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ACCESSION NUMBER: 0001021408-02-015499
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 10
CONFORMED PERIOD OF REPORT: 20020928
FILED AS OF DATE: 20021224
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-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-18281
FILM NUMBER: 02867943
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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<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 28, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 0-18281
HOLOGIC, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 04-2902449
(State 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
Form 10-K. X
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of December 17, 2002 was $245,643,481 based
on the price of the last reported sale on the Nasdaq National Market System on
that date.
As of December 17, 2002 there were 19,557,602 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 28, 2002 (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 to increase revenues and 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;
. the anticipated growth of our markets;
. the anticipated performance of, and the benefits we expect to receive from,
our products;
. business strategies;
. dependence on significant suppliers;
. dependence on significant distributors and customers and strategic
alliances;
. compliance with covenants contained in credit facilities and long terms
leases;
. 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. Except as otherwise required by law, 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.
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PART I
ITEM 1. BUSINESS
OVERVIEW
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
Corp., 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 10,000
mammography systems worldwide and our products are known within the industry for
superior image quality and technological innovation. We successfully integrated
our DirectRay technology into the Lorad mammography product line and offer 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. 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
resulted in annual cost savings in excess of $11 million. Cost savings
initiatives included a reduction of the workforce, reduction of operating
expenses in each of our business units and the phase-out of non-core and
unprofitable units. The second element of our restructuring plan focused on
long-term revenue growth through new marketing programs, expanded distribution
channels, and development of strategic business relationships. In January 2002,
we officially closed our conventional X-ray equipment manufacturing facility
located in Littleton, Massachusetts, which was acquired through our acquisition
of the U.S. assets of Trex Medical. This business incurred significant losses
during fiscal 2001. We relocated some of the Littleton product lines, and sales
and service support personnel to our corporate headquarters in Bedford,
Massachusetts. Since the beginning of fiscal 2001 through the end of fiscal
2002, we reduced our workforce by approximately 25%.
We returned the Company to profitability in the second quarter of fiscal
2002. We are continuing to focus on expanding our market position in bone
densitometry and mammography, and leading the field of digital mammography. To
that end, in October 2002, we received final approval from the FDA to commence
marketing activities with respect to our Lorad Selenia full field digital
mammography system. We are continuing to evaluate new marketing programs which
are designed to expand market share in our core markets and to assess new
distribution channels for our product portfolio
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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 five principal
operating segments: osteoporosis assessment products, mammography products,
direct-to-digital imaging products, mini C-arm imaging products and conventional
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. ACCLAIM, Affinity, CADfx,
Delphi, Direct Radiography, DirectRay, Discovery, DXA, Elite, EPEX, EPEX ER,
EPEX Symphony, Express BMD, Express Exam, FAST, FAST Paddle, Fluoroscan,
HiBrite, HTC, Image Pro, IVA, Ideas to Images, LORAD, M-IV, MultiCare,
Officemate, Omniflex, One Pass, Premier, Premier Encore, Picturing Life,
Profile, QDR, RADEX, Sahara, Selenia, Smart Paddle System and StereoLoc are
trademarks or registered trademarks of Hologic or Hologic subsidiaries in the
United States and other countries.
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.
OSTEOPOROSIS 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. In
February 2002, the National Osteoporosis Foundation estimated that osteoporosis
is a major public health threat for almost 44 million Americans, the majority of
whom are women. Each year osteoporosis contributes to more than 1.5 million new
hip, spine and other fractures. The National Osteoporosis Foundation estimated
that the national direct expenditures for osteoporotic and associated fractures
were $17 billion in 2001 and that the cost is rising. A significant boost for
our osteoporosis 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 osteoporosis 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 2002, we shipped more than 750 dual-energy X-ray bone
densitometry systems worldwide.
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 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.
In fiscal 2002, our Delphi systems represented approximately 72% of our
revenue from shipments of X-ray bone densitometry systems. Over 1,000 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
4
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technology advantages of Delphi.
In December of 2002, we introduced our next generation of bone
densitometers, the Discovery QDR Series. Discovery reduces bone density scan
times by 67%, providing bone density and vertebral imaging scans in just 10
seconds. In addition, Discovery provides automation and connectivity features to
maximize patient throughput and integrate with electronic information systems.
We expect to phase-out the Delphi product line in fiscal 2003 and replace it
with the Discovery QDR Series.
PRODUCTS
Our osteoporosis assessment products include a family of QDR X-ray bone
densitometers and the Sahara Clinical Bone Sonometer, a low-cost 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 9,000 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, 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. In 2001 and 2002 we introduced a series of software tools for
remote softcopy interpretation and electronic reporting of test results.
Electronic reporting is a critical feature for any medical imaging device, as
medical providers move towards paperless storage and reporting systems.
In November 1999, we introduced our Delphi QDR Series bone densitometer.
Delphi was the first bone densitometer to offer 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. Delphi systems are
modular in design, allowing customers to add features and capabilities, while
protecting their investment in equipment and patient data. Delphi is available
in four different configurations, the C and W models and the more advanced A and
SL models.
In December of 2002, we introduced our Discovery QDR Series of bone
densitometers. Discovery acquires bone density and vertebral imaging scans in
just ten seconds, which we believe provides the most comprehensive assessment of
fracture risk in the shortest amount of time. Discovery's CADfx feature
automates the classification of spine fractures, and our Express Exam feature
completely automates the patient examination procedure. Discovery also offers
workflow and connectivity enhancements, including complete electronic
integration with hospital information systems. We expect that the Discovery will
replace the Delphi product line, which we plan to phase-out during fiscal 2003.
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An important feature of the Discovery and Delphi 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
A and SL systems are capable of producing high quality images of the spine,
lateral spine, hip and other skeletal sites. A motorized rotating scan arm
allows for multiple scan views without patient repositioning. By using either of
the A or SL systems, high-quality lateral images of the entire spine can be
obtained in as little as ten seconds.
We also continue to offer our customers two versions of the ACCLAIM QDR
Series bone densitometer: the QDR 4500W and the QDR 4500C. These systems do not
offer the instant vertebral assessment capability offered by the Delphi and
Discovery systems, but can be field upgraded to add this capability.
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 a 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 licensed or registered operators. However, because ultrasound bone
measurements currently are not as precise as X-ray and other measurements, they
are less reliable for monitoring of small changes in bone density or for
assessing the response to therapies. In addition, they are generally limited to
measurements at peripheral skeletal sites, not the more important spine or hip
fracture sites. We believe that our Sahara ultrasound system represents a
relatively low cost, portable, easy-to-use, non-ionizing measurement technique
to assist in the initial diagnosis of osteoporosis. Since our introduction of
the Sahara, over 3,000 Sahara systems have been installed worldwide.
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 more than 203,000 new cases of invasive breast
cancer are expected to occur among women in the United States during 2002.
Breast cancer ranks as the second leading cause of cancer-related deaths among
women, causing an estimated 40,000 deaths in 2002. A leading industry analyst
estimates that the mammography imaging equipment market was expected to be
greater than $300 million in 2002, and anticipates 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 2002,
we shipped more than 800 mammography systems worldwide.
PRODUCTS
Our LORAD division offers a broad line of breast imaging products,
including the Selenia full field digital mammography system, a series of
screen-film mammography systems and a range of breast biopsy systems. The
Selenia, which received U.S. FDA marketing approval in October of 2002, is
currently the only marketed full field digital mammography system utilizing
direct conversion technology. This technology is based on our proprietary,
amorphous selenium DirectRay digital detector, which preserves image sharpness
by directly converting X-rays to electronic signal. Currently our highest-end
LORAD screen-film mammography system, the M-IV Platinum, is considered a
technology leader in the mammography marketplace. The M-IV Platinum incorporates
our High Transmission Cellular, (HTC) Grid, 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.
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We also began full commercial production of our mid-tier system, the LORAD
Affinity, which can also be configured with our HTC technology. The LORAD
Affinity 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. The Affinity replaced our previous
mid-tier system, the LORAD Elite, which is no longer manufactured by LORAD.
We also offer two minimally invasive breast biopsy systems, the MultiCare
prone stereotactic breast biopsy system and the StereoLoc II upright system.
These systems provide an alternative to open surgical biopsy, which is sometimes
performed under general anesthesia in the outpatient department of a hospital.
Minimally invasive biopsies are most often performed in a physician's office or
a breast imaging center on an outpatient basis under local anesthesia.
Stereotactic biopsies are less expensive than open surgical biopsies and cause
less tissue trauma. The following is a more detailed description of the products
sold by our LORAD Division.
Selenia Full Field Digital Mammography System
. LORAD Selenia. The Selenia, which utilizes our DirectRay amorphous
selenium flat-panel detector, is the industry's first FDA approved
digital mammography system based on direct conversion technology. Direct
conversion technology uses amorphous selenium to directly convert X-rays
to electronic signals, without first converting them to light, a step
required in systems using indirect conversion detectors. This direct
conversion process completely eliminates light diffusion and preserves
image sharpness, for exceptional digital images.
The Selenia has a number of other features which improve image quality,
enhance patient comfort, and streamline patient throughput. For example,
the system's detector size of 24 x 29 cm, the largest in the industry,
accommodates almost all breast sizes with a single exposure. In addition,
our award-winning HTC Grid, which is integrated into the digital
detector, significantly reduces radiation scatter and allows geometric
magnification views and our shifting Smart Paddle System permits all
views, including MLOs, to be taken without changing compression paddles.
The Selenia system facilitates efficient viewing and interpretation by
physicians and provides multiple image manipulation options through the
use and analysis of electronic and hard copy film printouts and the
system's computer workstation. The system is configured to interface with
a sophisticated image management system to handle routing, archival, and
retrieval of studies.
Screen-Film Mammography Systems
. LORAD M-IV Series, includes the LORAD M-IV and the M-IV Platinum. The
LORAD M-IV was introduced in 1996. Since that introduction, more than
3,600 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, fully automatic collimation and isocentric C-arm
rotation. Image quality can be further improved through use of the HTC
Grid and Fully Automatic Self-adjusting Tilt (FAST) Paddle, which are
standard features of the M-IV Platinum and optional components on the
M-IV. Other features of the LORAD M-IV Series include improved patient
management through streamlined patient scheduling, integrated auto film
identification, ands optional bar code reader. The LORAD M-IV has also
been designed to be upgradeable to our Selenia full field digital
mammography system.
. LORAD Affinity. We began full commercial production of the Affinity in
late 2002. 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 and
FAST Paddle technology.
Stereotactic 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.
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We offer the StereoLoc II upright biopsy system, which is used in
conjunction with our M-IV series of screen-film 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). Both systems can be 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.
DIGITAL MAMMOGRAPHY MARKET
We expect digital technology to provide 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 and
processing costs, reduce the cost of image storage, and have the potential to
increase patient throughput.
We believe that our Selenia full field direct-to-digital mammography system
positions us to expand our share of the mammography market. With the potential
for improved imaging and higher patient throughput 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. We believe that growth of the
digital mammography market will accelerate as product offerings improve image
quality over existing systems.
We believe our Selenia system provides excellent image quality, and offers
women one of the most advanced tools available for early detection of breast
cancer. The Selenia system is offered to our existing customer base through
upgrades or replacement systems, or as stand-alone purchases. We estimate that
we have sold over 10,000 mammography systems worldwide. We are also seeking to
expand our market beyond our historic customer base with expansion of our sales
force or co-distribution arrangements. To this end, in 2002 we entered into a
strategic alliance with Siemens AG focused on the development of
direct-to-digital mammography systems. Under our agreements with Siemens,
Siemens agreed to exclusively purchase from us its digital panel requirements
for its full field digital mammography system during the five year term of the
agreement and we licensed advanced image processing and display software from an
affiliate of Siemens. Through this alliance we have combined our proprietary
amorphous selenium direct-to-digital technology with Siemens' proprietary
software to create a dedicated physician's workstation and bring to market a
direct-to-digital mammography system. In connection with these agreements with
Siemens, we also agreed to support Siemens in its efforts to release its digital
mammography system to the market.
We also entered into a letter of intent with the Agfa-Gevaert Group whereby
Hologic would manufacture for Agfa, under a private label, a digital mammography
system utilizing our patented direct-to-digital amorphous selenium technology.
The launch of this manufacturing agreement 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 Agfa will be reached.
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 and
newer computed radiology technology creates a market with significant growth
potential in general and in our core mammography systems market in particular.
Within the examination room, digital radiography systems provide the
opportunity for more expedient patient
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exam flow, fewer repeat exams and increased room utilization. Because digital
radiography systems capture and convert X-ray images into a digital format
within seconds of exposure, the technologist can quickly preview the digitized
image for quality assurance prior to completion of a patient's examination. The
digitized image can then be transmitted electronically for reviewing on a
diagnostic workstation, printing on film or electronic storage.
The wide dynamic range inherent in most digital images allows a radiologist
to adjust the image electronically at a workstation to optimize the desired
anatomy view and gain more diagnostic information compared to traditional film
screen technology.
For healthcare providers, the benefits of digital radiography systems stem
from fast and efficient production of diagnostic quality images. We believe
digital radiography systems offer improved patient care, increased staff and
equipment productivity, and the potential to attract a greater number of
referral patients and physicians. In spite of their high acquisition cost,
digital radiography systems can be 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.
A significant factor in the medical 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. Although 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. While not all facilities in
which X-ray units are installed will migrate to digital technology, we believe
most large facilities will, particularly those in the U.S. where PACS is an
important initiative.
A leading industry analysis firm, estimates that in 2000 there were
approximately 300,000 general radiographic X-ray units installed worldwide with
a replacement rate of approximately 11,000 systems per year. By 2007, this
analysts project that the market for digital general radiography systems will
exceed $1.0 billion annually. Digital radiography technology coupled with
analyst's predictions that the worldwide X-ray mammography market will double to
close to $600 million in five years. We believe we are positioned to benefit
from market opportunities in general radiography and mammography.
Digital radiography X-ray systems can be divided into two classes: those
that employ direct methods to convert X-ray energy into an electrical charge and
those that use indirect methods. Systems using direct-conversion flat-panel
digital detectors, such as our DirectRay flat panel detector, use a
semiconductor coating - amorphous selenium (a-Se) - to directly convert X-ray
photons into an electrical charge. No intensifying screens or additional
processes are required to capture and convert the X-ray energy. Digital
radiography systems using indirect conversion detectors employ a two-step
process for X-ray detection. Semiconductor coatings, such as cesium iodide or
gadolinium oxysulfide, capture X-ray energy and convert it to light. An array of
thin-film diodes then converts the light energy to electrical signals. X-ray
imaging systems that use light may compromise image sharpness because light
scatter can blur the image.
DirectRay selenium coated detectors developed by our Direct Radiography
Corp. subsidiary are particularly well suited for high-quality digital imaging
because selenium 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.
Amorphous selenium deposition is a well-developed technology. It has been
used for decades in photocopiers, in photocells and exposure meters for
photographic use, as well as in solar cells. It is also used as a photographic
toner and as an additive in the glass and stainless steel industries. With the
only commercially available, FDA-cleared, direct-conversion selenium detectors,
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 DirectRay digital technology in fully integrated
radiographic systems, such as our EPEX and RADEX systems, and as a digital
component for original equipment manufacturers (OEMs), to incorporate into their
own equipment. Our OEMs include Analogic Corporation, a supplier to Eastman
Kodak, for general radiography systems, and Siemens for mammography systems.
Additionally, we sell digital detectors to Agfa for non-destructive testing for
industrial applications not related to healthcare.
In 2002, through our subsidiary Direct Radiography Corp. we continued to
expand our line of dose-efficient, high-productivity imaging systems empowered
by DirectRay technology. Our digital 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.
The majority of our digital radiography system sales are in the EPEX family
- - one and two detector systems sharing a common overhead X-ray tube subsystem,
designed for the full range of general radiography imaging. Our RADEX system is
a more basic general radiography system designed to provide flexibility as
required by outpatient departments. The division recently launched the EPEX ER,
a system particularly well suited for trauma and emergency department imaging.
The EPEX line also includes a new two-detector system, the EPEX Symphony,
dedicated chest systems with either a floor or ceiling mounted X-ray tube, and
the original EPEX fixed table-imaging system. As of the close of our fourth
quarter of 2002, we had a record backlog of 31 systems, or greater than $8.0
million, due to increasing orders for our EPEX and RADEX imaging systems.
