payment of the sum of the following amounts: (A)
the Executive's Annual Base Salary through the Date of Termination to the extent
not theretofore paid, (B) the product of (I) the Highest Annual Bonus and (II) a
fraction, the numerator of which is the number of days in the current fiscal
year through the Date of Termination, and the denominator of which is 365, (C)
the Special Bonus, if due to the Executive pursuant to Section 4(b)(iv), to the
extent not theretofore paid, and (D) any compensation previously deferred by the
Executive (together with any accrued interest or earnings thereon) and any
accrued bonus amounts or vacation pay, in each case, to the extent not yet paid
by the Company (the amounts described in subparagraphs (A), (B), (C) and (D) are
hereafter referred to as "Accrued Obligations" and shall be paid to the
Executive's estate or beneficiary, as applicable, in a lump sum in cash within
30 days of the Date of Termination), (ii) for the remainder of the Employment
Period, or such longer period as any plan, program, practice or policy may
provide, the Company shall continue benefits to the Executive and/or the
Executive's family at least equal to those which would have been provided in
accordance with the applicable plans, programs, practices and policies described
in Section 4(b)(v) of this Agreement as if the Executive's employment had not
been terminated in accordance with the most favorable plans, practices, programs
or policies of the Company and its affiliated companies as in effect and
applicable generally to other peer executives and their families during the one
year period immediately preceding the Effective Date or, if more favorable to
the Executive, as in effect at any time thereafter with respect to other peer
executives of the Company and its affiliated companies and their families (such
continuation of such benefits for the applicable period herein
-12-
<PAGE>
set forth shall be hereinafter referred to as "Welfare Benefit Continuation")
(for purposes of determining eligibility of the Executive for retiree benefits
pursuant to such plans, practices, programs and policies, the Executive shall be
considered to have remained employed until the end of the Employment Period and
to have retired on the last day of such period), and (iii) payment to the
Executive's estate or beneficiary, as applicable, in a lump sum in cash within
30 days of the Date of Termination of an amount equal to the sum of the
Executive's Annual Base Salary and the Highest Annual Bonus. Subject to the
provisions of Section 9 hereof, but, otherwise, anything herein to the contrary
notwithstanding, the Executive's family shall be entitled to receive benefits at
least equal to the most favorable benefits provided by the Company and any of
its affiliated companies to surviving families of peer executives of the Company
and such affiliated companies under such plans, programs, practices and policies
relating to family death benefits, if any, as in effect with respect to other
peer executives and their families at any time during the one year period
immediately preceding the Effective Date or, if more favorable to the Executive
and/or the Executive's family, as in effect on the date of the Executive's death
with respect to other peer executives of the Company and its affiliated
companies and their families.
(b) Disability. If the Executive's employment is terminated by reason of
----------
the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for (i)
payment of the Accrued Obligations (which shall be paid in a lump sum in cash
within 30 days of the Date of Termination), (ii) the timely payment and
provision of the Welfare Benefit Continuation, and (iii) payment to the
Executive in a lump sum in cash within 30 days of the Date of Termination of an
amount equal to the sum of the Executive's Annual Base Salary and the Highest
Annual Bonus. In addition, the Company shall transfer to the Executive the
insurance policy written with respect to the
-13-
<PAGE>
Executive under the Company's Group Term Life Insurance Policy for Executive
Officers and the right to the full cash surrender value thereof. Subject to the
provisions of Section 9 hereof, but, otherwise, anything herein to the contrary
notwithstanding, the Executive shall be entitled after the Disability Effective
Date to receive disability and other benefits at least equal to the most
favorable of those provided by the Company and its affiliated companies to
disabled executives and/or their families in accordance with such plans,
programs, practices and policies relating to disability, if any, as in effect
with respect to other peer executives and their families at any time during the
one year period immediately preceding the Effective Date or, if more favorable
to the Executive and/or the Executive's family, as in effect at any time
thereafter with respect to other peer executives of the Company and its
affiliated companies and their families.
(c) Cause, Other than for Good Reason. If the Executive's employment
---------------------------------
shall be terminated by the Company for Cause or by the Executive other than for
Good Reason (and other than by reason of his death or disability) during the
Employment Period, this Agreement shall terminate without further obligations to
the Executive other than the obligation to pay to the Executive Annual Base
Salary through the Date of Termination, plus the amount of any compensation
previously deferred by the Executive and any accrued bonus amounts or vacation
pay, in each case, to the extent theretofore unpaid. In such case, such amounts
shall be paid to the Executive in a lump sum in cash within 30 days of the Date
of Termination. The Executive shall, in such event, also be entitled to any
benefits required by law that are not otherwise provided by this Agreement.
(d) Good Reason; Other Than for Cause or Disability. If, during the
-----------------------------------------------
Employment Period, the Company shall terminate the Executive's employment other
than for Cause, death or
-14-
<PAGE>
Disability, or if the Executive shall terminate employment under this Agreement
for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:
A. all Accrued Obligations; and
B. the amount (such amount shall be hereinafter referred to
as the "Severance Amount") equal to one dollar ($1.00) less than the
product of (I) three (3) and (II) the Executive's "base amount" as defined
in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the
"Code").
(ii) the Company shall timely pay and provide the Welfare Benefit
Continuation; provided, however, that if the Executive becomes reemployed
with another employer and is eligible to receive medical or other welfare
benefits under another employer provided plan, the medical or other welfare
benefits described herein shall be secondary to those provided under such
other plan during such applicable period of eligibility; and
(iii) to the extent not theretofore paid or provided, the Company
shall timely pay or provide to the Executive and/or the Executive's family
any other amounts or benefits required to be paid or provided or which the
Executive and/or the Executive's family is eligible to receive pursuant to
this Agreement and under any plan, program, policy or practice or contract
or agreement of the Company and its affiliated companies as in effect and
applicable generally to other peer executives of the Company and its
affiliated companies and their families (such
-15-
<PAGE>
other amounts and benefits shall be hereinafter referred to as the "Other
Benefits"); and
(iv) all unvested options or stock appreciation rights which
Executive then holds to acquire securities from the Company shall be
immediately and automatically exercisable as of the Effective Date, and the
Executive shall have the right to exercise any such options or stock
appreciation rights for a period of one year after the Date of Termination.
Notwithstanding the foregoing, until two years from the date of this
Agreement, such options and/or stock appreciation rights shall not be
accelerated if such acceleration would result in the failure of a
transaction which has been approved by the Continuing Directors (as defined
in the Company's charter) and entered into by the Company to qualify as a
pooling for accounting purposes; and
(v) the Company shall transfer to the Executive the insurance
policy written with respect to the Executive under the Company's Group Term
Life Insurance Policy for Executive Officers and the right to the full cash
surrender value thereof.
7. Non-exclusivity of Rights. Except as provided in Section 6, nothing
-------------------------
in this Agreement shall prevent or limit the Executive's continuing or future
participation in any benefit, bonus, incentive or other plans, programs,
policies or practices, provided by the Company or any of its affiliated
companies and for which the Executive may qualify, nor shall anything herein
limit or otherwise affect such rights as the Executive may have under any other
agreements with the Company or any of its affiliated companies. Amounts which
are vested benefits or which the Executive is otherwise entitled to receive
under any plan, policy, practice or program of the
-16-
<PAGE>
Company or any of its affiliated companies at or subsequent to the Date of
Termination shall be payable in accordance with such plan, policy, practice or
program except as explicitly modified by this Agreement.
8. Full Settlement. (a) The Company's obligation to make the payments
---------------
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement and, except as
provided in Section 6(d)(ii), such amounts shall not be reduced whether or not
the Executive obtains other employment. The Company agrees to pay promptly as
incurred, to the full extent permitted by law, all legal fees and expenses which
the Executive may reasonably incur as a result of any contest (regardless of the
outcome thereof) by the Company, the Executive or others of the validity or
enforceability of, or liability under, any provision of this Agreement or any
guarantee of performance thereof (including as a result of any contest by the
Executive about the amount of any payment pursuant to this Agreement, unless a
court of competent jurisdiction determines that the Executive made such effort
in bad faith), plus in each case interest at the applicable Federal rate
provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as
amended (the "Code").
(b) If there shall be any dispute between the Company and the Executive (i)
in the event of any termination of the Executive's employment by the Company,
whether such termination was for Cause, or (ii) in the event of any termination
of employment by the Executive, whether Good Reason existed, then, unless and
until there is a final, nonappealable
-17-
<PAGE>
judgment by a court of competent jurisdiction declaring that such termination
was for Cause or that the determination by the Executive of the existence of
Good Reason was not made in good faith, the Company shall pay all amounts, and
provide all benefits, to the Executive and/or the Executive's family or other
beneficiaries, as the case may be, that the Company would be required to pay or
provide pursuant to Section 6(d) as though such termination were by the Company
without Cause, or by the Executive with Good Reason; provided, however, that the
Company shall not be required to pay any disputed amount pursuant to this
paragraph except upon receipt of an undertaking by or on behalf of the Executive
to repay all such amounts to which the Executive is ultimately adjudged by such
court not to be entitled.
9. Certain Reduction in Payments by the Company.
---------------------------------------------
(a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment or distribution by the Company to
or for the benefit of the Executive, whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise (a
"Payment"), would be nondeductible by the Company for Federal income tax
purposes because of Section 280G of the Code or would subject the Executive to
the excise tax imposed by Section 4999 of the Code, then the aggregate present
value of amounts payable or distributable to or for the benefit of the Executive
pursuant to this Agreement (such payments or distributions pursuant to this
Agreement are hereinafter referred to as "Agreement Payments") shall be reduced
(but not below zero) to the Reduced Amount. The "Reduced Amount" shall be one
dollar less than an amount expressed in present value which maximizes the
aggregate present value of Agreement Payments but which does not result in any
of the amount paid to the Executive being not deductible by reason of Section
280G of the Code or subject to
-18-
<PAGE>
the excise tax imposed by Section 4999 of the Code. For purposes of this Section
9, present value shall be determined in accordance with Section 280G(d)(4) of
the Code.
(b) All determinations required to be made under this Section 9 shall be
made by Arthur Andersen LLP (or its successor) unless such firm shall be the
accounting firm of the individual, entity or group effecting the Change of
Control or any affiliate of the Company at the Date of Termination, in which
case such determinations shall be made by an accounting firm of national
standing agreed to by the Company and the Executive, or, if the Company does not
so agree within 10 days of the Date of Termination, such an accounting firm
shall be selected by the Executive (the "Accounting Firm") which shall provide
detailed supporting calculations both to the Company and the Executive within 15
business days of the date such firm is selected or such earlier time as is
requested by the Company and an opinion to the Executive that he has substantial
authority not to report any Excise Tax on his Federal income tax return with
respect to any Agreement Payments. Any such determination by the Accounting
Firm shall be binding upon the Company and the Executive. Within five business
days of the determination by the Accounting Firm as to the Reduced Amount, the
Company shall pay to or distribute to or for the benefit of the Executive such
amounts as are then due to the Executive under this Agreement.
(c) As a result of the uncertainty in the application of Section 280G of
the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Agreement Payments will have been made by the
Company which should not have been made ("Overpayment") or that additional
Agreement Payments which will not have been made by the Company could have been
made ("Underpayment"), in each case, consistent with the calculations required
to be made hereunder. In the event that the Accounting Firm, based upon the
assertion of a deficiency by the Internal Revenue Service against the Executive
which the Accounting Firm
-19-
<PAGE>
believes has a high probability of success determines that an Overpayment has
been made, any such Overpayment paid or distributed by the Company to or for the
benefit of the Executive shall be treated for all purposes as a loan ab initio
to the Executive which the Executive shall repay to the Company together with
interest at the applicable Federal rate provided for in Section 7872(f)(2) of
the Code. In the event that the Accounting Firm, based upon controlling
precedent or other substantial authority, determines that an Underpayment has
occurred, any such Underpayment shall be promptly paid by the Company to or for
the benefit of the Executive together with interest at the applicable Federal
rate provided for in Section 7872(f)(2) of the Code.