MINI C-ARM IMAGING PRODUCTS
OVERVIEW
We manufacture and distribute Fluoroscan mini C-arm imaging systems. Mini
C-arms provide low intensity, real-time X-ray imaging, with high-resolution
images at radiation levels and at a cost well below those of conventional X-ray
and fluoroscopic equipment. 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. 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 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.
At the Radiological Society of North America trade show held in December
2002, Fluoroscan introduced the Premier Encore system. The Premier Encore system
streamlines system operation using a touch screen interface, configurable
physician preference pre-sets, enhanced DICOM image output, and CD image
storage. The Premier Encore system is available with a laser positioning pointer
and offers 60 degree monitor rotation for maximum operating room flexibility.
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.
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CONVENTIONAL GENERAL RADIOGRAPHY PRODUCTS
In January 2002 we officially closed our conventional X-ray equipment
manufacturing facility in Littleton, Massachusetts and relocated some of the
Littleton product lines and sales and service support personnel to our corporate
headquarters in Bedford, Massachusetts. This consolidation was 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 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
In the United States, we sell and service our products through a
combination of a direct sales and service force and a network of independent
distributors. In early fiscal 2002, we centralized our management of these sales
channels for all of our product lines. PSS World Medical, Inc. and its
affiliates, our largest distributor network in the United States, accounted for
approximately 24% of our product sales for fiscal 2002. In November 2002, PSS
sold its Diagnostic Imaging, Inc. subsidiary, which is a distributor of our
mammography product line, to Platinum Equity. Diagnostic Imaging, as part of
PSS, accounted for approximately 15% of our product sales for fiscal 2002. We do
not have a long term agreement with Diagnostic Imaging or PSS obligating them to
purchase products from us, or restricting them from purchasing products from our
competitors. As of November 30, 2002 our direct sales and service force
comprised of over 64 people in sales, support and associated administrative
functions. We have recently expanded our direct sales and service efforts for
mammography into territories that were previously covered by independent
distributors, and we are considering further expanding our direct sales and
service coverage in the United States.
Our United States marketing efforts also include the use of two national
account managers which are 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 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, Premier, 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 fiscal 2002, we restructured our operations in Europe, which
included entering into exclusive distribution agreements with Stephanix, one of
the leading French manufacturers of medical X-ray equipment, and its affiliate,
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 2000, 2001, and 2002 foreign sales accounted for
approximately 33%, 28%, and 20% of our product sales, respectively. See Note 11
of Notes to Consolidated Financial Statements for geographical information
concerning those sales.
In fiscal 2002, we entered into a number of agreements which have
strengthened the sales and distribution channels for our core product lines,
including the following:
. 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.
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. We finalized a strategic alliance with Siemens Medical Solutions
focused on the advancement of digital mammography technology. During
the term of this five-year agreement, Siemens has agreed to purchase
its digital panel requirements exclusively from Hologic.
. We signed a non-binding letter of intent with Afga-Gevaert Group for
the joint development of technological advancements in digital
mammography. The letter of intent also contemplates reciprocal
distribution rights of our Selenia system and Agfa's medical image
management system and workstations.
. We entered into a non-exclusive three-year purchasing agreement, with
options to extend for two additional years, with Broadlane Inc., a
leader in providing supply chain management services to the healthcare
industry, for the sale of bone densitometry systems. Broadlane
customers include leading healthcare providers such as Kaiser
Permanente, Tenet Healthcare Corporation and Universal Health
Services.
. We were awarded a sole source three-year agreement with Novation, the
leading supply chain management company in healthcare, for the
purchase and sale of our Fluoroscan line of mini C-arm imaging
systems.
. We have extended our existing non-exclusive agreement with Novation
for the sale of LORAD breast imaging systems, including Selenia Full
Field Digital Mammography System. Novation and Hologic also have
existing non-exclusive agreements in place to cover purchase and sale
of Hologic's bone densitometry systems, mini C-arm imaging products,
and digital radiographic units.
. We signed a multi-year non-exclusive agreement with the Department of
Veterans Affairs for the purchase and sale of our EPEX and RADEX
systems for general radiographic applications, our LORAD line of
breast imaging systems, and our Fluoroscan line of mini C-arm systems.
. We signed a multi-year non-exclusive contract with the Defense Supply
Center of Philadelphia (DSCP), which covers inclusion in the Federal
Supply Schedule and allows individual buying hospitals access to our
entire product line, including our premier bone densitometry systems;
EPEX and RADEX digital imaging systems for general radiographic
applications; LORAD breast imaging systems for mammography and
stereotactic biopsy procedures; and Fluoroscan mini C-arm systems for
orthopedic applications.
. We have extended our existing non-exclusive agreement with HealthTrust
Purchasing Group, LP, one of the nation's foremost healthcare group
purchasing organizations, for the sale of Lorad mammography systems.
. We were awarded a three-year dual-source contract with HealthTrust
Purchasing Group to cover purchase and sale of our Fluoroscan line of
mini C-arm imaging systems, effective January 1, 2002.
. We entered into a three-year non-exclusive agreement with Novation for
purchase and sale of our digital radiographic systems. The agreement
became effective 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.
COMPETITION
The healthcare industry in general, and the market for imaging and
osteoporosis 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
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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 whom 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 osteoporosis assessment products is GE,
which manufactures a competing line of dual-energy X-ray and other osteoporosis
assessment products to measure bone density of the hip and spine. Other
companies have developed 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 osteoporosis 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. 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.
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. We received FDA approval for our direct-to-digital mammography
system, the Selenia in October 2002. Selenia is currently the only marketed full
field digital mammography system utilizing direct conversion technology. 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 in part upon our ability to
market and sell Selenia. Although the Selenia is priced higher than competing
technologies, we believe Selenia provides outstanding performance in aiding
physicians in the early detection of breast cancer due to its image quality and
dose utilization characteristics. 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.
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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
We manufacture all of our systems, other than our mammography and breast
biopsy systems, at our headquarters in Bedford, Massachusetts. We manufacture
our 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. 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. Changes in design for our direct radiography
detectors, including for our mammography detectors, could result and has in the
past resulted in unanticipated production problems, such as a high level of
defects for the newly designed plates.
We are seeking to qualify a second supplier for the plate coating to
increase our manufacturing capacity, but cannot assure that we will be
successful. 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, 2002 totaled $40.9 million and as of
November 30, 2001 totaled $40.5 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
plates, 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 LORAD's research on the full field
digital mammography system. In addition, in December 2002 we introduced a new
generation bone densitometry product line and a further enhanced mini C-arm
product. 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 $20.4 in fiscal 2002, $23.3 million in fiscal 2001, and $17.2
million in fiscal 2000.
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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, 2002, we have obtained 46 United States patents relating
to our densitometry technology, 36 patents relating to our direct radiography
technology, four patents relating to our mini C-arm technology, and 20 patents
relating to the Lorad mammography business which we acquired from Trex Medical.
These patents have expiration dates ranging from 2004 to 2021. 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.
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.
On April 2, 1992, Fischer Imaging filed a lawsuit in the United States
District Court, District of Colorado, against Trex Medical, alleging that
Lorad's prone breast biopsy system infringes a Fischer Imaging patent on a
precision mammographic needle-biopsy system. On April 7, 1998, Fischer Imaging
filed a second lawsuit in the United States District Court, District of
Colorado, against Trex Medical, alleging that Lorad's manufacture of
breast-imaging equipment and breast biopsy system equipment infringes on a
second Fischer Imaging patent which was issued April 7, 1998. These two lawsuits
were consolidated into a single lawsuit. The lawsuit sought to enjoin further
violation of Fischer Imaging's patents, unspecified damages of up to three times
the amount found or assessed, and attorneys' fees. In connection with our Trex
Medical acquisition, we assumed liability for this lawsuit subject to
indemnification from Trex Medical and its parent, Thermo Electron Corporation,
for any damages, including attorneys' fees, up to our adjusted purchase price
for the Trex Medical assets. In June 2002, Trex Medical and Fischer Imaging
reached a settlement in this lawsuit. Under the settlement, Fischer Imaging has
dismissed all actions against us, we have retained the right to continue to sell
this product, and we are not required to pay any damages or ongoing royalties.
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.
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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 received premarket
approval of our Selenia full field digital mammography system in October 2002.
This premarket approval permits us to begin marketing efforts in the United
States and launch our commercialization efforts with respect to this product.
Our systems are also subject to approval by certain foreign regulatory and
safety agencies. Some of our technology is governed by the International Traffic
in Arms Regulations of the United States Department of State. As a result, the
export of some of our 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.
REIMBURSEMENT
In the United States, the Centers for Medicare & Medicaid Services
(formerly the Health Care Financing Administration), known as CMS, establishes
guidelines for the reimbursement of healthcare providers treating Medicare and
Medicaid patients. Under current CMS 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 CMS and by a state Medicare
carrier and private insurance carriers. Moreover, states as well as private
insurance carriers may choose not to follow the CMS 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, 2002, we had 729 full-time employees, including 249 in
manufacturing operations, 123 in research and development, 262 in marketing,
sales and support services, and 95 in finance and administration. In connection
with the closure of our Littleton manufacturing facility we eliminated
approximately 80 employees. None of our employees are represented by a union.
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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 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.
Leased Real Property
In September 2002, we completed a sale/leaseback transaction for our
200,000 square foot headquarters and manufacturing facility located in Bedford,
Massachusetts and our 62,500 square foot LORAD manufacturing facility in
Danbury, Connecticut. The new lease for these facilities, including the
associated land, has a term of 20 years, with four-five year renewal options. We
sublease approximately 20,000 square feet of the Bedford facility to two
subtenants, Tech Online and Phonetic Systems, Inc., under leases which expire in
May 2005 and July 2003 respectively.
We lease a 60,000 square feet of office and manufacturing space in Danbury,
Connecticut near our LORAD manufacturing facility. This lease expires in
November 2006.
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. We closed the Littleton facility in January 2002
and have negotiated the termination of that lease, effective July 2003.
We maintain a leased sales and service office in Belgium and a leased
support office in France.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
17
<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 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
FISCAL YEAR ENDED SEPTEMBER 28, 2002 HIGH LOW
First Quarter $ 11.44 $ 4.72
Second Quarter 16.60 8.99
Third Quarter 18.05 11.92
Fourth Quarter 14.24 8.56
Number of Holders. As of December 17, 2002, there were approximately 1,760
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. We did not sell unregistered
securities during fiscal 2002.
18
<PAGE>
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. Included in the fiscal
2002 financial data are restructuring costs of approximately $2.1 million
related to closing the conventional general radiography manufacturing facility
and to our continued efforts to streamline operations.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
September 26, September 25, September 30, September 29, September 28,
1998 1999 2000 2001 2002
------------- ------------- ------------- ------------- -------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenues:
Product sales $ 102,086 $ 69,924 $ 76,178 $ 137,977 $ 148,834
Service and other revenue 13,998 14,754 18,159 42,219 41,358
------------- ------------- ------------- ------------- -------------
116,084 84,678 94,337 180,196 190,192
------------- ------------- ------------- ------------- -------------
Costs and Expenses:
Cost of product sales 45,273 36,039 46,728 85,712 84,230
Cost of service and other revenue 13,097 15,909 18,726 33,734 34,146
Research and development 9,778 12,664 22,178 23,328 20,362
Selling and marketing 26,630 18,581 22,623 33,858 28,319
General and administrative 10,452 10,963 16,441 20,852 18,908
Restructuring and nonrecurring -- -- -- 1,518 2,070
------------- ------------- ------------- ------------- -------------
105,230 94,156 126,696 199,002 188,035
------------- ------------- ------------- ------------- -------------
Income (loss) from operations 10,854 (9,478) (32,359) (18,806) 2,157
Interest income 5,998 4,204 3,567 1,027 573
Interest/other expense (664) (548) (227) (2,902) (2,980)
------------- ------------- ------------- ------------- -------------
Income (loss) before provision (benefit) for
income taxes 16,188 (5,822) (29,019) (20,681) (250)
Provision (benefit) for income taxes 5,800 (2,075) (10,400) 169 (429)
------------- ------------- ------------- ------------- -------------
Net income (loss) $ 10,388 $ (3,747) $ (18,619) $ (20,850) $ 179
============= ============= ============= ============= =============
Net income (loss) per common and common
equivalent share:
Basic $ 0.78 $ (0.27) $ (1.22) $ (1.35) $ 0.01
============= ============= ============= ============= =============
Diluted $ 0.75 $ (0.27) $ (1.22) $ (1.35) $ 0.01
============= ============= ============= ============= =============
Weighted average number of common shares
outstanding:
Basic 13,259 13,950 15,320 15,475 18,419
============= ============= ============= ============= =============
Diluted 13,766 13,950 15,320 15,475 19,192
============= ============= ============= ============= =============
CONSOLIDATED BALANCE SHEET DATA
Working capital $ 99,633 $ 89,823 $ 53,022 $ 44,679 $ 98,472
Total assets 172,597 175,770 219,655 195,119 184,275
Long-term debt -- -- 25,000 28,416 2,268
Total stockholders' equity 140,382 150,422 131,572 111,807 142,409
</TABLE>
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
the "Selected Consolidated Financial Data" and the Consolidated Financial
Statements included elsewhere in this report and the information described under
the caption "Risk Factors" below.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the U.S.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to customer
programs and incentives, product returns, bad debts, inventories, investments,
intangible assets, income taxes, warranty obligations, restructuring and
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
REVENUE RECOGNITION
We recognize product revenue upon shipment, provided that there is
persuasive evidence of an arrangement, there are no uncertainties regarding
acceptance, the sales price is fixed or determinable, collection of the
resulting receivable is probable and only perfunctory obligations included in
the arrangement remain to be completed. We recognize product revenue upon the
completion of installation for shipments that require more than perfunctory
obligations at the time of shipment, specifically for our digital imaging
systems. A provision is made at the time of revenue recognition for estimated
warranty costs to be incurred. Our products are generally covered for a one year
period from the date of installation. We test the adequacy of our warranty
reserves quarterly by reviewing our most recent warranty repair experience by
product. Our product failure rates and service delivery costs have been
consistent over the past three fiscal years for our continuing product lines.
Our warranty accrual was approximately $5.0 million, $6.5 million and $9.7
million in fiscal 2002, 2001 and 2000, respectively. The decrease in this
accrual over the past three fiscal years is directly attributable to our
decision to eliminate the unprofitable conventional general radiography product
lines which had warranty periods of up to five years. Service and other
revenues, which primarily includes maintenance contracts, replacement parts and
services and fee-per-scan revenues are recorded ratably over the contract period
for maintenance contracts, at the time of shipment for replacement parts, as the
service is rendered or as the fees are collected for fee-per-scan revenue.
INVENTORY
Our inventories include material, labor and overhead, and are stated at the
lower of cost (first-in, first-out) or market. We write down inventory for
estimated obsolescence based upon assumptions about future demand and market
conditions, which may negatively affect our ability to dispose of inventory. If
actual market conditions are less favorable than those projected by management,
additional inventory write-downs may be required, which would have a negative
effect on our results of operations.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. If the financial
condition of the customers were to deteriorate, resulting
20
<PAGE>
in an impairment of their ability to make payments, additional allowances may be
required. We perform a specific bad debt review on a quarterly basis to
determine the amount of reserve required based on the outstanding balance due
and the age of the balance. We also provide a general reserve to cover items not
specifically reviewed. Our allowance for doubtful accounts was $4.6 million,
$4.7 million and $7.9 million in fiscal 2002, 2001 and 2000, respectively. The
decrease in the reserve in fiscal 2001 was primarily attributable to our write
off of reserves and accounts receivable acquired in the Trex Medical acquisition
related to the conventional general radiography product lines we eliminated.
INCOME TAXES
We account for income taxes under SFAS No. 109, "Accounting for Income
Taxes". This statement requires that we recognize a current tax liability or
asset for current taxes payable or refundable and a deferred tax liability or
asset for the estimated future tax effects of temporary differences and
carryforwards to the extent they are realizable. We record a valuation allowance
to reduce our deferred tax assets to the amount that is more likely than not to
be realized. While we have considered future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for the valuation
allowance, in the event we were to determine that we would be able to realize
our deferred tax assets in the future in excess of the net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
determination was made. Likewise, should we determine that we would not be able
to realize all or part of our net deferred tax asset in the future, an
adjustment to the deferred tax asset would be charged to income in the period
such determination was made.