10. Confidential Information. The Executive shall hold in a fiduciary
------------------------
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without the prior written consent of the Company or as
may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it. In no event shall an asserted violation of the provisions of
this Section 10 constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement.
11. Successors. (a) This Agreement is personal to the Executive and
----------
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will
-20-
<PAGE>
or the laws of descent and distribution. This Agreement shall inure to the
benefit of and be enforceable by the Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to assume expressly and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. As used in
this Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise. In addition, the
Executive shall be entitled, upon exercise of any outstanding stock options or
stock appreciation rights of the Company, to receive in lieu of shares of the
Company's stock, shares of such stock or other securities of such successor as
the holders of shares of the Company's stock received pursuant to the terms of
the merger, consolidation or sale.
12. Miscellaneous. (a) This Agreement shall be governed by and construed
-------------
in accordance with the laws of the Commonwealth of Massachusetts, without
reference to principles of conflict of laws. The captions of this Agreement are
not part of the provisions hereof and shall have no force or effect. This
Agreement may not be amended or modified otherwise than by a written agreement
executed by the parties hereto or their respective successors and legal
representatives.
-21-
<PAGE>
(b) All notices and other communications hereunder shall be in writing and
shall be given by hand delivery to the other party or by registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
John W. Cumming
35 Crosby Drive
Bedford, Massachusetts 01730-1401
If to the Company:
Hologic, Inc.
35 Crosby Drive
Bedford, Massachusetts 01730-1401
Attention: Chief Executive Officer
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notices and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement.
(d) The Company may withhold from any amounts payable under this Agreement
such Federal, state or local taxes as shall be required to be withheld pursuant
to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision hereof shall not be deemed to be a waiver of such
provision or any other provision thereof.
(f) This Agreement contains the entire understanding of the Company and the
Executive with respect to the subject matter hereof and by entering into this
Agreement the
-22-
<PAGE>
Executive waives all rights he may have under the Company's separation policy,
provided that if the Company's separation policy would provide greater benefits
to the Executive than this Agreement, than the Executive may elect to receive
benefits under the Company's separation policy in lieu of the benefits provided
hereunder.
(g) The Executive and the Company acknowledge that, except as may otherwise
be provided under any other written agreement between the Executive and the
Company, prior to the Effective Date, the employment of the Executive by the
Company is "at will" and may be terminated by either the Executive or the
Company at any time. Moreover, if prior to the Effective Date, the Executive's
employment with the Company terminates, then the Executive shall have no further
rights under this Agreement. Notwithstanding anything contained herein, if,
during the Employment Period, the Executive shall terminate employment with the
Company other than for Good Reason, the Executive shall have no liability to the
Company.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant
to the authorization from its Board of Directors, the Company has caused these
presents to be executed in its name on its behalf, all as of the day and year
first above written.
HOLOGIC, INC.
By: /s/ Glenn P. Muir
------------------------------
Name: Glenn P. Muir
Title: Chief Financial Officer
EXECUTIVE
/s/ John W. Cumming
---------------------------------
John W. Cumming
-23-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.12
<SEQUENCE>5
<FILENAME>dex1012.txt
<DESCRIPTION>EMPLOYMENT LETTER TO AN OFFICER
<TEXT>
<PAGE>
EXHIBIT 10.12
[HOLOGIC LOGO]
July 9, 2001
Mr. John W. Cumming
8 Encampment Place
Ridgefield, CT 06877
Dear Jack,
I am pleased to offer you the position of President & Chief Executive Officer
for Hologic, Inc. reporting to the Hologic, Inc., Board of Directors.
The following benefits are associated with the position:
1) Salary: $11,538.46 per bi-weekly pay period ( $300,000 annually)
2) Stock: option to purchase 150,000 shares of currently authorized Company
stock, subject to Board of Director approval, based on the price set at the
close of business on your first day of this new position. This option, which
we believe will represent a valuable equity position in Hologic, will vest
quarterly over four years. A detailed stock option agreement will be
provided to you shortly after you begin work.
3) A $600.00 per month car allowance.
4) A BONUS plan will be set for you upon acceptance of this offer based on
attaining specific revenue and profitability targets to be mutually agreed
upon.
5) The company will provide you with a detailed Relocation package to find
suitable housing in the Boston area. We would expect this move to take place
shortly after your acceptance of this offer. This package would include
realtor's fees, bridge loans, closing costs and moving company expenses as
approved by IRS guidelines.
6) You will continue to be eligible for all benefits under the Hologic Employee
Benefit Program.
7) Effective this fiscal year, you will be eligible to participate in the
Executive Financial Planning Services Program at a maximum reimbursement
cost of $5,000.00 per year.
8) Upon official appointment to the position of President & CEO, you will be
appointed as a member of the Hologic, Inc. Board of Directors.
9) In addition to other termination agreements, we will recommend to the BOD
that you participate in the current Change of Control separation package in
place for Executive Officers of the Company.
<PAGE>
This offer and your employment in this capacity will become effective on the
date of acceptance and upon completion of all other transition goals including;
1.) Moving to the Bedford area and 2.) Finding a replacement for LORAD.
Sincerely, Accepted by:
/s/ Jay Stein /s/ John Cumming
- ---------------------- -----------------------
Jay Stein John Cumming
Chairman July 11, 2001
-------------
Date
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.13
<SEQUENCE>6
<FILENAME>dex1013.txt
<DESCRIPTION>PROMISSORY NOTE TO AN OFFICER
<TEXT>
<PAGE>
EXHIBIT 10.13
[HOLOGIC LOGO]
Promissory Note
---------------
Mortgage Loan
$500,000
- --------
For the funds received, the undersigned Jack Cumming (the "Employee") of 12
Cusabo Place Hilton Head SC. 29926, does hereby promise to repay to the order of
Hologic, Inc., of 35 Crosby Drive, Bedford MA., the sum of Five Hundred Thousand
Dollars ($500,000) together with interest accrued on the outstanding principle
balance, if any, from the date of this note at 7% which represents LIBOR plus
1%.
The principle and interest of this note shall be payable each quarter beginning
on January 10, 2002 until paid in full no later than January 10, 2005, whichever
is earlier.
The undersigned employee shall have the right to repay this note in full at
anytime without penalty. All Payments to this note shall first be applied to
accrued interest, if any, then to principle.
In the event of a "Change of Control" of Hologic, Inc., this note will be
considered paid in full.
In the event of termination, either voluntarily or for "'cause", the undersigned
agrees to repay the note prior to the time of separation from the company.
Failure to repay this Note in full may result in attachment of wages or legal
action.
Changes to the above terms will require the approval of the Chief Executive
Officer and the Chief Financial Officer.
All rights and obligations hereunder shall be governed by the laws of the
Commonwealth of Massachusetts.
Executed on this date, August 30, 2001.
/s/ Jack Cumming /s/ Glenn P. Muir
- -------------------------- -------------------------------
Employee Hologic, Inc.
By: Jack Cumming By: Glenn P. Muir
----------------------- ----------------------------
Title: Executive Vice-President
---------------------------
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.14
<SEQUENCE>7
<FILENAME>dex1014.txt
<DESCRIPTION>FORM OF OFFICER SEPARATION AGREEMENT
<TEXT>
<PAGE>
EXHIBIT 10.14
Separation Agreement
- --------------------
In the event of your termination for any reason other than for cause, you will
receive a separation package to include a salary continuation of up to one year
of base salary and continued medical and dental benefits only up until such time
as you become re-employed or one year, which ever comes first.
This separation agreement would survive a change in control but can not be
triggered by the change of control or any voluntary separation notice by the
employee.
Recipients of Form of Separation Agreement
- ------------------------------------------
1. Glenn P. Muir
2. David Brady
3. Peter C. Kershaw
4. Eric von Stetten
5. Peter K. Soltani
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.25
<SEQUENCE>8
<FILENAME>dex1025.txt
<DESCRIPTION>LOAN AND SECURITY AGREEMENT
<TEXT>
<PAGE>
EXHIBIT 10.25
EXECUTION COPY
================================================================================
LOAN AND SECURITY AGREEMENT
by and among
HOLOGIC, INC.
and
EACH OF ITS SUBSIDIARIES THAT ARE SIGNATORIES HERETO
as Borrowers,
THE LENDERS THAT ARE SIGNATORIES HERETO
as Lenders,
and
FOOTHILL CAPITAL CORPORATION,
as Agent
Dated as of September 21, 2001
================================================================================
<PAGE>
Table of Contents
-----------------
<TABLE>
<CAPTION>
Page
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<S> <C>
1. DEFINITIONS AND CONSTRUCTION........................................................ 1
1.1 Definitions.................................................................... 1
1.2 Accounting Terms............................................................... 24
1.3 Code........................................................................... 25
1.4 Construction................................................................... 25
1.5 Schedules and Exhibits......................................................... 25
2. LOAN AND TERMS OF PAYMENT........................................................... 25
2.1 Revolver Advances............................................................. 25
2.2 Term Loan..................................................................... 27
2.3 Borrowing Procedures and Settlements.......................................... 27
2.4 Payments...................................................................... 33
2.5 Overadvances.................................................................. 36
2.6 Interest Rates and Letter of Credit Fee: Rates, Payments, and Calculations... 36
2.7 Cash Management............................................................... 37
2.8 Crediting Payments; Float Charge.............................................. 38
2.9 Designated Account............................................................ 38
2.10 Maintenance of Loan Account; Statements of Obligations........................ 39
2.11 Fees.......................................................................... 39
2.12 Letters of Credit............................................................. 40
2.13 Reserved...................................................................... 43
2.14 Capital Requirements.......................................................... 43
2.15 Joint and Several Liability of Borrowers...................................... 43
3. CONDITIONS; TERM OF AGREEMENT....................................................... 46
3.1 Conditions Precedent to the Initial Extension of Credit........................ 46
3.2 Conditions Subsequent to the Initial Extension of Credit....................... 49
3.3 Conditions Precedent to all Extensions of Credit............................... 49
3.4 Term........................................................................... 50
3.5 Effect of Termination.......................................................... 50
3.6 Early Termination by Borrowers................................................. 50
4. CREATION OF SECURITY INTEREST....................................................... 51
4.1 Grant of Security Interest..................................................... 51
4.2 Negotiable Collateral.......................................................... 52
4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral......... 52
4.4 Delivery of Additional Documentation Required; Commercial Tort Claims.......... 53
4.5 Power of Attorney.............................................................. 53
4.6 Right to Inspect; Appraisals................................................... 54
4.7 Control Agreements............................................................. 54
</TABLE>
i
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(Continued)
<TABLE>
<CAPTION>
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<S> <C>
5. REPRESENTATIONS AND WARRANTIES...................................................... 54
5.1 No Encumbrances............................................................... 54
5.2 Eligible Accounts............................................................. 54
5.3 Eligible Inventory............................................................ 55
5.4 Equipment..................................................................... 55
5.5 Location of Inventory and Equipment........................................... 56
5.6 Inventory Records............................................................. 56
5.7 Location of Chief Executive Office; FEIN...................................... 56
5.8 Due Organization and Qualification; Subsidiaries.............................. 56
5.9 Due Authorization; No Conflict................................................ 57
5.10 Litigation.................................................................... 57
5.11 No Material Adverse Change.................................................... 57
5.12 Fraudulent Transfer........................................................... 58
5.13 Employee Benefits............................................................. 58
5.14 Environmental Condition....................................................... 58
5.15 Brokerage Fees................................................................ 58
5.16 Intellectual Property......................................................... 58
5.17 Leases........................................................................ 58
5.18 Deposit Accounts.............................................................. 59
5.19 Complete Disclosure........................................................... 59
5.20 Indebtedness.................................................................. 59
6. AFFIRMATIVE COVENANTS............................................................... 59
6.1 Accounting System............................................................. 59
6.2 Collateral Reporting.......................................................... 59
6.3 Financial Statements, Reports, Certificates................................... 60
6.4 Guarantor Reports............................................................. 62
6.5 Return........................................................................ 62
6.6 Maintenance of Properties..................................................... 63
6.7 Taxes......................................................................... 63
6.8 Insurance..................................................................... 63
6.9 Location of Inventory and Equipment........................................... 64
6.10 Compliance with Laws.......................................................... 64
6.11 Leases........................................................................ 64
6.12 Brokerage Commissions......................................................... 64
6.13 Existence..................................................................... 64
6.14 Environmental................................................................. 64
6.15 Disclosure Updates............................................................ 65
6.16 Additional Investments........................................................ 65