During fiscal 2002 we recorded an increase in our valuation allowance
against a portion of our remaining potential deferred tax assets. The valuation
allowance primarily relates to the net losses generated in fiscal 2001 and 2000
for which we can only realize through the generation of future taxable income
and to certain deferred tax assets in foreign jurisdictions, for which
realization is uncertain. In fiscal 2002 we had a benefit for income taxes of
$429,000 as a result of a $4.5 million tax benefit recorded in the second
quarter of fiscal 2002, partially offset by a $3.9 million tax provision
recorded in the fourth quarter of fiscal 2002 to reduce our deferred tax asset
to $3.6 million that we believe will be fully realizable in the next 12 to 24
months.
We do not provide for U.S. income taxes on earnings of our subsidiaries
outside of the U.S. Our intention is to reinvest these earnings permanently or
to repatriate the earnings only when tax-effective to do so. It is not practical
to estimate the amount of additional taxes that might be payable upon
repatriation of foreign earnings; however, we believe that U.S. foreign tax
credits would largely eliminate any U.S. taxes or offset any foreign withholding
taxes.
LEASE ACCOUNTING
In September 2002, we completed a sale/leaseback of our Bedford,
Massachusetts and Danbury, Connecticut facilities, resulting in a loss of
$93,000 which is included in interest/other expense in our consolidated
statements of operations. Under the terms of the sale/leaseback, we entered into
a 20-year operating lease agreement for the two facilities requiring annual rent
payments of $3.2 million. In applying the provisions of SFAS No.13, Lease
Accounting, certain judgments and estimates must be made to determine if the
agreement should be accounted for as a capital or operating lease. Most
significant is the determination of our incremental borrowing rate in
calculating the present value of minimum lease payments in the event the rate
implicit in the lease is unknown. In order for a lease agreement to be accounted
as an operating lease, among other requirements, the present value of the
minimum lease payments may not be greater than 90% of the fair value of the
leased asset. In determining our incremental borrowing rate we considered, among
other things, quotes obtained from several lenders assuming we were financing a
purchase of the facility. We used an incremental borrowing rate of 10% which we
believe to be conservative compared to the range of rates quoted by several
lenders.
21
<PAGE>
OVERVIEW
We are engaged in the development, manufacture and distribution of
proprietary X-ray, digital X-ray and other medical imaging systems. As a result
of our decision to close the conventional general radiography manufacturing
facility, we have reclassified the general radiography business from the
mammography/general radiography segment into a separate segment. Prior periods
have been reclassified to conform to this presentation. Our businesses are
reported as five segments: osteoporosis assessment; mammography; digital
imaging; mini C-arm imaging; and conventional general radiography.
Our osteoporosis assessment products primarily consist of dual-energy X-ray
bone densitometry systems and, to a lesser extent, an ultrasound-based
osteoporosis 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 products include a broad product line of breast imaging products,
including mammography systems and breast biopsy systems. 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. In January,
2002, we closed the manufacturing facility for the conventional general
radiography products, however, we continue to service and support most of these
product lines.
ACQUISITIONS, RECENT DEVELOPMENTS AND RESTRUCTURING AND NONRECURRING CHARGES
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, in November 2001, we finalized the plan to close the
conventional general radiography 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 eliminated
approximately 80 employment positions and incurred a restructuring charge,
primarily related to severance costs, of approximately $1.0 million, in fiscal
2002.
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
22
<PAGE>
. $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 dispute with Fleet Business Credit, LLC ("Fleet") 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.
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 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.
For the year ended September 28, 2002 we incurred approximately $2.1
million of severance costs related to the closing of the conventional general
radiography manufacturing facility, closure of our direct sales and service
office in Paris, France and our continuing efforts to streamline operations.
Public Offering of Common Stock. In December 2001, we sold 3,000,000 shares
of our common stock to the public at a price of $9.00 per share. We received net
proceeds from this offering of approximately $24.8 million.
Sale/Leaseback Transaction. In September 2002, we completed a
sale/leaseback transaction for our headquarters and manufacturing facility
located in Bedford, Massachusetts and our LORAD manufacturing facility in
Danbury, Connecticut. The transaction resulted in net proceeds to us of $31.4
million. The new lease for these facilities, including the associated land, has
a term of 20 years, with four five-year renewal terms, which we may exercise at
our option. The basic rent for the facilities is $3.2 million per year, which is
23
<PAGE>
subject to adjustment for increases in the consumer price index. In addition, we
are required to maintain the facilities during the term of the lease and to pay
all taxes, insurance, utilities and other costs associated with those
facilities. Of the $31.4 million in net proceeds we received from this
transaction, we used $26.3 million to immediately repay the Trex Medical $25.0
million note payable plus accrued interest of $1.3 million. The effect of the
sale/leaseback transaction is to eliminate interest expense with respect to the
Trex Medical Note and the related depreciation expense on the buildings, but on
a going forward basis will increase operating expenses as a result of the lease
payments. At September 28, 2002 we were in compliance with the covenants
contained in the lease.
New Accounting Standards. In September 2001, the Emerging Issues Task Force
(EITF) issued No. 00-10, Accounting for Shipping and Handling Costs, relating to
the accounting for shipping and handling costs billed to customers. In
accordance with Issue No. 00-10, all amounts billed to a customer in a sale
transaction related to shipping and handling, if any, represent revenues earned
for the goods provided and should be classified as revenue in the statement of
operations. We have historically accounted for reimbursements received from
shipping and handling costs as a reduction to cost of revenues in the statement
of operations to offset the costs incurred. We adopted Issue No. 00-10 in
financial reporting periods beginning after September 29, 2001. Accordingly,
comparative financial statements herein for prior periods have been reclassified
to comply with the guidance in Issue No. 00-10. During the years ended September
28, 2002, September 29, 2001 and September 30, 2000, the amounts billed to
customers totaled $1,412,000 $1,705,000 and, $591,000 respectively, which have
been reflected as product revenues and cost of revenues in accordance with Issue
No. 00-10 in our consolidated statements of operations for all periods
presented.
24
<PAGE>
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 28, SEPTEMBER 29, SEPTEMBER 30,
2002 2001 2000
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Product sales 78.3% 76.6% 80.8%
Service and other revenue 21.7 23.4 19.2
------------- ------------- -------------
100.0 100.0 100.0
------------- ------------- -------------
Cost and expenses:
Cost of product sales 44.3 47.6 49.5
Cost of service and other revenue 18.0 18.7 19.9
Research and development 10.7 12.9 23.5
Selling and marketing 14.9 18.8 24.0
General and administrative 9.9 11.6 17.4
Nonrecurring and restructuring 1.1 0.8 --
------------- ------------- -------------
98.9 110.4 134.3
------------- ------------- -------------
Income (loss) from operations 1.1 (10.4) (34.3)
Interest income 0.3 0.6 3.7
Interest/other expense (1.5) (1.7) (0.2)
------------- ------------- -------------
Loss before income taxes (0.1) (11.5) (30.8)
(Benefit) provision for income taxes (0.2) 0.1 (11.1)
Net income (loss) 0.1% (11.6)% (19.7)%
------------- ------------- -------------
</TABLE>
FISCAL YEAR ENDED SEPTEMBER 28, 2002 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 29,
2001
Total Revenues. Total revenues increased 6% to $190.2 million in fiscal
2002 compared to $180.2 million in fiscal 2001. The increase in revenues was
primarily due to an increase in unit sales of our mammography products, digital
imaging products and to a lesser extent, mini C-arm products. Partially
offsetting these increases was a decrease in revenues from our conventional
general radiography business, and to a lesser extent, a decrease in the number
of Sahara ultrasound units sold primarily in the United States. We completed the
phase-out of the unprofitable conventional general radiography product line
during the third quarter of fiscal 2002.
Product Sales. Product sales in our mammography business increased
approximately 33% to $59.8 million in fiscal 2002 from $44.9 million in fiscal
2001. This increase was primarily due to an increase in the number of
mammography systems sold in the United States partially offset by fewer
mammography systems sold internationally.
Digital imaging product sales increased 106% to $21.5 million in fiscal
2002 compared to revenues of $10.4 million in fiscal 2001. This increase was
primarily due to an increase in the number of digital systems sold and, to a
lesser extent, an increase in the number of digital plates sold.
Mini C-arm product sales increased 15% to $14.8 million in fiscal 2002
from $12.8 million in fiscal 2001. This increase was primarily due to an
increase in the number of Premier systems sold in the United States.
25
<PAGE>
Osteoporosis Assessment product sales decreased 2% to $48.0 million in
fiscal 2002 from $49.1 million in fiscal 2001. These revenues decreased
primarily due to a decrease in the number of Sahara ultrasound systems sold in
the United States.
Conventional general radiography product sales decreased 77% to $4.8
million in fiscal 2002 from $20.9 million in fiscal 2001. This decrease was
primarily due to our decision to phase-out our unprofitable conventional general
radiography product line during fiscal 2002.
In fiscal 2002, approximately 80% of product sales were generated in the
United States, 9% in Europe and 11% in other international markets. In fiscal
2001, approximately 72% of product sales were generated in the United States,
14% in Europe and 14% in other international markets.
Service and Other Revenue. Service and other revenue decreased 2% to $41.4
million in fiscal 2002 compared to $42.2 million in fiscal 2001. The decrease in
service and other revenue in fiscal 2002 was primarily the result of the $2.1
million recognized in fiscal 2001 in connection with the settlement of the Fleet
litigation and from a reduction in sales of mammography product options in
fiscal 2002. Partially offsetting these decreases was revenue from the licensing
of certain digital imaging software and mammography patented technology in
fiscal 2002.
Costs of Product Sales. The cost of product sales decreased as a percentage
of product sales to 57% in fiscal 2002 from 62% in fiscal 2001. Fiscal 2001 cost
of product sales includes a $1.7 million reduction of expenses related to the
final purchase price adjustment of the Trex Medical acquisition. Excluding the
effect of these reductions, costs of product sales as a percentage of product
revenue would have been 63% in fiscal 2001. These costs decreased as a
percentage of product sales primarily due to improved gross margins recognized
on the mammography and digital imaging products as a result of a significant
increase in revenues and cost savings initiatives enacted in the summer of 2001.
The increased volume has improved the absorption of manufacturing overhead at
both facilities. DRC continues to have significant fixed manufacturing costs and
is operating significantly below manufacturing capacity. However, margins on
these products were positive for the last three quarters of fiscal 2002 compared
to negative margins for prior periods. Our gross margins also improved as a
result of the decrease in sales of conventional general radiography products
which have had significantly lower margins.
Costs of Service and Other Revenue. Cost of service and other revenue
increased as a percentage of service and other revenue to 83% in fiscal 2002
from 80% in fiscal 2001. Fiscal 2001 cost of service and other revenue includes
a $500,000 reduction of expenses related to the Fleet litigation settlement.
Excluding the reduction of these expenses and the $2.1 million of other revenue
recognized from this settlement, fiscal 2001 cost of service and other revenue
as a percentage of service and other revenue would have been 85%. These costs
decreased as a percentage of service and other revenue due to our closure of the
conventional general radiography facility which was partially offset by
additional personnel and other costs in our field service area for our other
business segments due to the increase in the number of systems in our installed
base.
Research and Development Expenses. Research and development expenses
decreased 13% to $20.4 million, 11% of total revenues, in fiscal 2002 from $23.3
million, 13% of total revenues, in fiscal 2001. This decrease was primarily due
to a decrease in research and development spending and personnel primarily
related to our cost-saving initiatives enacted in the summer of 2001. In
addition, approximately $6.4 million and $5.4 million of these expenses in
fiscal 2002 and 2001, respectively, related to the development of new digital
mammography and general radiography systems detectors at DRC.
Selling and Marketing Expenses. Selling and marketing expenses decreased
16% to $28.3 million, 15% of total revenues, in fiscal 2002 from $33.9 million,
19% of total revenues, in fiscal 2001. The decrease in selling and marketing
expenses was primarily due to our reduction in personnel related to our
cost-saving initiatives enacted during the summer of 2001.
26
<PAGE>
General and Administrative Expenses. General and administrative expenses
decreased 9% to $18.9 million, 10% of total revenues, in fiscal 2002 from $20.9
million, 12% of total revenues, in fiscal 2001. The decrease was primarily due
to our reduction in personnel and other cost-savings initiatives enacted during
the summer of 2001 and, to a lesser extent, the elimination of the legal
expenses as a result of the settlement of the Fleet litigation in August, 2001.
In addition, in connection with our early adoption of SFAS 142, (see Note 2 of
our consolidated financial statements) we eliminated approximately $700,000 of
goodwill amortization expense in the current year.
Restructuring and Nonrecurring Charges. Restructuring costs in fiscal 2002
of approximately $2.1 million were primarily the result of our continuing
efforts to streamline operations and eliminate unprofitable product lines. We
incurred a restructuring charge of approximately $806,000 in the first quarter
of fiscal 2002 primarily comprised of severance costs related to the termination
of 85 employees at the Littleton facility. In addition, we incurred severance
cost of approximately $561,000 and $208,000 in connection with the closure of
our direct sales and service office in Paris, France and the continued reduction
of Lorad's workforce, respectively. The severance charges related to the
workforce reductions of 5 persons in France and 20 persons at Lorad and were
across all functional areas. In the second quarter of fiscal 2002, we incurred
additional severance costs of approximately $495,000 primarily comprised of
severance costs in connection with the reduction of our workforce in the United
States and Europe by 13 persons across all functional areas.
Restructuring and nonrecurring costs of approximately $1.5 million in
fiscal 2001 were primarily the result of our ongoing efforts to streamline
operations. Specifically 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. Also in 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 nonrecurring expenses in connection with this move.
Interest Income. Interest income decreased to $573,000 in fiscal 2002 from
$1.0 million in fiscal 2001. This decrease was primarily attributable to reduced
interest rates on our investments.
Interest / Other Expense. In fiscal 2002 and 2001, we incurred interest and
other expenses of approximately $3.0 million and $2.9 million, respectively.
These expenses included interest costs of approximately $700,000 per quarter on
the $25.0 million note payable issued in connection with the Trex Medical
acquisition, and to a lesser extent, interest costs related to our lending
arrangement with Foothill Capital Corporation, foreign currency transaction
gains and interest costs on a bank line of credit used by our European
subsidiaries to borrow funds in their local currencies to pay for intercompany
sales, thereby reducing the foreign currency exposure on those transactions. In
September 2002, we paid off the $25.0 million note payable to Trex Medical from
the proceeds from the sale/leaseback transaction of our headquarters and
manufacturing facility located in Bedford, Massachusetts and also our LORAD
manufacturing facility in Danbury, Connecticut. Therefore, future periods will
only include interest costs associated with the remaining lending agreements. To
the extent that foreign currency exchange rates fluctuate in the future, we may
be exposed to continued financial risk. Although we have established a borrowing
line of credit denominated in the foreign currency, the euro, in which our
subsidiaries currently conduct business to minimize this risk, we cannot assure
that we will be successful or can fully hedge our outstanding exposure.
Provision (Benefit) for Income Taxes. In fiscal 2002 we had a benefit for
income taxes of $429,000 as a result of a $4.5 million tax benefit recorded in
the second quarter of fiscal 2002, partially offset by a $3.9 million tax
provision recorded in the fourth quarter of fiscal 2002 to reduce our deferred
tax asset to $3.6 million that we believe will be fully realizable in the next
12 to 24 months. During fiscal 2002, as a result of the Economic Stimulus Bill
signed into law in March, we have filed or are in the process of filing,
carryback claims of approximately $13.8 million. Of this amount, we have
received $6.0 million in cash, and $7.8 million which we expect to receive in
fiscal 2003 is included in other current assets in the accompanying balance
sheet at September 28, 2002. In fiscal 2001, we recorded a tax provision for
minimum state taxes as we believed that it was prudent at the time not to
benefit net operating losses that would only be realized by generating
sufficient future taxable income.
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FISCAL YEAR ENDED SEPTEMBER 29, 2001 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
2000
Total Revenues. Total revenues increased 91.0% to $180.2 million in fiscal
2001 from $94.3 million in fiscal 2000. This increase was primarily due to the
addition of revenues of $87.5 million from sales of mammography and conventional
general radiography products acquired in connection with the Trex Medical
acquisition in September 2000.
Product Sales. Total product sales for our historic businesses,
osteoporosis assessment, mini C-arm imaging and digital imaging, increased
slightly to $72.2 million in fiscal 2001 from $71.5 million in fiscal 2000. This
increase was primarily due to an increase in the number of digital imaging
products sold, which was partially offset by a decrease in osteoporosis
assessment sales. Total digital imaging sales for fiscal 2001 increased 50% to
$11.8 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. The decrease in osteoporosis assessment sales was primarily due
to a decrease in Sahara ultrasound product unit sales in the United States which
were partially offset by an increase in revenues from our sales of dual-energy
X-ray bone densitometers, principally our newly introduced Delphi product line.
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.
Service and Other Revenue. Service and other revenue increased to $42.2
million in fiscal 2001 from $18.2 million in fiscal 2000. This increase was
primarily due to the addition of service revenues of $21.8 million in connection
with the Trex Medical acquisition in September 2000. The remaining increase was
due to increased service contract revenue in the osteoporosis assessment
business and increased spare part sales in the digital imaging business. In
fiscal 2001 and 2000, other revenue consisted primarily of royalty revenues from
our licensing of technology to Vivid Technologies, Inc. (Vivid) for explosives
detection screening, and additional revenues generated from our strategic
alliance program on a fee-per-scan basis. In fiscal 2001, other revenue also
included $2.1 million of revenue attributable to our settlement of the Fleet
litigation. In fiscal 2000, other revenue included the $2.0 million of royalty
revenue we recognized relating to the buy-out by Vivid of our baggage equipment
license. These revenues for both periods were included in our osteoporosis
assessment segment revenues.
In November 2001, we announced that we were closing our conventional
general radiography equipment manufacturing facility and relocating some product
lines and our sales and support personnel to our corporate headquarters.
Approximately $27.5 million of revenues in fiscal 2001 and $5.4 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.
Cost of Product Sales. The cost of product sales increased slightly as a
percentage of product sales to 62% in fiscal 2001 from 61% in fiscal 2000. In
fiscal 2001, these costs were reduced by $1.7 million related to the final
purchase price adjustment of the Trex Medical acquisition. Excluding the effects
of this reduction, cost of product sales as a percentage of product revenue
would have been 63% 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 54% in fiscal 2000.
In fiscal 2001, improvements in margins in the osteoporosis assessment and
digital imaging businesses were offset by our increased sales of lower margin
mammography and conventional 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 due to
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
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product introduction. Our cost of product sales as a percentage of product sales
for our osteoporosis assessment, mini C-arm and digital imaging businesses
increased to 58% in fiscal 2001 from 56% 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.
Cost of Service and Other Revenue. Cost of service and other revenue
decreased as a percentage of service and other revenue to 80% in fiscal 2001
from 103% in fiscal 2000. Fiscal 2001 cost of service and other revenue includes
a $500,000 reduction related to the Fleet litigation settlement. Absent the
reduction of these expenses and the $2.1 million of other revenue recognized
from this settlement, fiscal 2001 cost of service and other revenue would have
been 85%.
Research and Development Expenses. Research and development expenses
increased 5% 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.
Selling and Marketing Expenses. Selling and marketing expenses increased
50% to $33.9 million, 19% of total sales, in fiscal 2001 from $22.6 million, 24%
of total 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 27% to $20.9 million, 12% of total revenues, in fiscal 2001 from $16.4
million, 17% 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
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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.
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 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 $25.0 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.
Provision (Benefit) for Income Taxes. In fiscal 2000, we had a benefit for
income taxes as a result of the loss during the period. 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.
SEGMENT RESULTS OF OPERATIONS
As a result of our decision to close the conventional general radiography
manufacturing facility, we have reclassified the General Radiography business
from the Mammography/General Radiography segment into a separate segment. Prior
periods have been restated to conform to this presentation. Our businesses are
reported as five segments: Osteoporosis Assessment; Mammography; Digital
Imaging; Mini C-arm Imaging; and General Radiography. The accounting policies of
the segments are the same as those described in the footnotes to the
accompanying consolidated financial statements. We measure segment performance
based on total revenues and operating income or loss. Revenues from each of
these segments are described above. The discussion that follows is a summary
analysis of the primary changes in operating income or loss by segment.
Osteoporosis Assessment. Reported operating income for the osteoporosis
assessment business segment was $6.5 million for fiscal 2002 compared to
operating income of $7.4 million in fiscal 2001. Fiscal 2001 operating income
includes $2.1 million of additional revenues and $500,000 of decreased expenses
as a result of the Fleet litigation settlement. Absent the effect of this
settlement, the improvement in operating income for this business segment for
fiscal 2002 was primarily due to an overall reduction in operating expenses as a
result of our cost-savings initiatives partially offset by an increase in field
service and training related expenses including additional headcount.
Mammography. Reported operating income for the mammography segment in
fiscal 2002 improved to $4.2 million from $900,000 in fiscal 2001. The fiscal
2001 results for the Mammography business segment included expense reductions of
approximately $1.6 million related to the final purchase price adjustment for
the Trex acquisition. The significant improvements in operating income in the
current year excluding these expense reductions in fiscal 2001 were primarily
due to increased revenues and improved gross margin. The increased gross margin
was primarily attributable to the increase in revenues and a reduction in
manufacturing cost and operating expenses as a result of our cost-saving
initiatives enacted during the summer of 2001 and, to a lesser extent, to a
non-recurring charge of $800,000 in the first quarter of fiscal 2001 to product
cost of sales for the fair market write-up of acquired inventory.
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Digital Imaging. The digital imaging business segment reported a 52%
decrease in loss from operations to $10.3 million in fiscal 2002 from $21.3
million for fiscal 2001. These decreases were primarily due to increased
revenues, improved gross margin and, to a lesser extent, reduced research and
development spending related to the completion of the EPEX and RADEX
direct-to-digital general radiography systems and a reduction in other operating
expenses as a result of our cost-saving initiatives enacted in the summer of
2001.
Mini C-arm Imaging. The mini C-arm business segment reported operating
income of $3.5 million for fiscal 2002 compared to operating income of $683,000
for fiscal 2001. These improvements were primarily attributable to increased
revenues, improved gross margin plus an overall reduction in manufacturing costs
and operating expenses in connection with the assimilation of the Fluoroscan
product line into the corporate headquarters located in Bedford, Massachusetts.
General Radiography. As previously discussed, we have closed the
manufacturing facility of the conventional general radiography business and
relocated certain of its product lines and sales and service support personnel
to our corporate headquarters. This business segment reported an operating loss
of $1.7 million for fiscal 2002 compared to an operating loss of $6.5 million
for fiscal 2001. The decrease in operating losses are primarily due to the
elimination of costs in the current year related to the facility closure. We
incurred losses from our conventional general radiography business through the
first half of fiscal 2002. However, the continuing service business generated
operating profits of approximately $1.1 million during the last half of fiscal
2002.
ACQUIRED IN-PROCESS TECHNOLOGY
As part of the Trex Medical purchase price allocation, all intangible
assets that were a part of the acquisition were identified and valued. It was
determined that technology assets and assembled workforce had value. At the
acquisition date, Trex Medical was conducting design, development, engineering
and testing activities associated with the completion of several research and
development projects related to its mammography and general radiography lines of
business. As part of our exit strategy for the conventional general radiography
business, we have terminated the development projects and efforts for the
general radiography line of business. We will not incur any further expenditures
or recognize any revenue related to these projects.
Since the acquisition, we have used the acquired in-process technology to
develop new products, which have or are expected to become part of our product
lines when completed. However, we are constantly reviewing the allocation of our
research and development resources to respond to the ever changing market and
technology developments, as well as developments of our own internally developed
and acquired evolving technology portfolio. Also, we have combined acquired
research and development projects with other of our development activities, and
we have delayed two projects.
As of September 28, 2002 our expenditures incurred and estimates to
complete our acquired in-process projects related to the mammography business
were consistent with our initial expectations other than the delays mentioned
above. If we are not successful in implementing our projects, we may be unable
to realize the remaining value assigned to this in-process technology. In
addition, the remaining value of the other acquired intangible assets associated
with this technology may also become impaired.
LIQUIDITY AND CAPITAL RESOURCES
At September 28, 2002 we had approximately $98.5 million of working
capital. At that date our cash and cash equivalents totaled $45.8 million. Our
cash and cash equivalents balance increased approximately $33.1 during fiscal
2002 primarily due to the proceeds from our sale/leaseback transaction for our
Bedford, Massachusetts and Danbury, Connecticut facilities in September 2002,
the net proceeds from our common stock public offering in December 2001, and
from operating activities, partially offset by the use of cash for the repayment
of the Trex Medical note payable and for purchases of property and equipment.
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Our cash provided by operating activities was $6.9 million which included
net income of $179,000 for fiscal 2002 increased by non-cash charges for
depreciation and amortization of $7.5 million and a $3.9 million charge to
increase our deferred tax valuation allowance recorded in the fourth quarter of
2002. These amounts were partially offset by changes in our current assets and
liabilities net of income tax refunds of approximately $7.8 million which we
expect to receive in fiscal 2003, due to the effect of the Economic Stimulus
Bill and the reclass of $3.6 million in deferred tax asset which is expected to
be realized within the next fiscal year. Cash used in operations due to changes
in our current assets and liabilities included a decrease in accounts payable of
$7.3 million and a decrease in accrued expenses of $4.7 million. These uses of
cash were partially offset by a decrease of $3.0 million in accounts receivable,
a decrease in prepaid expenses and other current assets of $2.0 million and a
decrease of $1.6 million in inventories. The decrease in accounts receivable was
primarily due to improved collections and the decrease in accounts payable,
accrued expenses and prepaid expenses were primarily due to the timing of
payments.
In fiscal 2002, we provided approximately $25.1 million of cash from
investing activities. These cash flows were primarily attributable to the net
proceeds from our sale/leaseback transaction of $31.4 million partially reduced
by purchases of property and equipment of $6.1 million, which consisted
primarily of corporate wide computer information software and hardware, systems
and other equipment and building improvements.
In fiscal 2002, financing activities provided us with $1.0 million of cash.
These cash flows included approximately $24.8 million, net of offering expenses,
from the public sale of 3.0 million shares of our common stock and proceeds from
the issuance of common stock pursuant to options and employee stock purchase
plan of $4.6 million, partially offset by the repayment of the $25.0 million
Trex Medical note payable plus interest and $2.2 million of repayments of our
European line of credit and our term loan with Foothill Capital Corp.
As of September 28, 2002 we had short term borrowings, including the
current portion of our long term obligations, of $480,000 and long term notes
payable totaling $2.3 million. The short term borrowings represent the current
portion of our long term notes payable. The long term notes payable consisted of
the $1.4 million borrowed from Foothill Capital Corporation as the long term
portion of our term loan under our credit facility, and the $842,000 balance due
on the note to Fleet in connection with the settlement of the Fleet litigation.
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 (3.32% at September 28, 2002) plus 1.5%. The borrowings under this line are
primarily used by our European subsidiaries to settle intercompany sales and are
denominated in the respective local currencies of its European subsidiaries. The
line of credit may be canceled by the bank with 30 days notice. At September 28,
2002, there were no outstanding borrowings under this line.
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 $25.0 million with an option for us to increase this amount to
$30.0 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 expected to incur in connection with
our decision to close our Littleton facility. Also, as a result of this
amendment, our loan may be limited based upon some financial covenants and
formulas. The term loan accrues interest at prime plus 1.25% for five years. The
line of credit advances accrue interest at prime plus 0.5%. The line of credit
expires in September 2004. We were in compliance with all covenants as of
September 28, 2002.
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In April 2002, we began an implementation project for an integrated
enterprise wide software application. Through September 28, 2002 we have made
payments totaling $1.9 million for hardware, software and consulting services.
We expect to make additional payments of approximately $1.0 million in fiscal
2003 in connection with this implementation. Most of the cost is currently being
capitalized and upon completion will be amortized over its expected useful life.
In September 2002, we completed a sale/leaseback transaction for our
headquarters and manufacturing facility located in Bedford, Massachusetts and
our LORAD manufacturing facility in Danbury, Connecticut. The transaction
resulted in net proceeds to us of $31.4 million. The new lease for these
facilities, including the associated land, has a term of 20 years, with four
five-year year renewal terms, which we may exercise at our option. The basic
rent for the facilities is $3.2 million per year, which is subject to adjustment
for increases in the consumer price index. The aggregate total minimum lease
payments during the initial 20-year term are $62.9 million. In addition, we are
required to maintain the facilities during the term of the lease and to pay all
taxes, insurance, utilities and other costs associated with those facilities.
Under the lease, we make customary representations and warranties and agree to
certain financial covenants and indemnities. In the event we default on the
lease, the landlord may terminate the lease, accelerate payments and collect
liquidated damages.
The following table summarizes our contractual obligations and commitments
as of September 28, 2002:
Payments Due by Period
(in thousands)
<TABLE>
<CAPTION>
Contractual Obligations Total Less than 1 year 2-3 years 4-5 years Thereafter
- ----------------------- -------- ---------------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Long Term Debt $ 2,748 $ 480 $ 2,268 $ -- $ --
Operating Leases $ 67,382 $ 5,143 $ 8,512 $ 6,651 $ 47,076
-------- ------- --------- --------- ----------
Total Contractual
Cash Obligations $ 70,130 $ 5,623 $ 10,780 $ 6,651 $ 47,076
======== ======= ========= ========= ==========
</TABLE>
Except as set forth above, we do not have any other significant capital
commitments. We are working on several projects, with an emphasis on direct
radiography plates and systems. We believe that we have sufficient funds in
order to fund our expected operations over the next twelve months.
RECENT ACCOUNTING PRONOUNCEMENTS
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. We do
not believe the adoption of this statement will have a material impact on our
results of operations or financial condition.
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SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, issued in July 2002, addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies EITF Issue
No. 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). The principal difference between Statement 146 and Issue 94-3
relates to Statement 146's requirements for recognition of a liability for a
cost associated with an exit or disposal activity. Statement 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under Issue 94-3, a liability for an exit costs
as generally defined in Issue 94-3 was recognized at the date of an entity's
commitment to an exit plan. Therefore, this Statement eliminates the definition
and requirements for recognition of exit costs in issue 94-3. This Statement
also established that fair value is the objective for initial measurement of the
liability.
The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. We do not believe the adoption of this statement will have a
material impact on our results of operations or financial condition.
FASB INTERPRETATION NO. 45 - GUARANTOR ACCOUNTING
FASB Interpretation No. 45 will significantly change current practice in
the accounting for, and disclosure of, guarantees. Most guarantees are to be
recognized and initially measured at fair value, which is a change from current
practice. In addition, guarantors will be required to make significant new
disclosures, even when the likelihood of the guarantor making payments under the
guarantee is remote. In general, the Interpretation applies to contracts or
indemnification agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes in an underlying that is
related to an asset, liability, or an equity security of the guaranteed party.
The Interpretation's disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002, while
the initial recognition and initial measurement provisions are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. We
do not believe the adoption of this statement will have a material impact on our
results of operations or financial condition.
EITF 00-21 - ACCOUNTING FOR REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES
At the November 21, 2002 meeting, the Task Force reached a consensus on
Issue 00-21, which addresses how to account for arrangements that may involve
the delivery or performance of multiple products, services, and/or rights to use
assets. The final consensus will be applicable to agreements entered into in
fiscal periods beginning after June 15, 2003 with early adoption permitted.
Additionally, companies will be permitted to apply the consensus guidance to all
existing arrangements as the cumulative effect of a change in accounting
principle in accordance with APB Opinion No. 20, Accounting Changes.
Following is a brief summary of the final model approved by the Task Force.
.. Revenue arrangements with multiple deliverables should be divided into
separate units of accounting if the deliverables in the arrangement meet the
following criteria:
.. The delivered item(s) has value to the customer on a standalone basis. That
item(s) has value on a standalone basis if it is sold separately by any vendor
or the customer could resell the deliverable on a standalone basis. In the
context of a customer's ability to resell the deliverable, the Task Force
observed that this criterion does not require the existence of an observable
market.
.. There is objective and reliable evidence of the fair value of the undelivered
item(s).
.. If the arrangement includes a general right of return, delivery or performance
of the undelivered item(s) is considered probable and substantially in the
control of the vendor.