7. NEGATIVE COVENANTS.................................................................. 65
7.1 Indebtedness.................................................................. 65
7.2 Liens......................................................................... 66
</TABLE>
ii
<PAGE>
Table of Contents
-----------------
(continued)
<TABLE>
<CAPTION>
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<S> <C>
7.3 Restrictions on Fundamental Changes........................................................................... 66
7.4 Disposal of Assets............................................................................................ 67
7.5 Change Name................................................................................................... 67
7.6 Guarantee..................................................................................................... 67
7.7 Nature of Business............................................................................................ 67
7.8 Prepayments and Amendments.................................................................................... 67
7.9 Change of Control............................................................................................. 67
7.10 Consignments.................................................................................................. 67
7.11 Distributions................................................................................................. 67
7.12 Accounting Methods............................................................................................ 68
7.13 Investments................................................................................................... 68
7.14 Transactions with Affiliates.................................................................................. 68
7.15 Suspension.................................................................................................... 68
7.16 Additional Investment......................................................................................... 68
7.17 Use of Proceeds............................................................................................... 68
7.18 Change in Location of Chief Executive Office; Inventory and Equipment with Bailees............................ 69
7.19 Securities Accounts........................................................................................... 69
7.20 Financial Covenants........................................................................................... 69
7.21 Permitted Transactions........................................................................................ 69
7.22 Hologic Investment Account.................................................................................... 69
8. EVENTS OF DEFAULT................................................................................................... 69
9. THE LENDER GROUP'S RIGHTS AND REMEDIES.............................................................................. 71
9.1 Rights and Remedies............................................................................................ 71
9.2 Remedies Cumulative............................................................................................ 73
10. TAXES AND EXPENSES.................................................................................................. 74
11. WAIVERS; INDEMNIFICATION............................................................................................ 74
11.1 Demand; Protest; etc.......................................................................................... 74
11.2 The Lender Group's Liability for Collateral................................................................... 74
11.3 Indemnification............................................................................................... 74
12. NOTICES............................................................................................................. 75
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.......................................................................... 76
14. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS.......................................................................... 77
14.1 Assignments and Participations................................................................................ 77
14.2 Successors.................................................................................................... 79
15. AMENDMENTS; WAIVERS................................................................................................. 79
</TABLE>
iii
<PAGE>
Table of Contents
-----------------
(continued)
<TABLE>
<CAPTION>
Page
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<S> <C>
15.1 Amendments and Waivers........................................................................................ 79
15.2 Replacement of Holdout Lender................................................................................. 80
15.3 No Waivers; Cumulative Remedies............................................................................... 81
16. AGENT; THE LENDER GROUP............................................................................................. 81
16.1 Appointment and Authorization of Agent........................................................................ 81
16.2 Delegation of Duties.......................................................................................... 82
16.3 Liability of Agent............................................................................................ 82
16.4 Reliance by Agent............................................................................................. 82
16.5 Notice of Default or Event of Default......................................................................... 83
16.6 Credit Decision............................................................................................... 83
16.7 Costs and Expenses; Indemnification........................................................................... 84
16.8 Agent in Individual Capacity.................................................................................. 84
16.9 Successor Agent............................................................................................... 85
16.10 Lender in Individual Capacity................................................................................. 85
16.11 Withholding Taxes............................................................................................. 85
16.12 Collateral Matters............................................................................................ 87
16.13 Restrictions on Actions by Lenders; Sharing of Payments....................................................... 88
16.14 Agency for Perfection......................................................................................... 89
16.15 Payments by Agent to the Lenders.............................................................................. 89
16.16 Concerning the Collateral and Related Loan Documents.......................................................... 89
16.17 Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders; Other Reports and Information.. 89
16.18 Several Obligations; No Liability............................................................................. 90
16.19 Legal Representation of Agent................................................................................. 91
17. GENERAL PROVISIONS................................................................................................... 91
17.1 Effectiveness.................................................................................................. 91
17.2 Section Headings............................................................................................... 91
17.3 Interpretation................................................................................................. 91
17.4 Severability of Provisions..................................................................................... 91
17.5 Amendments in Writing.......................................................................................... 91
17.6 Counterparts; Telefacsimile Execution.......................................................................... 91
17.7 Revival and Reinstatement of Obligations....................................................................... 92
17.8 Integration.................................................................................................... 92
17.9 Parent as Agent for Borrowers.................................................................................. 92
</TABLE>
iv
<PAGE>
LOAN AND SECURITY AGREEMENT
---------------------------
THIS LOAN AND SECURITY AGREEMENT (this "Agreement"), is entered into as of
September 21, 2001 by and among, on the one hand, the lenders identified on the
signature pages hereof (such lenders, together with their respective successors
and assigns, are referred to hereinafter each individually as a "Lender" and
collectively as the "Lenders"), FOOTHILL CAPITAL CORPORATION, a California
corporation, as agent for the Lenders ("Agent"), and, on the other hand,
HOLOGIC, INC., a Delaware corporation ("Parent"), FLUOROSCAN IMAGING SYSTEMS,
------
INC., a Delaware corporation and a wholly-owned subsidiary of Parent
("FluoroScan"), and DIRECT RADIOGRAPHY CORP., a Delaware corporation and a
----------
wholly-owned subsidiary of Parent ("DRC" and, collectively with the Parent and
---
FluoroScan, jointly, severally and jointly and severally, the "Borrowers" and
each a "Borrower").
--------
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 Definitions. As used in this Agreement, the following terms shall have
-----------
the following definitions:
"Account Debtor" means any Person who is or who may become obligated under,
--------------
with respect to, or on account of, an Account, chattel paper, or a General
Intangible.
"Accounts" means all of Borrowers' now owned or hereafter acquired right,
--------
title, and interest with respect to "accounts", as that term is defined from
time to time in the Code, and any and all supporting obligations in respect
thereof.
"Additional Documents" has the meaning set forth in Section 4.4.
-------------------- -----------
"Additional Investment" means an investment in any Borrower made by a
---------------------
Person other than another Borrower Party after the Closing Date in consideration
of (i) the sale of Stock of Parent, (ii) the issuance of Indebtedness by Parent
that is subordinated in payment and priority to all Obligations on terms
satisfactory to, and consented to in writing by, Agent in its Permitted
Discretion and (iii) the contributions to, or other investment in, the DRC Joint
Venture by a Person other than a Borrower Party on terms satisfactory to, and
consented to in writing by, Agent in its Permitted Discretion; provided,
--------
however, that if any Additional Investment requires the payment of interest or
- -------
cash dividends (directly or indirectly) by a Borrower or any of its
Subsidiaries, such Additional Investment shall be on terms satisfactory to Agent
in its Permitted Discretion.
"Additional Investment Proceeds" means the net cash proceeds received by a
------------------------------
Borrower as a result of one or more Additional Investments; provided, however,
-------- -------
that with respect to any Additional Investment made by a Person or Persons in
consideration of subordinated Indebtedness issued by a Borrower, Additional
Investment Proceeds shall not include the amount of such proceeds equal to such
Person's or Persons' tax liability on the original issue discount accretion of
the instrument(s) evidencing such subordinated Indebtedness for the period
1
<PAGE>
commencing on the date of the issuance of such instrument and terminating on the
Maturity Date.
"Administrative Borrower" has the meaning set forth in Section 17.9.
----------------------- -------------
"Advances" has the meaning set forth in Section 2.1.
-------- -----------
"Affiliate" means, as applied to any Person, any other Person who, directly
---------
or indirectly, controls, is controlled by, or is under common control with, such
Person. For purposes of this definition, "control" means the possession,
directly or indirectly, of the power to direct the management and policies of a
Person, whether through the ownership of Stock, by contract, or otherwise;
provided, however, that, in any event: (a) any Person which owns directly or
- -------- -------
indirectly 10% or more of the securities having ordinary voting power for the
election of directors or other members of the governing body of a Person or 10%
or more of the partnership or other ownership interests of a Person (other than
as a limited partner of such Person) shall be deemed to control such Person, (b)
each director (or comparable manager) of a Person shall be deemed to be an
Affiliate of such Person, and (c) each partnership or joint venture in which a
Person is a partner or joint venturer shall be deemed to be an Affiliate of such
Person.
"Agent" means Foothill, solely in its capacity as agent for the Lenders
-----
hereunder, and any successor thereto.
"Agent's Account" means an account at a bank designated by Agent from time
---------------
to time as the account into which Borrowers shall make all payments to Agent for
the benefit of the Lender Group and into which the Lender Group shall make all
payments to Agent under this Agreement and the other Loan Documents; unless and
until Agent notifies the Administrative Borrower and the Lender Group to the
contrary, Agent's Account shall be that certain deposit account bearing account
number 323-266193 and maintained by Agent with The Chase Manhattan Bank, 4 New
York Plaza, 15th Floor, New York, New York 10004, ABA #021000021.
"Agent Advances" has the meaning set forth in Section 2.3(e)(i).
-------------- -----------------
"Agent's Liens" means the Liens granted by Borrowers to Agent for the
-------------
benefit of the Lender Group under this Agreement or the other Loan Documents.
"Agent-Related Persons" means Agent together with its Affiliates, officers,
---------------------
directors, employees, and agents.
"Agreement" has the meaning set forth in the preamble hereto.
---------
"Applicable Prepayment Premium" means, as of any date of determination, an
-----------------------------
amount equal to (a) during the period of time from and after the date of the
execution and delivery of this Agreement up to the date that is the first
anniversary of the Closing Date, 3% times the sum of (i) the Maximum Revolver
Amount, plus (ii) the outstanding principal balance of the Term Loan on the
Closing Date, (b) during the period of time from and including the date that is
the first anniversary of the Closing Date up to the date that is the second
anniversary of the Closing Date, 2% times the sum of (i) the Maximum Revolver
Amount, plus (ii) the outstanding principal balance of the Term Loan on the
Closing Date, and (c) during the period of time from and
2
<PAGE>
including the date that is the second anniversary of the Closing Date up to the
Maturity Date, 1% times the sum of (i) the Maximum Revolver Amount, plus (ii)
the outstanding principal balance of the Term Loan on the Closing Date.
"Assignee" has the meaning set forth in Section 14.1.
-------- ------------
"Assignment and Acceptance" means an Assignment and Acceptance in the form
-------------------------
of Exhibit A-1.
"Authorized Person" means any officer or other employee of the
-----------------
Administrative Borrower.
"Availability" means, as of any date of determination, if such date is a
------------
Business Day, and determined at the close of business on the immediately
preceding Business Day, if such date of determination is not a Business Day, the
amount that Borrowers are entitled to borrow as Advances under Section 2.1
-----------
(after giving effect to all then outstanding Obligations and all sublimits and
reserves applicable hereunder).
"Bankruptcy Code" means the United States Bankruptcy Code, as in effect
---------------
from time to time.
"Base Rate" means, the rate of interest announced from time to time within
---------
Wells Fargo at its principal office in San Francisco as its "prime rate", with
the understanding that the "prime rate" is one of Wells Fargo's base rates (not
necessarily the lowest of such rates) and serves as the basis upon which
effective rates of interest are calculated for those loans making reference
thereto and is evidenced by the recording thereof after its announcement in such
internal publication or publications as Wells Fargo may designate.