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.. Arrangement consideration should be allocated among the separate units of
accounting based on their relative fair values. The amount allocated to the
delivered item(s) is limited to the amount that is not contingent on the
delivery of additional items or meeting other specified performance
conditions.
.. Applicable revenue recognition criteria should be considered separately for
separate units of accounting.
We are currently evaluating the ultimate impact of this statement on our results
of operations or financial position.
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.
We continue to incur significant losses in our digital imaging business segment
and cannot assure that the segment will become profitable.
Our digital imaging business segment incurred net losses of $13.3 million
in fiscal 2000, $21.4 million in fiscal 2001, and $10.2 million in fiscal 2002.
These losses were a large contributor in our incurring significant overall net
losses in fiscal 2000 and 2001, and offset the aggregate net income we
recognized on our other business segments in fiscal 2002. We intend to incur
significant expenses in connection with the further development, manufacturing
ramp-up and commercialization of our direct radiography plates and systems. We
cannot assure that the operating results of our digital imaging segment will
improve.
The markets for our direct radiography products are in the early stage of
development.
In 1998, our subsidiary, Direct Radiography Corp., was the first company to
introduce direct-to-digital X-ray imaging products in the United States. The
markets for these products are relatively new. 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 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 in the past and may in the future experience difficulties in manufacturing
these detectors in commercial quantities, primarily related to delays and
difficulties in obtaining critical components for these detectors that meet our
high manufacturing standards. Our initial difficulties have led to increased
delivery lead-times and increased costs of manufacturing these products. 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.
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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.
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 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.
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.
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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. We are
seeking to qualify a second supplier for the panel coating to increase our
manufacturing capacity and flexibility, but cannot assure that we will be
successful. 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.
We have recently expanded our direct sales and service efforts for mammography
into territories that were previously covered by independent distributors, are
considering further expanding our direct sales and service coverage in the
United States, and cannot assure that we can effect any such transition
effectively.
We have sold and serviced a majority of our mammography systems in the
United States primarily through a network of independent distributors and to a
lesser extent, through our direct sales force. We have recently expanded our
direct sales and service efforts for mammography into territories that were
previously covered by independent distributors, and are considering further
expanding our direct sales and service coverage in the United States. The
transition to a direct sales and service force could adversely affect our
relationships with our end-user customers and our sales of mammography systems
if we do not manage the transition effectively.
Our reliance on a customer for a significant portion of our revenues could harm
our business and prospects.
Our largest independent distributor, Diagnostic Imaging, Inc., recently
acquired by a wholly-owned subsidiary of Platinum Equity, LLC from PSS World
Medical, Inc., owed us a total of approximately $5.7 million as of September 28,
2002 and accounted for approximately 15% of our product sales for fiscal 2002.
We do not have a long-term agreement with Diagnostic Imaging obligating them to
purchase products from us, or restricting them from purchasing products from our
competitors. A reduction or delay in orders from Diagnostic Imaging, or a delay
or default in the payment of their accounts receivable, including in connection
with the expansion of our direct sale and service force, could harm our business
and prospects.
If we are unable to satisfy our financial covenants under our loan agreement and
our long-term leases for our headquarters and Lorad facilities, our loan
availability may be limited or the rent due under those leases may be
accelerated and we could be required to pay liquidated damages.
Our loan agreement with Foothill Capital Corporation and our long-term
leases contain financial and other covenants. If we do not comply with our
covenants under our loan agreement, our availability under our loan agreement
could be reduced or our lender could declare a default. If we do not comply with
our covenants under our long-term leases, the remaining rent payable under those
leases could be accelerated and we could be required to pay liquidated damages.
Our failure to meet any of our covenants under our loan agreement or long-term
leases could significantly harm our liquidity and financial position.
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
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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 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.
Our failure to manage current or future alliances or joint ventures effectively
may harm our business and prospects.
In fiscal 2002 we entered into strategic alliances with Siemens and R2
Technologies and entered into a letter of intent to form a strategic alliance
with Agfa. We are also exploring other potential alliances, joint ventures or
other business relationships. Siemens and Agfa are competitors or potential
competitors to us in some of our business segments, as well as a competitors or
potential competitors to some of our customers or potential customers. Our
alliance with Siemens, Agfa 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.
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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:
.. 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 Centers for Medicare & Medicaid Services, known as CMS, establishes
guidelines for the reimbursement of healthcare providers treating Medicare and
Medicaid patients. Under current CMS 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 CMS and by a state Medicare carrier and private insurance carriers. Moreover,
states as well as private insurance carriers may choose not to follow the CMS
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.
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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.
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.
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 and 20% of product sales
in fiscal 2002. 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
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currencies. We anticipate that foreign sales and sales denominated in foreign
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 continued strength in value
of the U.S. dollar to the 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. 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.
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.
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
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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.
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.
We are implementing a new corporate-wide management information system, which if
not successful could adversely impact our ability to operate virtually all
aspects of our business.
We are implementing a new corporate-wide management information system. If
we fail to implement this system effectively, our ability to operate virtually
all aspects of our business could be adversely harmed, including our ability to
purchase and schedule inventory, pay vendors, ship products, bill customers and
collect receivables.
There is a risk that our insurance will not be sufficient to protect us from
product liability or other claims, or that in the future liability insurance
will not be available to us at a reasonable cost, if at all.
Our business involves the risk of product liability and other 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 and other 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.
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.
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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 loan and security agreement with Foothill
Capital Corporation (the Foothill Agreement) and a European line of credit. The
Foothill Agreement term loan accrues interest at the prime rate plus 1.25% and
the European Line of Credit accrues interest at the Europe Interbank Offered
Rate plus 1.50%. At September 28, 2002, we had $1.9 million outstanding under
the Foothill Agreement and there were no amounts outstanding under the line of
credit.
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 15, in this report.
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Arthur Andersen LLP were the independent auditors for us until June 23,
2002. After reasonable efforts, we were unable to obtain from Arthur Andersen
LLP the consent required for the incorporation by reference of their report on
our consolidated balance sheets 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,
into registration statements we filed with the Securities and Exchange
Commission that are currently effective under the Securities Act of 1933.
Accordingly, pursuant to and in reliance upon Rule 437a of the Securities Act of
1933, we are permitted to dispense with the requirement to file their consent.
Because Arthur Andersen LLP have not consented to the incorporation by reference
of their report, investors may not be able to recover damages against Arthur
Andersen LLP under Section 11 of the Securities Act of 1933 for any untrue
statements of a material fact contained in the financial statements audited by
Arthur Andersen LLP that are included in this report or any omissions to state a
material fact required to be stated therein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
A change in independent accountants from Arthur Andersen LLP to Ernst &
Young LLP was reported in our current report on Form 8-K dated June 24, 2002.
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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 AND
RELATED STOCKHOLDER MATTERS.
The additional 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.
We maintain a number of equity compensation plans for employees, officers,
directors and others whose efforts contribute to our success. The table below
sets forth certain information as our fiscal year ended September 28, 2002
regarding the shares of our common stock available for grant or granted under
stock option plans that (i) were approved by our stockholders, and (ii) were not
approved by our stockholders.
EQUITY COMPENSATION PLAN INFORMATION
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
NUMBER OF SECURITIES REMAINING AVAILABLE FOR
TO BE ISSUED UPON WEIGHTED-AVERAGE EXERCISE FUTURE ISSUANCE UNDER EQUITY
EXERCISE OF PRICE OF OUTSTANDING COMPENSATION PLANS (EXCLUDING
OUTSTANDING OPTIONS, OPTIONS, SECURITIES REFLECTED IN
WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN (a))
PLAN CATEGORY (a) (b) (c)
- ------------------------- -------------------- ------------------------- -----------------------------
<S> <C> <C> <C>
Equity compensation plans 2,222,602 $ 8.71 175,787
approved by security
holders(1)
Equity compensation plans 1,492,191 $ 7.66 452,537
not approved by security
holders(2)
Total 3,714,793 $ 8.29 628,324
</TABLE>
- ----------
(1) Includes the following plans: 1986 Combination Stock Option Plan; Amended
and Restated 1990 Non-employee Director Stock Option Plan; 1995 Combination
Stock Option Plan; Amended and Restated
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1999 Equity Incentive Plan; and 2000 Employee Stock Purchase Plan. Also includes
the following plans which we assumed in connection with our acquisition of
Fluoroscan Imaging Systems in 1996: FluoroScan Imaging Systems, Inc. 1994
Amended and Restated Stock Incentive Plan and FluoroScan Imaging Systems, Inc.
1995 Stock Incentive Plan. For a description of these plans, please refer to
Footnote 6 contained in our consolidated financial statements.
(2) Includes the following plans: 1997 Employee Equity Incentive Plan and 2000
Acquisition Equity Incentive Plan. A description of each of these plans is as
follows:
1997 Employee Equity Incentive Plan. The purposes of the 1997 Employee
Equity Incentive Plan (the "1997 Plan"), adopted by the Board of Directors in
May 1997, are to attract and retain key employees, consultants and advisors, to
provide an incentive for them to assist us in achieving long-range performance
goals, and to enable such person to participate in our long-term growth. In
general, under the 1997 Plan, all employees, consultants, and advisors who are
not executive officers or directors are eligible to participate in the 1997
Plan. The 1997 Plan is administered by a committee consisting of at least three
members of the Board appointed by the Board of Directors. Participants in the
1997 Plan are eligible to receive non-qualified stock options, stock
appreciation rights, restricted stock and performance shares. A total of
1,100,000 shares of our common stock were reserved for issuance under the 1997
Plan. Of the shares reserved for issuance under the 1997 Plan, options to
purchase 995,365 shares have been granted and are outstanding and 8,293 shares
remain available for grant.
2000 Acquisition Incentive Plan. The purpose of the 2000 Acquisition Equity
Incentive Plan (the "2000 Plan"), adopted by the Board of Directors in April
2001, 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 our company or any of our consolidated subsidiaries, and (b)
employees, consultants and advisors, of our company who have or are anticipated
to provide significant assistance in connection with the acquisition of a newly
acquired business or its integration with our company, and to provide such
persons an incentive for them to achieve long-range performance goals, and to
enable them to participate in our long-term growth. In general, under the 2000
Plan, only employees, consultants and advisors who are not officers or directors
of our company are eligible to participate in the 2000 Plan. The 2000 Plan is
administered by the Board or, at its option, a committee consisting of at least
three members of the Board appointed by the Board of Directors. Participants in
the 2000 Plan are eligible to receive non-qualified stock options, stock
appreciation rights, restricted stock and performance shares. A total of
1,000,000 shares of our common stock were reserved for issuance under the 2000
Plan. Of the shares reserved for issuance under the 2000 Plan, options to
purchase 496,826 shares have been granted and are outstanding and 444,244 shares
remain available for grant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to the
sections entitled "Certain Related 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 our fiscal year.
ITEM 14. CONTROLS AND PROCEDURES.
Within the 90-day period prior to the date of this report, our Chief
Executive Officer and Chief Financial Officer performed an evaluation of our
disclosure controls and procedures, which have been designed to permit us to
effectively identify and timely disclose important information. They concluded
that the disclosure controls and procedures were effective. Since the date of
the evaluation, we have made no significant changes in our internal controls or
in other factors that could significantly affect our internal controls.
46
<PAGE>
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements
Reports of Independent Public Accountants
Consolidated Balance Sheets as of September 28, 2002
and September 29, 2001
Consolidated Statements of Operations for the years ended September
28, 2002, September 29, 2001 and September 30, 2000
Consolidated Statements of Stockholders' Equity for the years ended
September 28, 2002, September 29, 2001 and September 30, 2000
Consolidated Statements of Cash Flows for the years ended September
28, 2002, September 29, 2001 and September 30, 2000
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
All 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 Asset Purchase and Sale Agreement Among Trex Medical Systems
Corporation, Trex Medical Corporation, ThermoTrex Corporation and
Thermo Electron Corporation and Hologic, Inc. dated August 13, 2000 L-2
3.01 Certificate of Incorporation of Hologic A-3.01
3.02 Amendment to Certificate of Incorporation of Hologic F-3.03
3.03 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, as Amended, Filed as Exhibits 3.01 and 3.02). A-3.01; F-3.03
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 G-4.01
4.06 Amendment No. 2 to Rights Agreement, dated as of December 9, 1996 G-4.02
4.07 Amendment No. 3 to Rights Agreement, dated as of April 25, 1999 J-4.03
4.08 Rights Agreement dated September 17, 2002 Q-4
4.09 Form of Rights Certificate Q-4
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-10.26*
10.03 1995 Combination Stock Option Plan F-10.25*
10.04 Amended and Restated 1999 Equity Incentive Plan I-10*
10.05 1997 Employee Equity Incentive Plan H-99
10.06 2000 Acquisition Equity Incentive Plan P-10.05
10.07 2000 Employee Stock Purchase Plan O-99.3*
10.08 Form of Indemnification Agreement for Directors and Certain Officers of Hologic A-10.12*
10.09 Employment Agreement with an Officer of Hologic D-10.22*
</TABLE>
47
<PAGE>
<TABLE>
<S> <C>
10.10 Severance Agreement with an Officer of Hologic K-10.08*
10.11 Severance Agreement with an Officer of Hologic K-10.09*
10.12 Severance Agreement with an Officer of Hologic K-10.23*
10.13 Severance Agreement with an Officer of Hologic P-10.11*
10.14 Employment Letter to an Officer of Hologic P-10.12*
10.15 Promissory Note to an Officer of Hologic P-10.13*
10.16 Form of Officer Separation Agreement including List of Officers to Whom Provided P-10.14*
10.17 Supply Agreement N-10.27
10.18 Facility Lease (Danbury) M-10.14
10.19 Loan and Security Agreement P-10.25
10.20 Parent Pledge Agreement P-10.26
10.21 Guaranty and Security Agreement P-10.27
10.22 Mortgage and Security Agreement P-10.28
10.23 First Amendment to the Loan and Security Agreement P-10.29
10.24 Bill of Sale (Danbury and Bedford) filed herewith
10.25 Deed (Danbury) filed herewith
10.26 Deed (Bedford) filed herewith
10.27 Lease Agreement (Danbury and Bedford) filed herewith
10.28 Settlement and Waiver Agreement with an Officer of Hologic filed herewith
16.01 Letter Regarding Change in Certifying Public Accountant R-16*
21.01 Significant Subsidiaries of Hologic filed herewith
23.01 Consent of Ernst & Young LLP filed herewith
99.1 CEO Certification under Section 906 of Sarbanes-Oxley Act of 2002 filed herewith
99.2 CFO Certification under Section 906 of Sarbanes-Oxley Act of 2002 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.
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 May 14, 1996, with the referenced
exhibit number as an exhibit to our 1996 Second Quarter Report on Form 10-Q
(SEC File No. 000-18281) for the quarter ended March 30, 1996, and the
previously filed exhibit is incorporated herein by reference.
G 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
(SEC File No. 000-18281), and the previously filed exhibit is incorporated
herein by reference.
H We previously filed this exhibit on August 20, 1997 with the referenced
exhibit number as an exhibit to our Registration Statement on Form S-8 (SEC
File No. 333-34003), and the previously filed exhibit is incorporated
herein by reference.
48
<PAGE>
I 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.
J 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
(SEC File No. 000-18281), and the previously filed exhibit is incorporated
herein by reference.
K 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.
L 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.
M 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.
N 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.
O We previously filed this exhibit on May 2, 2001 with the referenced exhibit
number as an exhibit to our Registration Statement on Form S-8 (SEC File
No. 333-60046), and the previously filed exhibit is incorporated herein by
reference.
P We previously filed this exhibit on December 12, 2001 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 29, 2001, and the
previously filed exhibit is incorporated by reference.
Q We previously filed this exhibit on September 17, 2002 with the referenced
exhibit number as an exhibit to our Registration Statement on Form 8-A (SEC
File No. 000-18281), and the previously filed exhibit is incorporated
herein by reference.
R We previously filed this exhibit on June 27, 2002 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 27, 2002, and the previously filed exhibit
is incorporated herein by reference.
(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 September 26, 2002 regarding
shareholder rights agreement.