"Base Rate Loan" means each portion of an Advance or the Term Loan that
--------------
bears interest at a rate determined by reference to the Base Rate.
"Base Rate Margin" means 0.5 percentage points.
----------------
"Benefit Plan" means a "defined benefit plan" (as defined in Section 3(35)
------------ -------------
of ERISA) for which any Borrower or any Subsidiary or ERISA Affiliate of any
Borrower has been an "employer" (as defined in Section 3(5) of ERISA) within the
past six years.
"Board of Directors" means the board of directors (or comparable managers)
------------------
of the Parent or any committee thereof duly authorized to act on behalf thereof.
"Books" means all of each Borrower's now owned or hereafter acquired books
-----
and records (including all of its Records indicating, summarizing, or evidencing
its assets (including the Collateral) or liabilities, all of its Records
relating to its business operations or financial condition, and all of its goods
or General Intangibles related to such information).
"Borrower" and "Borrowers" have the respective meanings set forth in the
-------- ---------
preamble to this Agreement.
3
<PAGE>
"Borrower Party" means each of, and "Borrower Parties" means all of, the
-------------- ----------------
Guarantor and each of the Borrowers.
"Borrowing" means a borrowing hereunder consisting of Advances (or term
---------
loans, in the case of the Term Loan) made on the same day by the Lenders (or
Agent on behalf thereof), by Swing Lender in the case of a Swing Loan or by
Agent in the case of an Agent Advance, in each case, to the Administrative
Borrower.
"Borrowing Base" has the meaning set forth in Section 2.1.
-------------- -----------
"Borrowing Base Certificate" means a certificate in the form of
--------------------------
Exhibit B-1.
- -----------
"Business Day" means any day that is not a Saturday, Sunday, or other day
------------
on which national banks are authorized or required to close.
"Capital Lease" means a lease that is required to be capitalized for
-------------
financial reporting purposes in accordance with GAAP.
"Capitalized Lease Obligation" means any Indebtedness represented by
----------------------------
obligations under a Capital Lease.
"Cash Equivalents" means (a) marketable direct obligations issued or
----------------
unconditionally guaranteed by the United States or issued by any agency thereof
and backed by the full faith and credit of the United States, in each case
maturing within 1 year from the date of acquisition thereof, (b) marketable
direct obligations issued by any state of the United States or any political
subdivision of any such state or any public instrumentality thereof maturing
within 1 year from the date of acquisition thereof and, at the time of
acquisition, having the highest rating obtainable from either S&P or Moody's,
(c) commercial paper maturing no more than 1 year from the date of acquisition
thereof and, at the time of acquisition, having a rating of A-1 or P-1, or
better, from S&P or Moody's, and (d) certificates of deposit or bankers'
acceptances maturing within 1 year from the date of acquisition thereof either
(i) issued by any bank organized under the laws of the United States or any
state thereof which bank has a rating of A or A2, or better, from S&P or
Moody's, or (ii) certificates of deposit less than or equal to $100,000 in the
aggregate issued by any other bank insured by the Federal Deposit Insurance
Corporation.
"Cash Management Bank" has the meaning set forth in Section 2.7(a).
-------------------- --------------
"Cash Management Account" has the meaning set forth in Section 2.7(a).
----------------------- --------------
"Cash Management Agreements" means those certain cash management service
--------------------------
agreements, in form and substance satisfactory to Agent, each of which is among
the Administrative Borrower, Agent, and one of the Cash Management Banks.
"Change of Control" means (a) any "person" or "group" (within the meaning
-----------------
of Sections 13(d) and 14(d) of the Exchange Act) becomes the beneficial owner
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
35%, or more, of the Stock of the Parent having the right to vote for the
election of members of the Board of Directors, or (b) a majority of the members
of the Board of Directors do not constitute Continuing Directors, or (c) any
4
<PAGE>
Borrower ceases to directly own and control 100% of the outstanding capital
Stock of each of its Subsidiaries extant as of the Closing Date; provided, that
--------
a merger or consolidation permitted pursuant to Section 7.21 shall not be deemed
------------
a Change of Control.
"Chattel Paper" means all of Borrowers' now owned or hereafter acquired
-------------
right, title, and interest with respect to "chattel paper", including, without
limitation, "tangible chattel paper" and "electronic chattel paper", as such
terms are defined from time to time in the Code, and any and all supporting
obligations in respect thereof.
"Closing Date" means the date of the making of the initial Advance (or
------------
other extension of credit) hereunder or the date on which Agent sends Borrower a
written notice that each of the conditions precedent set forth in Section 3.1
-----------
either have been satisfied or have been waived.
"Closing Date Business Plan" means the set of Projections of Borrowers for
--------------------------
the 2 year period following the Closing Date (on a year by year basis, and for
the 1 year period following the Closing Date, on a quarterly basis), in form and
substance (including as to scope and underlying assumptions) satisfactory to
Agent.
"Code" means the Massachusetts Uniform Commercial Code, as in effect from
----
time to time.
"Collateral" means all of each Borrower's now owned or hereafter acquired
----------
right, title, and interest in and to each of the following:
(a) Accounts,
(b) Books,
(c) Deposit Accounts,
(d) General Intangibles,
(e) Goods,
(f) Investment Property,
(g) Negotiable Collateral,
(h) Real Property Collateral,
(i) money or other assets of each such Borrower that now or hereafter
come into the possession, custody, or control of any member of the Lender Group,
and
(j) the proceeds and products, whether tangible or intangible, of any
of the foregoing, including proceeds of insurance covering any or all of the
foregoing, and any and all Accounts, Books, Equipment, General Intangibles,
Inventory, Investment Property, Negotiable Collateral, Real Property, money,
Deposit Accounts, or other tangible or intangible property
5
<PAGE>
resulting from the sale, exchange, collection, or other disposition of any of
the foregoing, or any portion thereof or interest therein, and the proceeds
thereof.
"Collateral Access Agreement" means a landlord waiver, bailee letter, or
---------------------------
acknowledgement agreement of any lessor, warehouseman, processor, consignee, or
other Person in possession of, having a Lien upon, or having rights or interests
in the Equipment or Inventory, in each case, in form and substance satisfactory
to Agent.
"Collections" means all cash, checks, notes, instruments, and other items
-----------
of payment (including insurance proceeds, proceeds of cash sales, rental
proceeds, and tax refunds) of Borrowers.
"Commercial Tort Claim" means all of Borrowers' right, title, and interest
---------------------
with respect to any "commercial tort claim", as such term is defined from time
to time in the Code.
"Commitment" means, with respect to each Lender, its Revolver Commitment,
----------
its Term Loan Commitment, or its Total Commitment, as the context requires, and,
with respect to all Lenders, their Revolver Commitments, their Term Loan
Commitments, or their Total Commitments, as the context requires, in each case
as such Dollar amounts are set forth beside such Lender's name under the
applicable heading on Schedule C-1 or on the signature page of the Assignment
------------
and Acceptance pursuant to which such Lender became a Lender hereunder in
accordance with the provisions of Section 14.1.
------------
"Compliance Certificate" means a certificate substantially in the form of
----------------------
Exhibit C-1 delivered by the chief financial officer of the Parent to Agent.
- -----------
"Continuing Director" means (a) any member of the Board of Directors who
-------------------
was a director (or comparable manager) of the Parent on the Closing Date, and
(b) any individual who becomes a member of the Board of Directors after the
Closing Date if such individual was appointed or nominated for election to the
Board of Directors by a majority of the Continuing Directors, but excluding any
such individual originally proposed for election in opposition to the Board of
Directors in office at the Closing Date in an actual or threatened election
contest relating to the election of the directors (or comparable managers) of
the Parent (as such terms are used in Rule 14a-11 under the Exchange Act) and
whose initial assumption of office resulted from such contest or the settlement
thereof.
"Control Agreement" means a control agreement, in form and substance
-----------------
satisfactory to Agent, executed and delivered by the applicable Borrower, Agent,
and the applicable securities intermediary with respect to a Securities Account
or bank with respect to a deposit account.
"Copyright Security Agreement" means a copyright security agreement
----------------------------
executed and delivered by each Borrower and Agent, the form and substance of
which is satisfactory to Agent.
"Daily Balance" means, with respect to each day during the term of this
-------------
Agreement, the amount of an Obligation owed at the end of such day.
"Default" means an event, condition, or default that, with the giving of
-------
notice, the passage of time, or both, would be an Event of Default.
6
<PAGE>
"Defaulting Lender" means any Lender that fails to make any Advance (or
-----------------
other extension of credit) that it is required to make hereunder on the date
that it is required to do so hereunder.
"Defaulting Lender Rate" means (a) the Base Rate for the first 3 days from
----------------------
and after the date the relevant payment is due, and (b) thereafter, at the
interest rate then applicable to Advances that are Base Rate Loans (inclusive of
the Base Rate Margin applicable thereto).
"Delaware Facility" means Borrowers' facility located at Building 600,
-----------------
Glasgow Business Center, Newark, Delaware.
"Delaware Facility Value" means the fair market value of the Delaware
-----------------------
Facility as determined by a qualified appraisal company selected by Agent.
"Delaware Mortgage Documents" means the Assignment of Leases, the
---------------------------
Environmental Indemnity Agreement, the Subordination, Non-Disturbance and
Attornment Agreements, the Tenant Estoppel Certificates, the Mortgage Policy
with respect to the Delaware Facility and other agreements or documents, each in
form and substance satisfactory to Agent, to be executed and delivered by Parent
in connection with the Mortgage on the Delaware Facility.
"Deposit Account" means any "deposit account" (as that term is defined from
---------------
time to time in the Code) maintained by any Borrower.
"Designated Account" means account number 323869386 of the Administrative
------------------
Borrower maintained with the Designated Account Bank, or such other deposit
account of the Administrative Borrower (located within the United States) that
has been designated as such, in writing, by the Administrative Borrower to
Agent.
"Designated Account Bank" means The Chase Manhattan Bank, whose office is
-----------------------
located at 4 New York Plaza, 15th Floor, New York, New York 10004 and whose ABA
number is 021000021.
"Dilution" means, as of any date of determination, a percentage, based upon
--------
the experience of the immediately prior 90 days, that is the result of dividing
the Dollar amount of (a) bad debt write-downs, discounts, advertising
allowances, credits, or other dilutive items with respect to the Accounts during
such period, by (b) Borrowers' Collections with respect to Accounts during such
period (excluding extraordinary items) plus the Dollar amount of clause (a).
"Dilution Reserve" means, as of any date of determination, an amount
----------------
sufficient to reduce the advance rate against Eligible Accounts by one
percentage point for each percentage point by which Dilution is in excess of 5%.
"Disbursement Letter" means an instructional letter executed and delivered
-------------------
by the Administrative Borrower to Agent regarding the extensions of credit to be
made on the Closing Date, the form and substance of which is satisfactory to
Agent.
7
<PAGE>
"Document" means all of Borrowers' now owned or hereafter acquired right,
--------
title, and interest with respect to any "document" as that term is defined from
time to time in the Code, and any and all supporting obligations in respect
thereof.
"Dollars" or "$" means United States dollars.
------- -
"DRC Joint Venture" means a sale, transfer, contribution or other
-----------------
disposition of the plate business of DRC by way of a joint venture, strategic
alliance, sale of stock or assets, or other similar arrangement among Parent,
DRC and one or more other Persons.
"Due Diligence Letter" means the due diligence letter sent by Agent's
--------------------
counsel to the Administrative Borrower, together with the Administrative
Borrower's completed responses to the inquiries set forth therein, the form and
substance of such responses to be satisfactory to Agent.
"EBITDA" means, with respect to any fiscal period, the Parent's and its
------
Subsidiaries consolidated net earnings (or loss), minus extraordinary gains,
plus interest expense, income taxes, and depreciation and amortization for such
period, as determined in accordance with GAAP.