(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
Chairman of the Board,
President and Chief Executive
Officer
Dated: December 23, 2002
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 Chairman of the Board,
- ------------------------------- President and Chief Executive Officer December 23, 2002
JOHN W. CUMMING (Principal Executive Officer)
/s/ Glenn P. Muir Director, Executive Vice President
- ------------------------------- Finance and Administration and December 23, 2002
GLENN P. MUIR Treasurer (Principal Financial Officer)
/s/ Jay A. Stein Chairman Emeritus and
- ------------------------------- Chief Technical Officer December 23, 2002
JAY A. STEIN
/s/ Robert H. Lavallee Vice President, Corporate Controller
- ------------------------------- (Principal Accounting Officer) December 23, 2002
ROBERT H. LAVALLEE
/s/ Irwin Jacobs Director December 23, 2002
- -------------------------------
IRWIN JACOBS
/s/ William A. Peck Director December 23, 2002
- -------------------------------
WILLIAM A. PECK
/s/ Gerald Segel Director December 23, 2002
- -------------------------------
GERALD SEGEL
/s/ Elaine Ullian Director December 23, 2002
- -------------------------------
ELAINE ULLIAN
</TABLE>
50
<PAGE>
CERTIFICATION
I, John W. Cumming, Chief Executive Officer of Hologic, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Hologic, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 23, 2002
/s/ John W. Cumming
John W. Cumming
Chief Executive Officer
51
<PAGE>
CERTIFICATION
I, Glenn P. Muir, Chief Financial Officer of Hologic, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Hologic, Inc., Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 23, 2002
/s/ Glenn P. Muir
Glenn P. Muir
Chief Financial Officer
52
<PAGE>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Hologic, Inc.
Years ended September 28, 2002, September 29, 2001 and September 30, 2000
<PAGE>
Hologic, Inc.
Audited Consolidated Financial Statements
Years ended September 28, 2002, September 29, 2001 and September 30, 2000
CONTENTS
Report of Independent Auditors...............................................F-1
Report of Independent Public Accountants.....................................F-2
Audited Financial Statements
Consolidated Balance Sheets..................................................F-3
Consolidated Statements of Operations........................................F-4
Consolidated Statements of Stockholders' Equity..............................F-5
Consolidated Statements of Cash Flows........................................F-7
Notes to Consolidated Financial Statements...................................F-9
<PAGE>
Report of Independent Auditors
To Hologic, Inc.:
We have audited the accompanying consolidated balance sheet of Hologic, Inc. (a
Delaware corporation) and subsidiaries as of September 28, 2002 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended September 28, 2002. The financial statements of Hologic, Inc. as
of September 29, 2001 and for each of the two years in the period ended
September 29, 2001 were audited by other auditors who have ceased operations and
whose report dated December 8, 2001, expressed an unqualified opinion on those
statements, before the restatement adjustments described in Note 2. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Hologic, Inc. and subsidiaries as of September 28, 2002 and the results of their
operations and their cash flows for the year ended September 28, 2002, in
conformity with accounting principles generally accepted in the United States.
As discussed above, the financial statements of Hologic, Inc. as of September
29, 2001, and for each of the two years then ended were audited by other
auditors who have ceased operations. As described in Note 2, in 2002, the
Company changed the composition of its reportable segments, adopted Emerging
Issues Task Force Issue No. 00-10, Accounting for Shipping and Handling Costs,
early-adopted Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, separately reported service and other
revenues and cost of revenues from product sales and cost of sales and
reclassified certain selling and marketing expenses to cost of service revenues.
The 2001 and 2000 financial statements have been revised to conform to the 2002
composition of reportable segments and to reflect the 2002 presentation of
revenues and cost of revenues. These financial statements have also been revised
to include the transitional disclosures required by SFAS No. 142, which was
adopted by the Company as of September 30, 2001.
We audited the adjustments that were applied to revise the disclosures for
reportable segments, shipping and handling costs, service and other revenues and
cost of service and other revenues reflected in the 2001 and 2000 financial
statements. With respect to reportable segments, our procedures included (a)
agreeing the adjusted amounts of segment revenues, operating income, assets,
depreciation and amortization and capital expenditures to the Company's
underlying records obtained from management, and (b) testing the mathematical
accuracy of the reconciliations of segment amounts to the consolidated financial
statements. Our audit procedures with respect to the goodwill disclosures in
Note 2 relating to 2001 included (a) agreeing the previously reported net income
to the previously issued financial statements and the adjustments to reported
net income representing amortization expense recognized in 2001 related to
goodwill, and (b) testing the mathematical accuracy of the reconciliation of
adjusted net income to reported net income, and the related earnings-per-share
amounts. In our opinion, such adjustments and disclosures are appropriate and
have been properly applied. However, we were not engaged to audit, review, or
apply any procedures to the 2001 and 2000 financial statements of the Company
other than with respect to such adjustments and disclosures and, accordingly, we
do not express an opinion or any other form of assurance on the 2001 and 2000
financial statements taken as a whole.
/s/ Ernst & Young LLP
Boston, Massachusetts,
November 8, 2002
F-1
<PAGE>
THIS REPORT IS A CONFORMED COPY OF THE REPORT PREVIOUSLY ISSUED BY ARTHUR
ANDERSEN LLP AND HAS NOT BEEN REISSUED BY THAT FIRM.
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
ARTHUR ANDERSEN LLP WERE THE INDEPENDENT AUDITORS FOR HOLOGIC, INC. UNTIL JUNE
23, 2002. AFTER REASONABLE EFFORTS, HOLOGIC WAS UNABLE TO OBTAIN FROM ARTHUR
ANDERSEN LLP THE CONSENT REQUIRED FOR THE INCORPORATION BY REFERENCE OF THEIR
REPORT ON HOLOGIC'S CONSOLIDATED BALANCE SHEETS 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, INTO REGISTRATION STATEMENTS FILED BY HOLOGIC, INC.
WITH THE SECURITIES AND EXCHANGE COMMISSION THAT ARE CURRENTLY EFFECTIVE UNDER
THE SECURITIES ACT OF 1933. ACCORDINGLY, PURSUANT TO AND IN RELIANCE UPON RULE
437A OF THE SECURITIES ACT OF 1933, HOLOGIC IS PERMITTED TO DISPENSE WITH THE
REQUIREMENT TO FILE THEIR CONSENT. BECAUSE ARTHUR ANDERSEN LLP HAVE NOT
CONSENTED TO THE INCORPORATION BY REFERENCE OF THEIR REPORT, INVESTORS MAY NOT
BE ABLE TO RECOVER DAMAGES AGAINST ARTHUR ANDERSEN LLP UNDER SECTION 11 OF THE
SECURITIES ACT OF 1933 FOR ANY UNTRUE STATEMENTS OF A MATERIAL FACT CONTAINED IN
THE FINANCIAL STATEMENTS AUDITED BY ARTHUR ANDERSEN LLP THAT ARE INCLUDED IN
THIS REPORT OR ANY OMISSIONS TO STATE A MATERIAL FACT REQUIRED TO BE STATED
THEREIN.
F-2
<PAGE>
Hologic, Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
<TABLE>
<CAPTION>
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 45,836 $ 12,754
Accounts receivable, less reserves of $4,565 and $4,668,
respectively 39,568 42,227
Inventories 37,855 39,285
Prepaid expenses and other current assets 14,811 5,309
------------- -------------
Total current assets 138,070 99,575
------------- -------------
Property and equipment, at cost:
Land 1,500 12,203
Buildings and improvements 13,387 36,556
Equipment 27,112 23,191
Furniture and fixtures 3,607 3,678
Leasehold improvements 1,684 1,571
------------- -------------
47,290 77,199
Less--accumulated depreciation and amortization 17,910 17,143
------------- -------------
29,380 60,056
------------- -------------
Intangible assets:
Patented technology, net of accumulated amortization of $4,705
and $3,402, respectively 2,529 3,741
Developed technology and know-how, net of accumulated amortization
of $1,903 and $991, respectively 7,248 8,160
Goodwill, net of accumulated amortization of $592 5,989 5,989
------------- -------------
15,766 17,890
------------- -------------
Deferred income taxes, net - 16,516
Other assets, net 1,059 1,082
Total assets $ 184,275 $ 195,119
============= =============
LIABILITIES
Current liabilities:
Lines of credit $ - $ 1,998
Current portion of note payable 480 485
Accounts payable 10,929 18,152
Accrued expenses 18,935 25,507
Deferred revenue 9,254 8,754
------------- -------------
Total current liabilities 39,598 54,896
------------- -------------
Notes payable, net of current portion 2,268 28,416
------------- -------------
Commitments and contingencies (Notes 9 and 13)
Stockholders' equity:
Preferred stock, $0.01 par value-1,623 shares authorized; 0 shares
issued - -
Common stock, $0.01 par value-30,000 shares authorized; 19,461 and
15,670 shares issued, respectively 195 157
Capital in excess of par value 141,405 111,300
Retained earnings 3,150 2,971
Accumulated other comprehensive loss (1,877) (2,157)
Treasury stock, at cost--45 shares (464) (464)
------------- -------------
Total stockholders' equity 142,409 111,807
------------- -------------
Total liabilities and stockholders' equity $ 184,275 $ 195,119
============= =============
</TABLE>
See accompanying notes.
F-3
<PAGE>
Hologic, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 30,
2002 2001 2000
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Product sales $ 148,834 $ 137,977 $ 76,178
Service and other revenue 41,358 42,219 18,159
------------- ------------- -------------
190,192 180,196 94,337
------------- ------------- -------------
Costs and expenses:
Cost of product sales 84,230 85,712 46,728
Cost of service and other revenue 34,146 33,734 18,726
Research and development 20,362 23,328 17,178
In-process research and development - - 5,000
Selling and marketing 28,319 33,858 22,623
General and administrative 18,908 20,852 16,441
Restructuring and nonrecurring 2,070 1,518 -
------------- ------------- -------------
188,035 199,002 126,696
------------- ------------- -------------
Income (loss) from operations 2,157 (18,806) (32,359)
Interest income 573 1,027 3,567
Interest/other expense (2,980) (2,902) (227)
------------- ------------- -------------
Loss before (benefit) provision for income taxes (250) (20,681) (29,019)
(Benefit) provision for income taxes (429) 169 (10,400)
------------- ------------- -------------
Net income (loss) $ 179 $ (20,850) $ (18,619)
============= ============= =============
Net income (loss) per common share:
Basic $ 0.01 $ (1.35) $ (1.22)
============= ============= =============
Diluted $ 0.01 $ (1.35) $ (1.22)
============= ============= =============
Weighted average number of common shares outstanding:
Basic 18,419 15,475 15,320
============= ============= =============
Diluted 19,192 15,475 15,320
============= ============= =============
</TABLE>
See accompanying notes.
F-4
<PAGE>
Hologic, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands, except per share data)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------- CAPITAL IN
NUMBER OF $0.01 EXCESS OF RETAINED
SHARES PAR VALUE PAR VALUE EARNINGS
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at September 25, 1999 15,303 $ 153 $ 109,624 $ 42,440
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 at September 30, 2000 15,419 154 110,233 23,821
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
<CAPTION>
TREASURY STOCK ACCUMULATED
------------------------------- OTHER TOTAL COMPREHENSIVE
NUMBER OF COMPREHENSIVE STOCKHOLDERS' INCOME
SHARES AMOUNT LOSS EQUITY (LOSS)
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at September 25, 1999 45 $ (464) $ (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 at September 30, 2000 45 (464) (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)
==============
</TABLE>
F-5
<PAGE>
Hologic, Inc.
Consolidated Statements of Stockholders' Equity (continued)
(In thousands, except per share data)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------- CAPITAL IN
NUMBER OF $0.01 EXCESS OF RETAINED
SHARES PAR VALUE PAR VALUE EARNINGS
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at September 29, 2001 15,670 157 111,300 2,971
Sale of common stock, net of
issuance costs of $2,220 3,000 30 24,750 -
Exercise of stock options 595 6 4,203 -
Stock issued for employee
compensation 140 1 801 -
Issuance of common stock under
employee stock purchase plan 56 1 351 -
Net income - - - 179
Translation adjustments - - - -
-------------- -------------- -------------- --------------
Comprehensive income
Balance at September 28, 2002 19,461 $ 195 $ 141,405 $ 3,150
============== ============== ============== ==============
<CAPTION>
TREASURY STOCK ACCUMULATED
------------------------------- OTHER TOTAL COMPREHENSIVE
NUMBER OF COMPREHENSIVE STOCKHOLDERS' INCOME
SHARES AMOUNT LOSS EQUITY (LOSS)
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at September 29, 2001 45 (464) (2,157) 111,807 -
Sale of common stock, net of
issuance costs of $2,220 - - - 24,780 -
Exercise of stock options - - - 4,209 -
Stock issued for employee
compensation - - - 802 -
Issuance of common stock under
employee stock purchase plan - - - 352 -
Net income - - - 179 179
Translation adjustments - - 280 280 280
-------------- -------------- -------------- -------------- --------------
Comprehensive income $ 459
==============
Balance at September 28, 2002 45 $ (464) $ (1,877) $ 142,409
============== ============== ============== ==============
</TABLE>
See accompanying notes.
F-6
<PAGE>
Hologic, Inc.
Consolidated Statements of Cash Flows
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 30,
2002 2001 2000
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 179 $ (20,850) $ (18,619)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation 5,395 6,189 3,556
Amortization 2,081 2,546 864
Noncash interest expense 187 - -
Reversal of previously recorded Trex reserves - (2,004) -
Deferred income taxes 3,896 293 (10,546)
Loss on sale/leaseback 93 - -
Acquired in-process research and development - - 5,000
Compensation expense related to issuance of common stock and
stock options - 968 105
Noncash interest expense - - -
Changes in assets and liabilities, net of impact of
businesses acquired in 2000
Accounts receivable 3,040 7,859 2,190
Inventories 1,641 2,310 836
Prepaid expenses and other current assets 1,998 (2,098) 4,605
Accounts payable (7,290) 4,698 3,104
Accrued expenses (4,695) (7,173) 6,189
Deferred revenue 436 (2,989) 2,039
------------- ------------- -------------
Net cash provided by (used in) operating activities 6,961 (10,251) (677)
------------- ------------- -------------
INVESTING ACTIVITIES
Purchases of held-to-maturity investments - - (20,938)
Proceeds from maturities of investment securities - - 50,074
Proceeds from settlement of Trex purchase price - 932 -
Purchase of businesses, net of cash acquired - - (30,198)
Proceeds from sale/leaseback, net of costs 31,372 - -
Purchase of property and equipment (6,138) (4,330) (5,821)
Increase in other assets (122) (1,259) (5,218)
------------- ------------- -------------
Net cash provided by (used in) investing activities 25,112 (4,657) (12,101)
------------- ------------- -------------
FINANCING ACTIVITIES
(Repayments) borrowings under lines of credit (2,150) 1,610 (715)
Issuance of note payable 24 2,360 -
Repayments of note payable (26,177) (9) -
Net proceeds from sale of common stock 29,341 904 549
------------- ------------- -------------
Net cash provided by (used in) financing activities 1,038 4,865 (166)
------------- ------------- -------------
Effect of exchange rate changes on cash (29) 19 (786)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 33,082 (10,024) (13,730)
</TABLE>
F-7
<PAGE>
Hologic, Inc.
Consolidated Statements of Cash Flows (continued)
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 30,
2002 2001 2000
------------- ------------- -------------
<S> <C> <C> <C>
Cash and cash equivalents, beginning of period 12,754 22,778 36,508
------------- ------------- -------------
Cash and cash equivalents, end of period $ 45,836 $ 12,754 $ 22,778
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes $ 236 $ 166 $ 199
============= ============= =============
Cash paid during the period for interest $ 3,072 $ 2,933 $ 38
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Stock issued for employee compensation $ 802 $ - $ 61
============= ============= =============
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 $ - $ - $ 57,050
Liabilities assumed - - (25,270)
Cost in excess of net assets acquired - - 19,220
In-process research and development cost acquired - - 5,000
Cash paid - - (30,000)
Acquisition costs incurred - - (1,000)
------------- ------------- -------------
Fair value of stock/note payable issued $ - $ - $ 25,000
============= ============= =============
</TABLE>
See accompanying notes.
F-8
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements
September 28, 2002
(In thousands, except per share data)
1. OPERATIONS
Hologic, Inc. (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.