"Eligible Accounts" means those Accounts created by any one of the
-----------------
Borrowers in the ordinary course of its business, that arise out of such
Borrower's sale of goods or rendition of services, that comply with each of the
representations and warranties respecting Eligible Accounts made by Borrowers
under the Loan Documents, and that are not excluded as ineligible by virtue of
one or more of the criteria set forth below; provided, however, that such
-------- -------
criteria may be fixed and revised from time to time by Agent in Agent's
Permitted Discretion to address the results of any audit performed by Agent from
time to time after the Closing Date. In determining the amount to be included,
Eligible Accounts shall be calculated net of customer deposits and unapplied
cash remitted to Borrowers. Eligible Accounts shall not include the following:
---
(a) Accounts that the Account Debtor has failed to pay within 120 days
of original invoice date or Accounts with selling terms of more than 60 days;
(b) Accounts owed by an Account Debtor (or its Affiliates) where 51%
or more of all Accounts owed by that Account Debtor (or its Affiliates) are
deemed ineligible under clause (a) above;
(c) Accounts with respect to which the Account Debtor is an employee,
Affiliate, or agent of any Borrower;
(d) Accounts arising in a transaction wherein goods are placed on
consignment or are sold pursuant to a guaranteed sale, a sale or return, a sale
on approval, a bill and hold, or any other terms by reason of which the payment
by the Account Debtor may be conditional;
(e) Accounts that are not payable in Dollars;
8
<PAGE>
(f) Accounts with respect to which the Account Debtor either (i) does
not maintain its chief executive office in the United States, or (ii) is not
organized under the laws of the United States or any state thereof, or (iii) is
the government of any foreign country or sovereign state, or of any state,
province, municipality, or other political subdivision thereof, or of any
department, agency, public corporation, or other instrumentality thereof, unless
(y) the Account is supported by an irrevocable letter of credit satisfactory to
Agent (as to form, substance, and issuer or domestic confirming bank) that has
been delivered to Agent and is directly drawable by Agent, or (z) the Account is
covered by credit insurance in form, substance, and amount, and by an insurer,
satisfactory to Agent;
(g) Accounts with respect to which the Account Debtor is either (i)
the United States or any department, agency, or instrumentality of the United
States (exclusive, however, of Accounts with respect to which the applicable
Borrower has complied, to the reasonable satisfaction of Agent, with the
Assignment of Claims Act, 31 USC (S) 3727), or (ii) any state of the United
States (exclusive, however, of (y) Accounts owed by any state that does not have
a statutory counterpart to the Assignment of Claims Act, or (z) Accounts owed by
any state that does have a statutory counterpart to the Assignment of Claims Act
as to which the applicable Borrower has complied to Agent's satisfaction);
(h) Accounts with respect to which the Account Debtor is a creditor of
any Borrower, has or has asserted a right of setoff (including, without
limitation, any warranty reserves, customer deposits and Accounts recorded by
Borrowers as deferred revenue in their financial statements), has disputed its
liability, or has made any claim with respect to its obligation to pay the
Account, to the extent of such claim, right of setoff, or dispute;
(i) Accounts with respect to (A) an Account Debtor (other than PSS
World Medical, Inc.) whose total obligations owing to Borrowers exceed 10% of
all Eligible Accounts to the extent that the obligations owing by such Account
Debtor exceed such percentage and (B) PSS World Medical, Inc. to the extent that
the obligations owing by PSS World Medical, Inc. exceed the lesser of $3,800,000
or 20% of all Eligible Accounts (which dollar amount and percentage the Agent in
its Permitted Discretion may adjust from time to time);
(j) Accounts with respect to which the Account Debtor is subject to an
Insolvency Proceeding, is not Solvent, has gone out of business, or as to which
Borrower has received notice of an imminent Insolvency Proceeding or a material
impairment of the financial condition of such Account Debtor;
(k) Accounts with respect to which the Account Debtor is located in
the states of New Jersey, Minnesota, or West Virginia (or any other state that
requires a creditor to file a business activity report or similar document in
order to bring suit or otherwise enforce its remedies against such Account
Debtor in the courts or through any judicial process of such state), unless the
applicable Borrower has qualified to do business in New Jersey, Minnesota, West
Virginia, or such other states, or has filed a business activities report with
the applicable division of taxation, the department of revenue, or with such
other state offices, as appropriate, for the then-current year, or is exempt
from such filing requirement;
9
<PAGE>
(l) Accounts, the collection of which, Agent, in its Permitted
Discretion, believes to be doubtful by reason of the Account Debtor's financial
condition, including, without limitation, customer "short pays" and Accounts
with C.O.D. payment terms;
(m) Accounts that are not subject to a valid and perfected first
priority Agent's Lien;
(n) Accounts with respect to which (i) the goods giving rise to such
Account have not been shipped and billed to the Account Debtor, or (ii) the
services giving rise to such Account have not been performed and billed to the
Account Debtor;
(o) Accounts that represent the right to receive progress payments or
other advance billings that are due prior to the completion of performance by
the applicable Borrower of the subject contract for goods or services; or
(p) Accounts not generated in the ordinary course of Borrowers'
primary businesses, including, without limitation, Accounts in respect of leases
of Borrowers' owned Real Property.
"Eligible Inventory" means Inventory of the Borrowers consisting of first
------------------
quality finished goods held for sale in the ordinary course of Borrowers'
business located at one of the business locations of the Borrowers set forth on
Schedule E-1 (or in-transit between any such locations), that complies with each
- ------------
of the representations and warranties respecting Eligible Inventory made by
Borrowers in the Loan Documents, and that is not excluded as ineligible by
virtue of the one or more of the criteria set forth below; provided, however,
-------- -------
that such criteria may be fixed and revised from time to time by Agent in its
Permitted Discretion to address the results of any audit or appraisal performed
by Agent from time to time after the Closing Date. In determining the amount to
be so included, after adjustments by Agent in its Permitted Discretion for mark-
ups of raw materials, Inventory shall be valued at the lower of cost or market
on a basis consistent with Borrowers' historical accounting practices. An item
of Inventory shall not be included in Eligible Inventory if:
---
(a) a Borrower does not have good, valid, and marketable title
thereto;
(b) it is not located at one of the locations in the United States set
forth on Schedule E-1 or in transit from one such location to another such
------------
location;
(c) it is located on real property leased by a Borrower, unless it is
subject to a Collateral Access Agreement executed by the lessor of such real
property;
(d) it is in the possession of a bailee, consignee contract
warehouseman or other third party, unless such third party in possession has
authenticated a record acknowledging that it holds possession of such item of
Inventory for the benefit of Agent and the other Lenders, and unless it is
segregated or otherwise separately identifiable from goods of others, if any,
stored on the premises;
(e) it is not subject to a valid and perfected first priority Agent's
Lien;
10
<PAGE>
(f) it consists of goods returned or rejected by a Borrower's
customer;
(g) it consists of goods that are obsolete (including without
limitation goods constituting parts inventory for products no longer
manufactured by a Borrower) or slow moving, restrictive or custom items, work-
in-process, raw materials, or goods that constitute spare parts, packaging and
shipping materials, supplies used or consumed in a Borrower's business, bill and
hold goods, defective goods, "seconds," or Inventory acquired on consignment;
(h) it consists of goods related to Bennet Mammography Equipment, FG
Cardiac Systems or Full Field Digital Mammography Equipment products acquired
from Trex Medical Corporation; or
(i) it is not tracked by a perpetual system.
"Eligible Transferee" means (a) a commercial bank organized under the laws
-------------------
of the United States, or any state thereof, and having total assets in excess of
$250,000,000, (b) a commercial bank organized under the laws of any other
country which is a member of the Organization for Economic Cooperation and
Development or a political subdivision of any such country and which has total
assets in excess of $250,000,000, provided that such bank is acting through a
branch or agency located in the United States, (c) a finance company, insurance
company, or other financial institution or fund that is engaged in making,
purchasing, or otherwise investing in commercial loans in the ordinary course of
its business and having (together with its Affiliates) total assets in excess of
$250,000,000, (d) any Affiliate (other than individuals) of a Lender that was
party hereto as of the Closing Date, (e) so long as no Event of Default has
occurred and is continuing, any other Person approved by Agent and
Administrative Borrower, and (f) during the continuation of an Event of Default,
any other Person approved by Agent; provided, that no GE Entity shall be an
--------
Eligible Transferee, except, subject to Section 3.6, in connection with an
-----------
acquisition by a GE Entity of Wells Fargo, Foothill and/or any other Lender (or
its direct or indirect parent or holding company) or in connection with a bulk
sale by Foothill of its portfolio of financial accommodations; provided,
--------
further, that so long as (i) no Default or Event of Default has occurred and is
- -------
continuing and (ii) the Maximum Revolver Amount is less than or equal to
$25,000,000 (or, following Borrowers' exercise of the Increase Option,
$30,000,000), a Person shall not be deemed an Eligible Transferee unless the
Administrative Borrower has consented thereto in writing, which consent shall
not be unreasonably withheld.
"Environmental Actions" means any complaint, summons, citation, notice,
---------------------
directive, order, claim, litigation, investigation, judicial or administrative
proceeding, judgment, letter, or other communication from any Governmental
Authority, or any third party involving violations of Environmental Laws or
releases of Hazardous Materials from (a) any assets, properties, or businesses
of any Borrower or any predecessor in interest, (b) from adjoining properties or
businesses, or (c) from or onto any facilities which received Hazardous
Materials generated by any Borrower or any predecessor in interest.
"Environmental Law" means any applicable federal, state, provincial,
-----------------
foreign or local statute, law, rule, regulation, ordinance, code, binding and
enforceable guideline, binding and enforceable written policy, or rule of common
law now or hereafter in effect and in each case as
11
<PAGE>
amended, or any judicial or administrative interpretation thereof, including any
judicial or administrative order, consent decree or judgment, to the extent
binding on Borrowers, relating to the environment, employee health and safety,
or Hazardous Materials, including CERCLA; RCRA; the Federal Water Pollution
Control Act, 33 USC Section 1251 et seq.; the Toxic Substances Control Act, 15
-- ----
USC Section 2601 et seq.; the Clean Air Act, 42 USC Section 7401 et seq.; the
-- ---- -- ----
Safe Drinking Water Act, 42 USC Section 3803 et seq.; the Oil Pollution Act of
-- ----
1990, 33 USC Section 2701 et seq.; the Emergency Planning and the Community
-- ----
Right-to-Know Act of 1986, 42 USC Section 11001 et seq.; the Hazardous Material
-- ----
Transportation Act, 49 USC Section 1801 et seq.; and the Occupational Safety and
-- ----
Health Act, 29 USC Section 651 et seq. (to the extent it regulates occupational
-- ----
exposure to Hazardous Materials); any state and local or foreign counterparts or
equivalents, in each case as amended from time to time.
"Environmental Indemnity Agreement" means an indemnity agreement with
---------------------------------
respect to environmental liabilities relating to the Delaware Facility executed
and delivered by Parent and Agent in form and substance satisfactory to Agent.
"Environmental Liabilities and Costs" means all liabilities, monetary
-----------------------------------
obligations, Remedial Actions, losses, damages, punitive damages, consequential
damages, treble damages, costs and expenses (including all reasonable fees,
disbursements and expenses of counsel, experts, or consultants, and costs of
investigation and feasibility studies), fines, penalties, sanctions, and
interest incurred as a result of any claim or demand by any Governmental
Authority or any third party, and which relate to any Environmental Action.
"Environmental Lien" means any Lien in favor of any Governmental Authority
------------------
for Environmental Liabilities and Costs.
"Equipment" means all of Borrowers' now owned or hereafter acquired right,
---------
title, and interest with respect to "equipment", as that term is defined from
time to time in the Code, including all attachments, accessories, accessions,
replacements, substitutions, additions, and improvements to any of the
foregoing.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended, and any successor statute thereto.