The Company believes that a critical accounting policy is one that is both
important to the portrayal of the Company's financial condition and results and
requires managements most difficult, subjective or complex judgments, often as
the result of the need to make estimates about the effect of matters that are
inherently uncertain. The Company believes the following critical accounting
policies affect management's more significant judgments and estimates used in
the preparation of the Company's consolidated financial statements: Inventory,
Allowance for Doubtful Accounts, Revenue Recognition, Income Taxes, and Lease
accounting.
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.
FISCAL YEAR
The Company's fiscal year ends on the last Saturday in September. Fiscal 2002,
2001 and 2000 ended on September 28, 2002, September 29, 2001 and September 30,
2000, respectively.
F-9
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 a recent history of pre-tax losses,
early stage of development of direct-to-digital products, rapid technological
changes, competition, limited number of suppliers, customer concentration,
integration of acquisitions, government regulations, management of international
activities and dependence on key individuals.
CASH AND CASH EQUIVALENTS
The Company considers its highly liquid investments with maturities of three
months or less at the time of acquisition to be cash equivalents. Included in
cash equivalents at September 28, 2002 and September 29, 2001 are approximately
$259 and $541, respectively, of securities purchased under agreements to resell.
The securities purchased under agreements to resell are collateralized by U.S.
government securities. At September 28, 2002 and September 29, 2001 the
Company's other cash equivalents consisted of money market accounts.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that subject the Company to credit risk primarily consist
of cash and cash equivalents, trade accounts receivable and long-term
receivables. The Company's credit risk is managed by investing its cash and cash
equivalents in high-quality money market instruments and securities of the U.S.
government and its agencies. The Company generally 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
significant additional credit risk, beyond amounts provided for, is believed by
management to be inherent in the Company's accounts receivable.
F-10
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company utilizes a distributor in the United States for certain product
lines. This distributor had amounts due to the Company of approximately $7,775
and $6,969 as of September 28, 2002 and September 29, 2001, respectively, and
accounted for 23.8% and 20.3% of product revenues for fiscal 2002 and 2001,
respectively. There were no other customers with balances greater than 10% of
accounts receivable as of September 28, 2002 or September 29, 2001 or customers
that represented greater than 10% of product revenues for fiscal 2002 and 2001,
respectively. During the year ended September 30, 2000, no individual customers
represented greater than 10% of revenue.
In prior years, the Company financed 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 and 2002.
DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments mainly consist of cash, accounts receivable,
lines of credit, long-term receivables, accounts payable and notes payable. The
carrying amounts of the Company's cash equivalents, accounts receivable, lines
of credit and accounts payable approximate fair value due to the short-term
nature of these instruments. The notes payable to Foothill Capital Corporation
and Fleet Business Credit, LLC have variable interest rates and, therefore,
fluctuate based on market conditions. As of September 28, 2002, the fair values
of the notes payable approximate their carrying amounts based on comparable
market terms and conditions.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist of the following:
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
------------- -------------
Raw materials and work-in-process $ 30,637 $ 27,421
Finished goods 7,218 11,864
------------- -------------
$ 37,855 $ 39,285
============= =============
Work-in-process and finished goods inventories consist of materials, labor and
manufacturing overhead.
F-11
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
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
- -----------------------------------------------------------------------
Buildings and improvements 40 years
Equipment 3-8 years
Furniture and fixtures 5-7 years
Leasehold improvements Shorter of Life of Lease or
Estimated Useful Life
The Company applies the provisions of American Institute of Certified Public
Accountants Statement of Position (SOP) 98-1, Software Developed or Obtained for
Internal Use. SOP 98-1 requires computer software costs associated with internal
use software to be expensed as incurred until certain capitalization criteria
are met. SOP 98-1 also defines which types of costs should be capitalized and
which should be expenses. The Company has capitalized $2,280 during fiscal 2002
related to a company-wide Enterprise Resource Planning (ERP) systems
implementation project and has included these amounts in equipment in the
accompanying consolidated balance sheet. The Company will begin to amortize such
costs at such time the ERP system is operational, which is anticipated to be
during the first fiscal quarter of 2003.
In September 2002, the Company completed a sale/leaseback of its Bedford,
Massachusetts and Danbury, Connecticut facilities, resulting in a loss of $93,
which is included in interest/other expense in the accompanying consolidated
statement of operations. Under the terms of the sale/leaseback, the Company
entered into a 20-year operating lease agreement for the facilities requiring
annual rent payments of $3,156, in addition to all operating costs.
In applying the provisions of Statement of Financial Accounting Standards (SFAS)
No. 13, Accounting for Leases, certain judgments and estimates must be made to
determine if the agreement should be accounted for as a capital or operating
lease. Most significant is the determination of the Company's incremental
borrowing rate in calculating the present value of minimum lease payments in the
event the rate implicit in the lease is unknown. In order for a lease agreement
to be accounted as an operating lease, among other
F-12
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
requirements, the present value of the minimum lease payments may not be greater
than 90% of the fair value of the leased asset. In determining the Company's
incremental borrowing rate management considered, among other things, quotes
obtained from several lenders assuming the Company was financing a purchase of
the facility.
LONG-LIVED ASSETS
The Company assesses the realizability of its long-lived assets, including
intangible assets except goodwill, 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.
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 is no longer be amortized, instead goodwill is
reviewed for impairment annually, at a minimum, by applying a fair-value-based
test. The Company early adopted this statement effective in the first quarter in
the fiscal year ended September 2002. Accordingly, the Company reclassified the
net book value of assembled workforce of approximately $1,586 to goodwill and
ceased amortization of all goodwill.
During the second quarter of fiscal 2002, the Company engaged an independent
appraiser, experienced in conducting these impairment tests, to complete the
fair value based test of the Company's goodwill as of September 30, 2001, the
first day of fiscal 2002. Based on the results of this test, goodwill was deemed
not to be impaired for fiscal 2002. The Company has determined that the
appraisal completed in the second quarter will serve as its first annual test as
well.
F-13
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Unaudited adjusted net income (loss) and earnings (loss) per share, assuming the
adoption of Statement 142 occurred on October 1, 2000 are as follows:
TWELVE MONTHS ENDED
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
------------- -------------
Reported net income (loss) $ 179 $ (20,850)
Add back: Goodwill and assembled
workforce amortization - 549
------------- -------------
Adjusted net income (loss) $ 179 $ (20,301)
============= =============
Basic earnings per share:
Reported net income (loss) $ 0.01 $ (1.35)
Goodwill and assembled workforce
amortization - 0.04
------------- -------------
Adjusted net income (loss) $ 0.01 $ (1.31)
============= =============
Diluted earnings per share:
Reported net income (loss) $ 0.01 $ (1.35)
Goodwill and assembled workforce
amortization - 0.04
------------- -------------
Adjusted net income (loss) $ 0.01 $ (1.31)
============= =============
DEFERRED FINANCING COSTS
Included in other assets in the accompanying balance sheets as of September 28,
2002 and September 29, 2001 are deferred financing costs of approximately $441
and $393, respectively, 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. The Company amortized $187 and $0 to interest expense
related to these amounts during the years ended September 28, 2002 and September
29, 2001, respectively.
F-14
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 2002, 2001 and 2000 were not significant.
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. The Company recognizes
product revenue upon the completion of installation for shipments that require
more than perfunctory obligations at the time of shipment, specifically for our
digital imaging systems. A provision is made at that time for estimated warranty
costs to be incurred.
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% of the contracts funded. This
program was terminated in fiscal 1999 (see Notes 10 and 13).
Service revenues primarily consist of fee-per-scan revenues, amounts recorded
under maintenance contracts and repairs not covered under warranty as well as
shipping and handling costs billed to customers. Fee-per-scan revenues have been
recorded as the fees are collected. Maintenance contract revenues are recognized
ratably over the term of the contract. Other service revenues are recorded when
the services are completed.
F-15
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Research and development costs are 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.
NET INCOME (LOSS) PER SHARE
Basic and diluted net income (loss) per share are presented in conformity with
SFAS No. 128, Earnings per Share. Basic net income (loss) per share is computed
by dividing net income (loss) by the weighted average number of common shares
outstanding during the period. Diluted net loss per share in 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.
Basic and diluted weighted average common shares for 2002 are as follows (in
thousands):
Basic weighted average common shares outstanding 18,419
Weighted average common equivalent shares 773
-------------
Diluted weighted average common shares outstanding 19,192
=============
Dilutive weighted average shares outstanding do not include 1,071, 3,367 and
2,712 common-equivalent shares for the end of fiscal years 2002, 2001 and 2000,
respectively, as their effect would have been antidilutive.
DERIVATIVE FINANCIAL INSTRUMENTS
At September 28, 2002 and September 29, 2001, the Company had no derivative
financial instruments.
F-16
<PAGE>
2. Summary of Significant Accounting Policies (continued)
Reclassifications
In September 2001, the Emerging Issues Task Force (EITF) reached a consensus on
Issue No. 00-10, Accounting for Shipping and Handling Costs, relating to the
accounting for shipping and handling costs billed to customers. In accordance
with Issue No. 00-10, all amounts billed to a customer in a sale transaction
related to shipping and handling, if any, represent revenues earning for the
goods provided and should be classified as revenue in the statement of
operations. The Company has historically accounted for reimbursements received
for shipping and handling costs as a reduction to cost of service and other
revenue in the statement of operations to offset the costs incurred. The Company
has adopted Issue No. 00-10 in financial reporting periods beginning after
September 29, 2001. Accordingly, comparative financial statements herein for
prior periods have been reclassified to comply with the guidance in Issue No.
00-10. During the years ended September 28, 2002, September 29, 2001 and
September 30, 2000, the amounts billed to customers totaled $1,412, $1,705 and
$591, respectively, which has been reflected as service and other revenues and
cost of service and other revenues in accordance with Issue No. 00-10 in the
accompanying statements of operations for all periods presented.
During 2002, the Company began to separately report Service and Other Revenue
from Product Sales and to separately report Cost of Service and Other Revenue
from Cost of Product Sales. In addition, in 2002 the Company began reporting
certain Selling and Marketing Expenses as Costs of Service and Other Revenue.
Prior-period amounts have been reclassified to conform with the current-period
presentation. The following is a summary of such reclassifications.
Year End
----------------------------
September 29, September 30,
2001 2000
------------- -------------
Product Sales:
As previously reported $ 175,908 $ 90,864
Less - Service revenues (37,931) (14,686)
------------- -------------
As revised $ 137,977 $ 76,178
------------- -------------
Service and Other Revenue:
As previously reported $ 2,583 $ 2,882
Add - Service revenues 37,931 14,686
Add - Shipping and handling fees 1,705 591
------------- -------------
As revised $ 42,219 $ 18,159
------------- -------------
2. Summary of Significant Accounting Policies (continued)
Year End
----------------------------
September 29, September 30,
2001 2000
------------- -------------
Cost of Product Sales:
As previously reported $116, 177 $ 63,604
Less - Cost of service revenues (30,465) (16,876)
------------- -------------
As revised $ 85,712 $ 46,728
------------- -------------
Cost of Service and Other Revenue:
As previously reported $ - $ -
Add - Cost of service revenues 30,465 16,876
Add - Shipping and handling fees 1,705 591
Add - Application services costs 1,564 1,259
------------- -------------
As revised $ 33,734 $ 18,726
------------- -------------
Selling and Marketing Expenses:
As previously reported $ 35,422 $ 23,882
Less - Application service costs (1,564) (1,259)
------------- -------------
As revised $ 33,858 $ 22,263
------------- -------------
As a result of management's decision to close the conventional general
radiography manufacturing facility, the Company reclassified the General
Radiography business from the Mammography/General Radiography segment into a
separate segment in 2002. The segment information presented in Note 11 has been
revised in 2001 and 2000 to reflect the 2002 presentation. The following
reconciles previously reported segment revenues to the information presented in
Note 11.
Year End
---------------------------
September 29, September 30,
2001 2000
------------- -------------
Revenues:
Mammography $ 59,943 $ 2,921
General Radiography 27,590 2,201
Shipping and handling fees (1,063) (36)
------------ -------------
Mammography/General Radiography $ 86,470 $ 5,086
------------ -------------
Recently Issued Accounting Policies
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
Dis
F-17
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
not anticipate the adoption of this Statement to have any material impact on its
results of operations or financial condition.
FASB Interpretation No. 45, Guarantor Accounting, will significantly change
current practice in the accounting for, and disclosure of, guarantees. Most
guarantees are to be recognized and initially measured at fair value, which is a
change from current practice. In addition, guarantors will be required to make
significant new disclosures, even when the likelihood of the guarantor making
payments under the guarantee is remote. In general, the Interpretation applies
to contracts or indemnification agreements that contingently require the
guarantor to make payments to the guaranteed party based on changes in an
underlying that is related to an asset, liability, or an equity security of the
guaranteed party. The Interpretation's disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002, while the initial recognition and initial measurement provisions are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. We do not believe the adoption of this statement will have a
material impact on our results of operations or financial condition.
EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables,
the Task Force reached a consensus on Issue 00-21, at the November 21, 2002
meeting, which addresses how to account for arrangements that may involve the
delivery or performance of multiple products, services, and/or rights to use
assets. The final consensus will be applicable to agreements entered into in
fiscal periods beginning after June 15, 2003 with early adoption permitted.
Additionally, companies will be permitted to apply the consensus guidance to all
existing arrangements as the cumulative effect of a change in accounting
principle in accordance with APB Opinion No. 20, Accounting Changes.
Following is a brief summary of the final model approved by the Task Force.
.. Revenue arrangements with multiple deliverables should be divided into
separate units of accounting if the deliverables in the arrangement meet the
following criteria:
.. The delivered item(s) has value to the customer on a standalone basis. That
item(s) has value on a standalone basis if it is sold separately by any vendor
or the customer could resell the deliverable on a standalone basis. In the
context of a customer's ability to resell the deliverable, the Task Force
observed that this criterion does not require the existence of an observable
market.
.. There is objective and reliable evidence of the fair value of the undelivered
item(s).
.. If the arrangement includes a general right of return, delivery or performance
of the undelivered item(s) is considered probable and substantially in the
control of the vendor.
.. Arrangement consideration should be allocated among the separate units of
accounting based on their relative fair values. The amount allocated to the
delivered item(s) is limited to the amount that is not contingent on the
delivery of additional items or meeting other specified performance
conditions.
.. Applicable revenue recognition criteria should be considered separately for
separate units of accounting.
We are currently evaluating the ultimate impact of this statement on our results
of operations or financial position.
3. ACQUISITION OF 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 had a term of three years, bore interest at a rate of 11.5%
per annum and was repaid in full in September 2002 with the proceeds from the
Company's sale/leaseback transaction (see Note 2). The Company recorded interest
expense related to this note payable of $2,638, $2,875 and $109 for the years
ended September 28, 2002, September 29, 2001 and September 30, 2000,
respectively, in the accompanying consolidated statements 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
was accounted for as a purchase in accordance with APB Opinion No. 16 and,
accordingly, the results of the operations of Trex Medical are included in the
accompanying consolidated financial statements from the date of acquisition. In
accordance with APB Opinion No. 16, the
F-18
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
3. ACQUISITION OF TREX MEDICAL SYSTEMS CORPORATION (CONTINUED)
purchase price was 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 Staff Accounting Bulleting (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, 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
F-19
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
3. ACQUISITION OF TREX MEDICAL SYSTEMS CORPORATION (CONTINUED)
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.
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 being amortized over a period of 10 years at approximately $910 of
amortization expense per year. 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.
In accordance with SFAS No. 142, the Company reclassified the net book value of
assembled workforce as of September 29, 2001 to goodwill and ceased amortization
at the beginning of fiscal 2002 (see Note 2).
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. The Company early adopted SFAS No. 142 in the first
quarter of fiscal 2002 and, accordingly, ceased amortization of goodwill (see
Note 2).
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 transferred these
obligations, along with $1,300 in cash and the assets and other liabilities
associated with that product line to another company. Such amount had been
accrued as part of the purchase price allocation.