"ERISA Affiliate" means (a) any Person subject to ERISA whose employees are
---------------
treated as employed by the same employer as the employees of a Borrower under
IRC Section 414(b), (b) any trade or business subject to ERISA whose employees
are treated as employed by the same employer as the employees of a Borrower
under IRC Section 414(c), (c) solely for purposes of Section 302 of ERISA and
Section 412 of the IRC, any organization subject to ERISA that is a member of an
affiliated service group of which a Borrower is a member under IRC Section
414(m), or (d) solely for purposes of Section 302 of ERISA and Section 412 of
the IRC, any Person subject to ERISA that is a party to an arrangement with a
Borrower and whose employees are aggregated with the employees of a Borrower
under IRC Section 414(o).
"Event of Default" has the meaning set forth in Section 8.
---------------- ---------
"Excess Availability" means the amount, as of the date any determination
-------------------
thereof is to be made, equal to Availability minus the aggregate amount, if any,
of all trade payables of
12
<PAGE>
Borrowers aged in excess of historical levels with respect thereto and all book
overdrafts in excess of historical practices with respect thereto, in each case
as determined by Agent in its Permitted Discretion.
"Exchange Act" means the Securities Exchange Act of 1934, as in effect from
-------------
time to time.
"Fee Letter" means that certain fee letter, dated as of even date herewith,
----------
between Borrowers and Agent, in form and substance satisfactory to Agent.
"FEIN" means Federal Employer Identification Number.
----
"Foothill" means Foothill Capital Corporation, a California corporation.
--------
"Funding Date" means the date on which a Borrowing occurs.
------------
"Funding Losses" has the meaning set forth in Section 2.13(b)(ii).
-------------- -------------------
"GAAP" means generally accepted accounting principles as in effect from
----
time to time in the United States, consistently applied.
"GE Entity" means General Electric Capital Corporation or any Affiliate
---------
thereof.
"General Intangibles" means all of Borrowers' now owned or hereafter
-------------------
acquired right, title, and interest with respect to general intangibles
(including payment intangibles, contract rights, rights to payment, rights
arising under common law, statutes, or regulations, choses or things in action,
goodwill, patents, trade names, trademarks, servicemarks, copyrights,
blueprints, drawings, purchase orders, customer lists, monies due or recoverable
from pension funds, route lists, rights to payment and other rights under any
royalty or licensing agreements, infringement claims, computer programs,
information contained on computer disks or tapes, software, literature, reports,
catalogs, money, deposit accounts, insurance premium rebates, tax refunds, and
tax refund claims), and any and all supporting obligations in respect thereof,
and any other personal property other than goods, Accounts, Investment Property,
and Negotiable Collateral.
"Goods" means all of Borrowers' now owned or hereafter acquired right,
-----
title, and interest with respect to "goods", as that term is defined from time
to time in the Code, including, without limitation, any and all Inventory and
Equipment.
"Governing Documents" means, with respect to any Person, the certificate or
-------------------
articles of incorporation, by-laws, or other organizational documents of such
Person.
"Governmental Authority" means any federal, state, local, or other
----------------------
governmental or administrative body, instrumentality, department, or agency or
any court, tribunal, administrative hearing body, arbitration panel, commission,
or other similar dispute-resolving panel or body.
"Guarantor" means X-Ray Technology Corporation, a Delaware corporation.
---------
13
<PAGE>
"Guaranty and Security Agreement" means the Guaranty and Security Agreement
-------------------------------
executed and delivered by Guarantor in favor of Agent, for the benefit of the
Lender Group, in form and substance satisfactory to Agent.
"Hazardous Materials" means (a) substances that are defined or listed in,
-------------------
or otherwise classified pursuant to, any applicable laws or regulations as
"hazardous substances," "hazardous materials," "hazardous wastes," "toxic
substances," or any other formulation intended to define, list, or classify
substances by reason of deleterious properties such as ignitability,
corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP
toxicity", (b) oil, petroleum, or petroleum derived substances, natural gas,
natural gas liquids, synthetic gas, drilling fluids, produced waters, and other
wastes associated with the exploration, development, or production of crude oil,
natural gas, or geothermal resources, (c) any flammable substances or explosives
or any radioactive materials, and (d) asbestos in any form or electrical
equipment that contains any oil or dielectric fluid containing levels of
polychlorinated biphenyls in excess of 50 parts per million.
"Hologic Investment" means Hologic Investment Corp., a Massachusetts
------------------
corporation and a wholly-owned Subsidiary of Parent.
"Hologic Investment Account" means account number 1119308001 maintained by
--------------------------
Hologic Investment with Goldman Sachs & Co.
"Increase Option" means the Borrowers' option to increase the Maximum
---------------
Revolver Amount to $30,000,000.
"Indebtedness" means (a) all obligations of a Borrower for borrowed money,
------------
(b) all obligations of a Borrower evidenced by bonds, debentures, notes, or
other similar instruments and all reimbursement or other obligations of a
Borrower in respect of letters of credit, bankers acceptances, interest rate
swaps, or other financial products, (c) all obligations of a Borrower under
Capital Leases, (d) all obligations or liabilities of others secured by a Lien
on any asset of a Borrower, irrespective of whether such obligation or liability
is assumed, (e) all obligations of a Borrower for the deferred purchase price of
assets (other than trade debt incurred in the ordinary course of a Borrower's
business and repayable in accordance with customary trade practices), and (f)
any obligation of a Borrower guaranteeing or intended to guarantee (whether
directly or indirectly guaranteed, endorsed, co-made, discounted, or sold with
recourse to a Borrower) any obligation of any other Person.
"Indemnified Liabilities" has the meaning set forth in Section 11.3.
----------------------- ------------
"Indemnified Person" has the meaning set forth in Section 11.3.
------------------ ------------
"Insolvency Proceeding" means any proceeding commenced by or against any
---------------------
Person under any provision of the Bankruptcy Code or under any other state or
federal bankruptcy or insolvency law, assignments for the benefit of creditors,
formal or informal moratoria, compositions, extensions generally with creditors,
or proceedings seeking reorganization, arrangement, or other similar relief.
14
<PAGE>
"Instruments" means all of Borrowers' now owned or hereafter acquired
-----------
right, title, and interest with respect to "instruments", including, without
limitation, any "promissory notes", as such terms are defined from time to time
in the Code, and any and all supporting obligations in respect thereof.
"Intangible Assets" means, with respect to any Person, that portion of the
-----------------
book value of all of such Person's assets that would be treated as intangibles
under GAAP.
"Inventory" means all Borrowers' now owned or hereafter acquired right,
---------
title, and interest with respect to "inventory", as that term is defined from
time to time in the Code, including, without limitation, goods held for sale or
lease or to be furnished under a contract of service, goods that are leased by a
Borrower as lessor, goods that are furnished by a Borrower under a contract of
service, and raw materials, work in process, or materials used or consumed in a
Borrower's business.
"Investment" means, with respect to any Person, any investment by such
----------
Person in any other Person (including Affiliates) in the form of loans,
guarantees, advances, or capital contributions (excluding (a) commission,
travel, and similar advances to officers and employees of such Person made in
the ordinary course of business, and (b) bona fide Accounts arising from the
sale of goods or rendition of services in the ordinary course of business
consistent with past practice), purchases or other acquisitions for
consideration of Indebtedness or Stock, and any other items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
"Investment Property" means all of Borrowers' now owned or hereafter
-------------------
acquired right, title, and interest with respect to "investment property" as
that term is defined in the Code, and any and all supporting obligations in
respect thereof.
"Investment Reserve Account" has the meaning set forth in Section 6.17.
-------------------------- ------------
"Investment Reserve Amount" has the meaning set forth in the definition of
-------------------------
Additional Investment Proceeds.
"IRC" means the Internal Revenue Code of 1986, as in effect from time to
---
time.
"Issuing Lender" means Foothill or any other Lender that, at the request of
--------------
the Administrative Borrower and with the consent of Agent agrees, in such
Lender's sole discretion, to become an Issuing Lender for the purpose of issuing
L/Cs or L/C Undertakings pursuant to Section 2.12.
------------
"L/C" has the meaning set forth in Section 2.12(a).
--- ---------------
"L/C Disbursement" means a payment made by the Issuing Lender pursuant to a
----------------
Letter of Credit.
"L/C Undertaking" has the meaning set forth in Section 2.12(a).
--------------- ---------------
15
<PAGE>
"Lender" and "Lenders" have the respective meanings set forth in the
------ -------
preamble to this Agreement, and shall include any other Person made a party to
this Agreement in accordance with the provisions of Section 14.1.
------------
"Lender Group" means, individually and collectively, each of the Lenders
------------
(including the Issuing Lender) and Agent.
"Lender Group Expenses" means, if the Maximum Revolver Amount is less than
---------------------
or equal to $25,000,000, all (a) costs or expenses (including taxes, and
insurance premiums) required to be paid by a Borrower under any of the Loan
Documents that are paid or incurred by Agent, (b) fees or charges paid or
incurred by Agent in connection with Agent's transactions with Borrowers,
including, fees or charges for photocopying, notarization, couriers and
messengers, telecommunication, public record searches (including tax lien,
litigation, and UCC searches and including searches with the patent and
trademark office, the copyright office, or the department of motor vehicles),
filing, recording, publication, appraisal (including periodic Collateral
appraisals or business valuations to the extent of the fees and charges (and up
to the amount of any limitation) contained in this Agreement, real estate
surveys, real estate title policies and endorsements, and environmental audits,
(c) costs and expenses incurred by Agent in the disbursement of funds to or for
the account of Borrowers (by wire transfer or otherwise), (d) charges paid or
incurred by Agent resulting from the dishonor of checks, (e) reasonable costs
and expenses paid or incurred by Agent to correct any default or enforce any
provision of the Loan Documents, or in gaining possession of, maintaining,
handling, preserving, storing, shipping, selling, preparing for sale, or
advertising to sell the Collateral, or any portion thereof, irrespective of
whether a sale is consummated, (f) audit fees and expenses of Agent related to
audit examinations of the Books to the extent of the fees and charges (and up to
the amount of any limitation) contained in this Agreement, (g) reasonable costs
and expenses of third party claims or any other suit paid or incurred by Agent
in enforcing or defending the Loan Documents or in connection with the
transactions contemplated by the Loan Documents or Agent's relationship with any
Borrower or any guarantor of the Obligations, (h) Agent's reasonable fees and
expenses (including attorneys fees) incurred in advising, structuring, drafting,
reviewing, administering, or amending the Loan Documents, and (i) Agent's
reasonable fees and expenses (including attorneys fees) incurred in terminating,
enforcing (including attorneys fees and expenses incurred in connection with a
"workout," a "restructuring," or an Insolvency Proceeding concerning any
Borrower or in exercising rights or remedies under the Loan Documents), or
defending the Loan Documents, irrespective of whether suit is brought, or in
taking any Remedial Action concerning the Collateral.
If the Maximum Revolver Amount is greater than $25,000,000, however,
"Lender Group Expenses" shall mean all (a) costs or expenses (including taxes,
- ----------------------
and insurance premiums) required to be paid by a Borrower under any of the Loan
Documents that are paid or incurred by the Lender Group, (b) fees or charges
paid or incurred by Agent in connection with the Lender Group's transactions
with Borrowers, including, fees or charges for photocopying, notarization,
couriers and messengers, telecommunication, public record searches (including
tax lien, litigation, and UCC searches and including searches with the patent
and trademark office, the copyright office, or the department of motor
vehicles), filing, recording, publication, appraisal (including periodic
Collateral appraisals or business valuations to the extent of the fees and
charges (and up to the amount of any limitation) contained in this Agreement),
real estate
16
<PAGE>
surveys, real estate title policies and endorsements, and environmental audits,
(c) costs and expenses incurred by Agent in the disbursement of funds to or for
the account of Borrowers (by wire transfer or otherwise), (d) charges paid or
incurred by Agent resulting from the dishonor of checks, (e) reasonable costs
and expenses paid or incurred by the Lender Group to correct any default or
enforce any provision of the Loan Documents, or in gaining possession of,
maintaining, handling, preserving, storing, shipping, selling, preparing for
sale, or advertising to sell the Collateral, or any portion thereof,
irrespective of whether a sale is consummated, (f) audit fees and expenses of
Agent related to audit examinations of the Books to the extent of the fees and
charges (and up to the amount of any limitation) contained in this Agreement,
(g) reasonable costs and expenses of third party claims or any other suit paid
or incurred by the Lender Group in enforcing or defending the Loan Documents or
in connection with the transactions contemplated by the Loan Documents or the
Lender Group's relationship with any Borrower or any guarantor of the
Obligations, (h) Agent's and each Lender's reasonable fees and expenses
(including attorneys fees) incurred in advising, structuring, drafting,
reviewing, administering, or amending the Loan Documents, and (i) Agent's and
each Lender's reasonable fees and expenses (including attorneys fees) incurred
in terminating, enforcing (including attorneys fees and expenses incurred in
connection with a "workout," a "restructuring," or an Insolvency Proceeding
concerning any Borrower or in exercising rights or remedies under the Loan
Documents), or defending the Loan Documents, irrespective of whether suit is
brought, or in taking any Remedial Action concerning the Collateral.
"Lender-Related Person" means, with respect to any Lender, such Lender,
---------------------
together with such Lender's Affiliates, and the officers, directors, employees,
and agents of such Lender.
"Letter(s) of Credit" means an L/C or an L/C Undertaking, as the context
-------------------
requires.
"Letter of Credit Rights" means all of Borrowers' now owned or hereafter
-----------------------
acquired right, title, and interest with respect to "letter of credit rights",
as that term is defined from time to time in the Code, and any and all
supporting obligations in respect thereof.
"Letter of Credit Usage" means, as of any date of determination, the
----------------------
aggregate undrawn amount of all outstanding Letters of Credit plus 100% of the
amount of outstanding time drafts accepted by an Underlying Issuer as a result
of drawings under Underlying Letters of Credit.
"Lien" means any interest in an asset securing an obligation owed to, or a
----
claim by, any Person other than the owner of the asset, whether such interest
shall be based on the common law, statute, or contract, whether such interest
shall be recorded or perfected, and whether such interest shall be contingent
upon the occurrence of some future event or events or the existence of some
future circumstance or circumstances, including the lien or security interest
arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation,
assignment, deposit arrangement, security agreement, conditional sale or trust
receipt, or from a lease, consignment, or bailment for security purposes and
also including reservations, exceptions, encroachments, easements, rights-of-
way, covenants, conditions, restrictions, leases, and other title exceptions and
encumbrances affecting Real Property.
"Loan Account" has the meaning set forth in Section 2.10.
------------ ------------
17
<PAGE>
"Loan Documents" means this Agreement, the Cash Management Agreements, the
--------------
Control Agreements, the Copyright Security Agreement, the Disbursement Letter,
the Due Diligence Letter, the Fee Letter, the Guaranty and Security Agreement,
the Letters of Credit, the Mortgages, the Delaware Mortgage Documents, the
Officers' Certificate, the Patent Security Agreement, the Parent Pledge
Agreement, the Trademark Security Agreement, any note or notes executed by
Borrower in connection with this Agreement and payable to a member of the Lender
Group, and any other agreement entered into, now or in the future, by any
Borrower and the Lender Group in connection with this Agreement.
"Material Adverse Change" means (a) a material adverse change in the
-----------------------
business, prospects, operations, results of operations, assets, liabilities or
condition (financial or otherwise) of the Borrowers taken as a whole, (b) a
material impairment of a Borrowers' ability, taken as a whole, to perform their
obligations under the Loan Documents to which it is a party or of the Lender
Group's ability to enforce the Obligations or realize upon the Collateral, or
(c) a material impairment of the enforceability or priority of the Agent's Liens
with respect to the Collateral.
"Maturity Date" has the meaning set forth in Section 3.4.
------------- -----------
"Maximum Revolver Amount" means (i) at any date of determination prior to
-----------------------
Borrowers' exercise of the Increase Option, $25,000,000 (ii) at any date of
determination following Borrowers' exercise of the Increase Option, $30,000,000.
"Moody's" means Moody's Investors Service, Inc.
-------
"Mortgages" means individually and collectively, one or more mortgages,
---------
deeds of trust, or deeds to secure debt, executed and delivered by Parent in
favor of Agent, for the benefit of the Lender Group, in form and substance
satisfactory to Agent, that encumber the Real Property Collateral and the
related improvements thereto.
"Negotiable Collateral" means all of Borrowers' now owned and hereafter
---------------------
acquired right, title, and interest with respect to any letters of credit,
Letter of Credit Rights, Instruments, drafts, Documents, and Chattel Paper, and
any and all supporting obligations in respect thereof.
"Net Liquidation Percentage" means the value of Borrowers' Inventory that
--------------------------
is estimated to be recoverable in an orderly liquidation of such Inventory, such
percentage to be determined from time to time by a qualified appraisal company
selected by Agent.
"Notice of Exercise of Increase Option" means a notice in the form of
-------------------------------------
Exhibit I-1.
- -----------
"Obligations" means all loans (including the Term Loan), Advances, debts,
-----------
principal, interest (including any interest that, but for the provisions of the
Bankruptcy Code, would have accrued), contingent reimbursement obligations with
respect to outstanding Letters of Credit, premiums, liabilities (including all
amounts charged to Borrowers' Loan Account pursuant hereto), obligations, fees
(including the fees provided for in the Fee Letter), charges, costs, Lender
Group Expenses (including any fees or expenses that, but for the provisions of
the Bankruptcy Code, would have accrued), lease payments, guaranties, covenants,
and duties of any kind and description owing by Borrowers to the Lender Group
pursuant to or evidenced by the Loan Documents and irrespective of whether for
the payment of money, whether direct or
18
<PAGE>
indirect, absolute or contingent, due or to become due, now existing or
hereafter arising, and including all interest not paid when due and all Lender
Group Expenses that Borrowers are required to pay or reimburse by the Loan
Documents, by law, or otherwise. Any reference in this Agreement or in the Loan
Documents to the Obligations shall include all amendments, changes, extensions,
modifications, renewals replacements, substitutions, and supplements, thereto
and thereof, as applicable, both prior and subsequent to any Insolvency
Proceeding.
"Officers' Certificate" means the representations and warranties of
---------------------
officers form submitted by Agent to the Administrative Borrower, together with
Borrowers' completed responses to the inquiries set forth therein, the form and
substance of such responses to be satisfactory to Agent.
"Originating Lender" has the meaning set forth in Section 14.1(e).
------------------ ---------------
"Overadvance" has the meaning set forth in Section 2.5.
----------- -----------
"Parent" has the meaning set forth in the preamble to this Agreement.
------
"Parent Pledge Agreement" means a stock pledge agreement, in form and
-----------------------
substance satisfactory to Agent, executed and delivered by each Borrower to
Agent with respect to the pledge of the Stock of Subsidiaries of Parent.
"Participant" has the meaning set forth in Section 14.1(e).
----------- ---------------
"Patent Security Agreement" means a patent security agreement executed and
-------------------------
delivered by each Borrower and Agent, the form and substance of which is
satisfactory to Agent.
"Payment Directive" means an irrevocable payment directive executed and
-----------------
delivered by Parent and Hologic Investment to Goldman Sachs.
"Permitted Discretion" means a determination made in good faith and in the
--------------------
exercise of reasonable (from the perspective of a secured asset-based lender)
business judgment.
"Permitted Dispositions" means (a) sales or other dispositions by Borrowers
----------------------
in the ordinary course of the applicable Borrower's business of Equipment that
is substantially worn, damaged, or obsolete, (b) sales by Borrowers of Inventory
to buyers in the ordinary course of business, (c) the use or transfer of money
or Cash Equivalents by Borrowers in a manner that is not prohibited by the terms
of this Agreement or the other Loan Documents, and (d) the licensing by
Borrowers, on a non-exclusive basis, of patents, trademarks, copyrights, and
other intellectual property rights in the ordinary course of the applicable
Borrower's business.
"Permitted Investments" means (a) investments in Cash Equivalents, (b)
---------------------
investments in negotiable instruments for collection, (c) advances made in
connection with purchases of goods or services in the ordinary course of
business, and (d) investments by any Borrower in any other Borrower, provided
--------
that, if any such investment is in the form of Indebtedness, such Indebtedness
- ----
shall be subject to the terms and conditions of an intercompany subordination
agreement in form and substance satisfactory to Agent.
19
<PAGE>
"Permitted Liens" means (a) Liens held by Agent for the benefit of Agent
---------------
and the Lenders, (b) Liens for unpaid taxes that either (i) are not yet
delinquent, or (ii) do not constitute an Event of Default hereunder and are the
subject of Permitted Protests, (c) Liens set forth on Schedule P-1, (d) the
------------
interests of lessors under operating leases, (e) purchase money Liens or the
interests of lessors under Capital Leases to the extent that such Liens or
interests secure Permitted Purchase Money Indebtedness permitted by the terms of
this Agreement and so long as such Lien attaches only to the asset purchased or
acquired and the proceeds thereof, (f) Liens arising by operation of law in
favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers, or
suppliers, incurred in the ordinary course of business of Borrowers and not in
connection with the borrowing of money, and which Liens either (i) are for sums
not yet delinquent, or (ii) are the subject of Permitted Protests, (g) Liens
arising from deposits made in connection with obtaining worker's compensation or
other unemployment insurance, (h) Liens or deposits to secure performance of
bids, tenders, or leases incurred in the ordinary course of business of
Borrowers and not in connection with the borrowing of money, (i) Liens granted
as security for surety or appeal bonds in connection with obtaining such bonds
in the ordinary course of business of Borrowers, (j) Liens resulting from any
judgment or award that is not an Event of Default hereunder, (k) Liens with
respect to the Real Property Collateral listed on Schedule P-1, as accepted by
------------
Agent, and (l) with respect to any Real Property that is not part of the Real
Property Collateral, easements, rights of way, and zoning restrictions that do
not materially interfere with or impair the use or operation thereof by
Borrowers.
"Permitted Protest" means the right of the applicable Borrower to protest
-----------------
any Lien (other than any such Lien that secures the Obligations), taxes (other
than payroll taxes or taxes that are the subject of a United States federal tax
lien), or rental payment, provided that (a) a reserve with respect to such
obligation is established on the Books in such amount as is required under GAAP,
(b) any such protest is instituted promptly and prosecuted diligently by the
applicable Borrower in good faith, and (c) Agent is satisfied that, while any
such protest is pending, there will be no impairment of the enforceability,
validity, or priority of any of the Agent's Liens.
"Permitted Purchase Money Indebtedness" means, as of any date of
-------------------------------------
determination, Purchase Money Indebtedness incurred after the Closing Date in an
aggregate principal amount outstanding at any one time not in excess of
$1,000,000.
"Permitted Transaction" has the meaning set forth in Section 7.21.
--------------------- ------------
"Person" means natural persons, corporations, limited liability companies,
------
limited partnerships, general partnerships, limited liability partnerships,
joint ventures, trusts, land trusts, business trusts, or other organizations,
irrespective of whether they are legal entities, and governments and agencies
and political subdivisions thereof.
"Personal Property Collateral" means all Collateral other than Real
----------------------------
Property.
"Pre-Effective Jurisdiction" means, as of any date, any state or other
--------------------------
jurisdiction in which Revised Article 9 is not effective.
"Projections" means Parent's forecasted (a) balance sheets, (b) profit and
-----------
loss statements, and (c) cash flow statements, all prepared on a basis
consistent with Parent's historical financial
20
<PAGE>
statements, together with appropriate supporting details and a statement of
underlying assumptions substantially in the form of the projections previously
delivered to Agent.
"Pro Rata Share" means:
--------------
(a) with respect to a Lender's obligation to make Advances and receive
payments of principal, interest, fees, costs, and expenses with respect thereto,
the percentage obtained by dividing (i) such Lender's Revolver Commitment, by
(ii) the aggregate Revolver Commitments of all Lenders,
(b) with respect to a Lender's obligation to participate in Letters of
Credit, to reimburse the Issuing Lender, and to receive payments of fees with
respect thereto, the percentage obtained by dividing (i) such Lender's Revolver
Commitment, by (ii) the aggregate Revolver Commitments of all Lenders,
(c) with respect to a Lender's obligation to make the Term Loan and receive
payments of interest, fees, and principal with respect thereto, the percentage
obtained by dividing (i) such Lender's Term Loan Commitment, by (ii) the
aggregate amount of all Lenders' Term Loan Commitments, and
(d) with respect to all other matters (including the indemnification
obligations arising under Section 16.7), the percentage obtained by dividing (i)
------------
such Lender's Total Commitment, by (ii) the aggregate amount of Total
Commitments of all Lenders; provided, however, that, in each case, in the event
-------- -------
all Commitments have been terminated, Pro Rata Share shall be determined
according to the Commitments in effect immediately prior to such termination.
"Purchase Money Indebtedness" means Indebtedness (other than the
---------------------------
Obligations, but including Capitalized Lease Obligations), incurred at the time
of, or within 20 days after, the acquisition of any fixed assets for the purpose
of financing all or any part of the acquisition cost thereof.
"Real Property" means any estates or interests in real property now owned
-------------
or hereafter acquired by any Borrower and the improvements thereto.
"Real Property Collateral" means the parcel or parcels of Real Property
------------------------
identified on Schedule R-1 and any Real Property hereafter acquired by a
------------
Borrower.
"Records" means information that is inscribed on a tangible medium or which
-------
is stored in an electronic or other medium and is retrievable in perceivable
form.
"Remedial Action" means all actions taken to (a) clean up, remove,
---------------
remediate, contain, treat, monitor, assess, evaluate, or in any way address
Hazardous Materials in the indoor or outdoor environment, (b) prevent or
minimize a release or threatened release of Hazardous Materials so they do not
migrate or endanger or threaten to endanger public health or welfare or the
indoor or outdoor environment, (c) perform any pre-remedial studies,
investigations, or post-remedial operation and maintenance activities, or (d)
conduct any other actions authorized by 42 USC Section 9601.
21
<PAGE>
"Report" has the meaning set forth in Section 16.17.
------ -------------
"Required Availability" means Excess Availability and unrestricted cash and
---------------------
Cash Equivalents in an amount of not less than $10,000,000.
"Required Lenders" means, at any time, (a) Agent, and (b) Lenders whose Pro
----------------
Rata Shares aggregate 51% of the Total Commitments, or if the Commitments have
been terminated irrevocably, 51% of the Obligations then outstanding.
"Reserve Percentage" means, on any day, for any Lender, the maximum
------------------
percentage prescribed by the Board of Governors of the Federal Reserve System
(or any successor Governmental Authority) for determining the reserve
requirements (including any basic, supplemental, marginal, or emergency
reserves) that are in effect on such date with respect to eurocurrency funding
(currently referred to as "eurocurrency liabilities") of that Lender, but so
long as such Lender is not required or directed under applicable regulations to
maintain such reserves, the Reserve Percentage shall be zero.
"Restricted Payment" has the meaning set forth in Section 7.11.
------------------ ------------
"Revised Article 9" means revised Article 9 of the Uniform Commercial Code
-----------------
in the form or substantially in the form approved by the American Law Institute
and the National Conference of Commissioners on Uniform State Law and contained
in the 2000 official text of the Uniform Commercial Code.
"Revolver Commitment" means, with respect to each Lender, its Revolver
-------------------
Commitment, and, with respect to all Lenders, their Revolver Commitments, in
each case as such Dollar amounts are set forth beside such Lender's name under
the applicable heading on Schedule C-1 or on the signature page of the
------------
Assignment and Acceptance pursuant to which such Lender became a Lender
hereunder in accordance with the provisions of Section 14.1.
------------
"Revolver Usage" means, as of any date of determination, the sum of (a) the
--------------
then extant amount of outstanding Advances, plus (b) the then extant amount of
the Letter of Credit Usage.
"Risk Participation Liability" means, as to each Letter of Credit, all
----------------------------
reimbursement obligations of Borrowers to the Issuing Lender with respect to an
L/C Undertaking, consisting of (a) the amount available to be drawn or which may
become available to be drawn, (b) all amounts that have been paid by the Issuing
Lender to the Underlying Issuer to the extent not reimbursed by Borrowers,
whether by the making of an Advance or otherwise, and (c) all accrued and unpaid
interest, fees, and expenses payable with respect thereto.
"S&P" means Standard & Poor's Rating Services, a division of the McGraw-
---
Hill Companies.
"SEC" means the United States Securities and Exchange Commission and any
---
successor thereto.
"Securities Account" means a "securities account" as that term is defined
------------------
in the Code.
22
<PAGE>
"Settlement" has the meaning set forth in Section 2.3(f)(i).
---------- -----------------
"Settlement Date" has the meaning set forth in Section 2.3(f)(i).
--------------- -----------------
"Solvent" means, with respect to any Person on a particular date, that such
-------
Person is not insolvent (as such term is defined in the Uniform Fraudulent
Transfer Act).
"Stock" means all shares, options, warrants, interests (including, without
-----
limitation, any Borrower's interest in the DRC Joint Venture), participations,
or other equivalents (regardless of how designated) of or in a Person, whether
voting or nonvoting, including common stock, preferred stock, or any other
"equity security" (as such term is defined in Rule 3a11-1 of the General Rules
and Regulations promulgated by the SEC under the Exchange Act).
"Subordination, Non-Disturbance and Attornment Agreements" means the
--------------------------------------------------------
subordination, non-disturbance and attornment agreements executed and delivered
by each of Parent's tenants at the Delaware Facility, Parent and Agent, in form
and substance satisfactory to Agent.
"Subsidiary" of a Person means a corporation, partnership, limited
----------
liability company, or other entity in which that Person directly or indirectly
owns or controls the shares of Stock having ordinary voting power to elect a
majority of the board of directors (or appoint other comparable managers) of
such corporation, partnership, limited liability company, or other entity.
"Swing Lender" means Foothill or any other Lender that, at the request of
------------
the Administrative Borrower and with the consent of Agent agrees, in such
Lender's sole discretion, to become the Swing Lender hereunder.
"Swing Loan" has the meaning set forth in Section 2.3(d)(i).
---------- -----------------
"Tangible Net Worth" means, as of any date of determination, the result of
------------------
(a) the total stockholder's equity of Parent and its Subsidiaries, minus (b) the
sum of (i) all Intangible Assets of Parent and its Subsidiaries, (ii) all of
Parent's prepaid expenses, and (iii) all amounts due to Parent and its
Subsidiaries from Affiliates.
"Taxes" has the meaning set forth in Section 16.11.
----- -------------
"Tenant Estoppel Certificates" means tenant estoppel certificates executed
----------------------------
and delivered to Agent by each of Parent's tenants at the Delaware Facility, in
form and substance satisfactory to Agent.
"Term Loan" has the meaning set forth in Section 2.2.
--------- -----------
"Term Loan Amount" means the lesser of (i) $2,361,000 or (ii) 80 percent of
----------------
the amount that is estimated to be recoverable in an orderly liquidation of
Borrowers' Equipment (excluding any equipment which the Agent believes, in its
Permitted Discretion, constitutes or might constitute a fixture) as determined
from time to time (subject to Section 4.6) by a qualified appraisal company
-----------
selected by Agent.
23
<PAGE>
"Term Loan Commitment" means, with respect to each Lender, its Term Loan
--------------------
Commitment, and, with respect to all Lenders, their Term Loan Commitments, in
each case as such Dollar amounts are set forth beside such Lender's name under
the applicable heading on Schedule C-1 or on the signature page of the
------------
Assignment and Acceptance pursuant to which such Lender became a Lender
hereunder in accordance with the provisions of Section 14.1.
------------
"Term Loan Margin" means 1.25 percentage points.
----------------
"Total Commitment" means, with respect to each Lender, its Total
----------------
Commitment, and, with respect to all Lenders, their Total Commitments, in each
case as such Dollar amounts are set forth beside such Lender's name under the
applicable heading on Schedule C-1 attached hereto or on the signature page of
------------
the Assignment and Acceptance pursuant to which such Lender became a Lender
hereunder in accordance with the provisions of Section 14.1.
------------
"Trademark Security Agreement" means a trademark security agreement
----------------------------
executed and delivered by each Borrower and Agent, the form and substance of
which is satisfactory to Agent.
"Trailing Four Quarter EBITDA" means EBITDA for the four fiscal quarter
----------------------------
period ended as of the date of the most recent Compliance Certificate.
"Trex Indebtedness" means the $25,000,000 Indebtedness incurred by the
-----------------
Parent in connection with the acquisition of the assets of Trex Medical
Corporation from Trex Medical Systems Corporation.
"Trex Mortgages" means, collectively, the mortgages on the Parent's
--------------
properties at each of 35 Crosby Drive, Bedford, Massachusetts and 36 Apple Ridge
Road, Danbury, Connecticut, respectively, granted by the Parent to Trex Medical
Systems Corporation in connection with the Trex Indebtedness.
"Trex Note" means the Secured Promissory Note dated September 15, 2000 in
---------
the principal amount of $25,000,000 issued by the Parent to Trex Medical Systems
Corporation in connection with the Trex Indebtedness.
"Underlying Issuer" means a third Person which is the beneficiary of an L/C
-----------------
Undertaking and which has issued a letter of credit at the request of the
Issuing Lender for the benefit of Borrowers.
"Underlying Letter of Credit" means a letter of credit that has been issued
---------------------------
by an Underlying Issuer.
"Voidable Transfer" has the meaning set forth in Section 17.7.
----------------- ------------
"Wells Fargo" means Wells Fargo Bank, National Association, a national
-----------
banking association.
1.2 Accounting Terms. All accounting terms not specifically defined herein
----------------
shall be construed in accordance with GAAP. When used herein, the term
"financial statements" shall include the notes and schedules thereto. Whenever
the term "Borrowers" or the term "Parent" is
24
<PAGE>
used in respect of a financial covenant or a related definition, it shall be
understood to mean Parent and its Subsidiaries on a consolidated basis unless
the context clearly requires otherwise.
1.3 Code. Any terms used in this Agreement that are defined in the Code
----
shall be construed and defined as set forth in the Code unless otherwise defined
herein.
1.4 Construction. Unless the context of this Agreement or any other Loan
------------
Document clearly requires otherwise, references to the plural include the
singular, references to the singular include the plural, the term "including" is
not limiting, and the term "or" has, except where otherwise indicated, the
inclusive meaning represented by the phrase "and/or." The words "hereof,"
"herein," "hereby," "hereunder," and similar terms in this Agreement or any
other Loan Document refer to this Agreement or such other Loan Document, as the
case may be, as a whole and not to any particular provision of this Agreement or
such other Loan Document, as the case may be. Section, subsection, clause,
schedule, and exhibit references herein are to this Agreement unless otherwise
specified. Any reference in this Agreement or in the other Loan Documents to
any agreement, instrument, or document shall include all alterations,
amendments, changes, extensions, modifications, renewals, replacements,
substitutions, joinders, and supplements, thereto and thereof, as applicable
(subject to any restrictions on such alterations, amendments, changes,
extensions, modifications, renewals, replacements, substitutions, joinders, and
supplements set forth herein). Any reference herein to any Person shall be
construed to include such Person's successors and assigns. Any requirement of a
writing contained herein or in the other Loan Documents shall be satisfied by
the transm