F-20
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
3. ACQUISITION OF TREX MEDICAL SYSTEMS CORPORATION (CONTINUED)
The aggregate purchase price (after the adjustments discussed above) 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
=============
On November 13, 2001, the Company announced they would be closing the general
radiography manufacturing facility in Littleton, Massachusetts that the Company
had acquired from Trex Medical and that it would relocate certain of its product
lines and sales and support personnel to its corporate headquarters in Bedford,
Massachusetts. The Company 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 included amounts for lease abandonment, as well as for
the write-off of certain fixed assets and accounts receivable. The Company
incurred an additional restructuring charge of approximately $961 in 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 (3.32% at
September 28, 2002) plus 1.50%. As of September 28, 2002, there were no amounts
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 2002 was approximately $638 and the weighted average interest rate
for fiscal 2002 was 10.4%. Interest expense on this line of credit of
approximately $66, $95 and $23 has been included in interest/other expenses in
the accompanying consolidated statements of operations for 2002, 2001 and 2000,
respectively.
On September 21, 2001, the Company signed a Loan and Security Agreement with
Foothill Capital Corporation (the Foothill Agreement). The Foothill Agreement
provided
F-21
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
4. CREDIT FACILITIES (CONTINUED)
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 (4.75% at September 28, 2002) plus 1.25%. As of
September 28, 2002, there was $1,888 outstanding under the Foothill Agreement.
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 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 assets of the Company,
excluding real estate, and expires on September 21, 2004. The Company was in
compliance with all covenants as of September 28, 2002.
F-22
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
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:
YEARS ENDED
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 30,
2002 2001 2000
------------- ------------- -------------
Federal:
Current $ (13,527) $ - $ -
Deferred 13,000 - (9,963)
------------- ------------- -------------
(527) - (9,963)
------------- ------------- -------------
State
Current 150 150 134
Deferred (84) - (583)
------------- ------------- -------------
66 150 (449)
------------- ------------- -------------
Foreign
Current 32 19 12
------------- ------------- -------------
$ (429) $ 169 $ (10,400)
============= ============= =============
F-23
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
5. INCOME TAXES (CONTINUED)
A reconciliation of the federal statutory rate to the Company's effective tax
rate is as follows:
YEARS ENDED
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 30,
2002 2001 2000
------------- ------------- -------------
Income tax provision at
federal statutory rate (35.0)% (35.0)% (35.0)%
Increase (decrease) in tax
resulting from:
Change in valuation
allowance and net effect
of losses of foreign
subsidiaries not
benefited (28.5) 40.6 1.3
State tax provision
(benefit), net of
federal benefit 43.1 (1.2) (1.3)
Research and development
tax credit (199.7) (2.5) -
Non-deductible expenses 48.7 - -
Effect of not providing
U.S. taxes on exempt
FSC income - - (0.1)
Other - (1.1) (0.7)
------------- ------------- -------------
(171.4)% 0.8% (35.8)%
============= ============= =============
The components of domestic and foreign loss before the provision (benefit) for
income taxes are as follows:
YEARS ENDED
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 30,
2002 2001 2000
------------- ------------- -------------
Domestic $ 1,327 $ (20,561) $ (27,942)
Foreign (1,577) (120) (1,077)
------------- ------------- -------------
$ (250) $ (20,681) $ (29,019)
============= ============= =============
F-24
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
5. INCOME TAXES (CONTINUED)
The components of the net deferred tax asset recognized in the accompanying
consolidated balance sheets are as follows:
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
------------- -------------
Deferred tax assets $ 10,952 $ 25,508
Valuation allowance (7,352) (8,992)
------------- -------------
$ 3,600 $ 16,516
============= =============
The Company generated significant tax loss carryforwards during fiscal 2001 and
2000, which may 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.
During fiscal 2002, as a result of the Economic Stimulus Bill signed into law in
March 2002, the Company has filed or is in the process of filing, carryback
claims of approximately $13,800. Of this amount, $6,000, has been received by
the Company and $7,800 is included in other current assets in the accompanying
balance sheet at September 28, 2002. The reduction in the net deferred tax asset
is primarily the result of these carryback claims.
The Company has recorded an increase in the valuation allowance against a
portion of its remaining potential deferred tax assets. The valuation allowance
primarily relates to the net losses generated in fiscal 2001 and 2000 for which
the Company can only realize through the generation of future taxable income and
certain deferred tax assets in foreign jurisdictions, for which realization is
uncertain. The Company believes that its net deferred tax asset as of September
28, 2002 will be realizable in the next 12-24 months.
F-25
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
5. INCOME TAXES (CONTINUED)
The approximate income tax effect of each type of temporary difference and
carryforward before allocation of the valuation allowance is approximately as
follows:
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
------------- -------------
Net operating loss carryforwards $ 9,167 $ 19,040
Nondeductible accruals 720 1,147
Nondeductible reserves 3,883 4,079
Other temporary differences (3,935) 696
Research credit 1,008 508
Deferred revenue 109 38
------------- -------------
$ 10,952 $ 25,508
============= =============
The following table summarizes the expiration dates of the net operating loss
and R&D credit carryforwards:
<TABLE>
<CAPTION>
YEAR OF EXPIRATION
2019 2020 2021 2022 TOTAL
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Operating Loss $ 356 $ 10,431 $ 9,937 $ 4,085 $ 24,809
R&D Credit $ - $ - $ 508 $ 500 $ 1,008
</TABLE>
6. COMMON STOCK
COMMON STOCK OFFERING
On December 12, 2001, the Company completed an offering of 3,000 shares of
common stock for net proceeds of $24,780.
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.
F-26
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
6. COMMON STOCK (CONTINUED)
During fiscal 1996, the 1986 Plan was terminated. Options granted under the 1986
Plan vest over a five-year period and are exercisable at varying dates.
The Company's 1994 Stock Option Plan (the 1994 Plan) and the 1995 Stock Option
Plan (the 1995 Plan), both of which were originally adopted by FluoroScan 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 28, 2002, the Company had one share
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 28, 2002, 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 28, 2002,
the Company had eight shares available for future grant under this plan.
F-27
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
6. COMMON STOCK (CONTINUED)
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. Effective September 29, 2002, the
Board of Directors increased the number of shares available for issuance under
the 1999 Plan from 1,440 to 1,840. 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 28, 2002, the Company had two shares
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 28, 2002, the Company
had 444 shares available for future grant under this plan.
F-28
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
6. COMMON STOCK (CONTINUED)
The following table summarizes all stock option activity under all of the plans
for the three years in the period ended September 28, 2002:
<TABLE>
<CAPTION>
EXERCISE WEIGHTED
NUMBER PRICE PER AVERAGE
OF SHARES SHARE EXERCISE PRICE
--------- ------------------ --------------
<S> <C> <C> <C>
Outstanding at 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 at 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 at September 29, 2001 3,367 1.81-44.25 7.65
Granted 1,324 5.05-17.00 9.25
Terminated (380) 3.50-28.13 7.80
Exercised (595) 1.81-13.25 7.07
--------- ------------------ --------------
Outstanding at September 28, 2002 3,716 $ 1.81-44.25 $ 8.29
========= ================== ==============
Exercisable at September 28, 2002 1,563 $ 1.81-44.25 $ 8.82
========= ================== ==============
Exercisable at September 29, 2001 1,555 $ 1.81-44.25 $ 9.29
========= ================== ==============
Exercisable at September 30, 2000 1,262 $ 1.81-44.25 $ 9.75
========= ================== ==============
</TABLE>
F-29
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
6. COMMON STOCK (CONTINUED)
The range of exercise prices for options outstanding and options exercisable at
September 28, 2002 are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF OPTIONS LIFE EXERCISE OPTIONS EXERCISE
EXERCISE PRICE OUTSTANDING (YEARS) PRICE EXERCISABLE PRICE
- ---------------------------- ----------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.81-$3.94 184 5.68 $ 3.53 94 $ 3.15
$4.00-$5.00 544 8.08 4.96 280 4.98
$5.05-$5.78 614 8.45 5.49 162 5.61
$5.85-$7.06 426 7.07 6.60 226 6.67
$7.19-$8.88 443 5.24 8.26 351 8.25
$9.00-$9.50 505 9.89 9.49 17 9.21
$9.74-$10.26 400 9.17 10.23 - 9.81
$10.45-$13.13 432 6.10 11.71 311 11.75
$13.15-$32.59 167 5.51 21.88 122 24.29
$44.25 1 3.75 44.25 - 44.25
----------- ----------- --------- ----------- --------
$1.81-$44.25 3,716 7.58 $ 8.29 1,563 $ 8.82
=========== =========== ========= =========== ========
</TABLE>
The weighted average grant date fair value under the Black-Scholes option
pricing model of options granted during the years ended September 28, 2002,
September 29, 2001 and September 30, 2000 under the various plans is $2.82,
$3.30 and $3.37 per share, respectively. As of September 28, 2002, September 29,
2001 and September 30, 2000, the weighted average remaining contractual life of
outstanding options under these plans is 7.58, 7.46 and 7.26 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 the years ended September 29, 2001 and September 30, 2000 of $166
and $47, respectively 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.
Additional amounts recorded as stock-based compensation in fiscal 2000
F-30
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
6. COMMON STOCK (CONTINUED)
relate to the amortization of compensation expense due to the issuance of common
stock options at less than fair market value in fiscal 1995.
In October 1995 the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which established a fair-value-based method of accounting for
stock-based compensation plans. The Company has adopted the disclosure-only
alternative under SFAS No. 123 that requires disclosure of the pro forma effects
on net income (loss) and income (loss) per share as if SFAS No. 123 had been
adopted, as well as certain other information.
The Company has computed the pro forma disclosures required under SFAS No. 123
for stock options and stock issuances under the employee stock purchase plan of
the Company in fiscal years ended September 28, 2002, September 29, 2001 and
September 30, 2000, 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 28, 2002, September 29, 2001 and September 30, 2000 are as follows:
2002 2001 2000
----------- ----------- ------------
Risk-free interest rate 3.73% 5.50% 6.00%
Expected dividend yield - - -
Expected lives 4 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 28, 2002, September 29,
2001 and September 30, 2000 would be as follows:
2002 2001 2000
----------- ----------- ------------
Net income (loss) reported $ 179 $ (20,850) $ (18,619)
Pro forma net loss (4,499) (24,150) (21,052)
Diluted net income (loss)
per share, as reported $ 0.01 $ (1.35) $ (1.22)
Pro forma diluted net loss
per share
$ (0.24) $ (1.56) $ (1.37)
F-31
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
6. COMMON STOCK (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
The Company has an 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 two years, whether or not consecutive, of
employment with the Company or any of its participating subsidiaries 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. During the fiscal years ended September 28, 2002, September 29, 2001
and September 30, 2000, the Company issued 56, 100 and 91 shares, respectively
under the ESP Plan. At September 28, 2002, there are 173 shares available for
purchase under the ESP Plan.
RIGHTS AGREEMENT
In December 1992, the Company adopted a shareholder rights plan (the December
1992 Rights Plan). The Company amended the plan in December 1995, December 1996
and April 1999. The December 1992 Rights Plan expires on December 31, 2002. The
December 1992 Rights Plan is intended to protect shareholders from unfair or
coercive takeover practices. In accordance with the December 1992 Rights 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 $60 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.
On September 17, 2002, the Board of Directors adopted a new shareholder rights
plan to replace the December 1992 Plan when it expires on December 31, 2002. In
addition to certain other modifications, the new rights plan uses preferred
stock purchase rights rather than common stock purchase rights. To effect the
new rights plan, the Board of Directors declared a dividend distribution of one
right for each share of the Company's common stock outstanding as of the close
of business on December 31, 2002. Each right entitles the registered holder to
purchase one one-thousandth of a share of the Company's Series A Junior
Participating Preferred Stock at a purchase price of $60.00. The rights
F-32
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
6. COMMON STOCK (CONTINUED)
will be exercisable if a person or group acquires beneficial ownership of 15% or
more of the Company's common stock or announces a tender or exchange offer for
15% or more of the Company's common stock. At such time, each holder of a right
(other than the 15% holder) will thereafter have a right to purchase, upon
payment of the purchase price of the right, that number of shares of the
Company's common stock which have a market value of twice the purchase price of
the right. The new rights plan is designed to deter coercive or unfair takeover
tactics and to ensure that all of the Company's shareholders receive fair and
equal treatment in the event of an unsolicited attempt to acquire the Company.
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 $710, $849, and $301
as a provision for the profit sharing contribution for fiscal 2002, 2001 and
2000, respectively. During 2002, the Company paid the 2001 profit sharing
contribution through issuance of its common stock.
8. RELATED PARTY TRANSACTIONS
NOTE RECEIVABLE FROM OFFICER
In fiscal 2000 and 2001, the Company loaned an officer an aggregate of $500,000,
which is required to be repaid quarterly beginning in April 2003 through April
2006. 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.
9. COMMITMENTS
OPERATING LEASES
The Company conducts its operations in leased facilities under operating lease
agreements that expire through fiscal 2022. The Company leases certain equipment
under operating lease agreements that expire through fiscal 2007.
In September 2002, the Company completed a sale/leaseback transaction of its
headquarters and manufacturing facility located in Bedford, Massachusetts and
its manufacturing facility in Danbury, Connecticut. The transaction resulted in
net proceeds
F-33
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
9. COMMITMENTS (CONTINUED)
to the Company of $31.4 million. The new lease for these facilities, including
the associated land, has a term of 20 years, with four five-year renewal terms,
which the Company may exercise at its option. The basic rent for the facilities
is $3.2 million per year, which is subject to adjustment for increases in the
consumer price index. In addition, the Company is required to maintain the
facilities during the term of the lease and to pay all taxes, insurance,
utilities and other costs associated with those facilities. Of the $31.4 million
in net proceeds received from this transaction, the Company used $26.3 million
to immediately repay the Trex Medical $25.0 million note payable plus accrued
interest of $1.3 million. Under the lease, the Company makes customary
representations and warranties and agrees to certain financial covenants and
indemnities. In the event the Company defaults on the lease, the landlord may
terminate the lease, accelerate payments and collect liquidated damages. As of
the end of fiscal 2002, the Company was not in default of any covenants
contained in the lease.
Future minimum lease payments under all the Company's operating leases are
approximately as follows:
FISCAL YEARS ENDING AMOUNT
- ------------------------------------------------------------ ----------
September 27, 2003 $ 5,143
September 25, 2004 4,286
September 24, 2005 4,226
September 30, 2006 3,481
September 25, 2007 3,170
Thereafter 47,076
----------
$ 67,382
==========
Rental expense, net of sublease income, was approximately $2,462, $2,479 and
$724 for fiscal 2002, 2001 and 2000, 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 under the program. The Company recorded the amount for which it
was contingently liable as deferred revenue.
F-32
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
10. FEE PER SCAN PROGRAM (CONTINUED)
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
The Company reports segment information in accordance with SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. 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 executive officer. To date, the
Company has viewed its operations and manages its business as five principal
operating segments: the manufacture and sale of Osteoporosis Assessment
products, Mammography products, Digital Imaging products, Mini-C Arm Imaging
products and General Radiography products. Intersegment sales and transfers are
not significant.
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 revenues and operating income (loss). Segment information for fiscal
years ended 2002, 2001 and 2000 is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 30,
2002 2001 2000
------------- -------------- -------------
<S> <C> <C> <C>
Total revenues:
Osteoporosis Assessment $ 63,544 $ 66,155 $ 66,853
Mammography 75,039 59,943 2,921
Digital Imaging 23,660 11,780 7,864
Mini C-Arm Imaging 17,030 14,728 14,498
General radiography 10,919 27,590 2,201
------------- ------------- -------------
$ 190,192 $ 180,196 $ 94,337
============= ============= =============
</TABLE>
F-35
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
11. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 30,
2002 2001 2000
-------------- -------------- --------------
<S> <C> <C> <C>
Operating income (loss):
Osteoporosis Assessment $ 6,450 $ 7,357 $ 88
Mammography 4,174 909 (10,245)
Digital Imaging (10,271) (21,252) (20,327)
Mini C-Arm Imaging 3,509 683 163
General radiography (1,705) (6,503) (2,038)
-------------- -------------- --------------
$ 2,157 $ (18,806) $ (32,359)
============== ============== ==============
Net income (loss):
Osteoporosis Assessment $ 7,079 $ 8,157 $ 2,472
Mammography 1,508 (2,066) (6,541)
Digital Imaging (10,234) (21,374) (13,290)
Mini C-Arm Imaging 3,509 972 57
General radiography (1,683) (6,539) (1,317)
-------------- -------------- --------------
$ 179 $ (20,850) $ (18,619)
============== ============== ==============
Identifiable assets:
Osteoporosis Assessment $ 138,469 $ 117,796 $ 110,425
Mammography 49,726 50,811 61,016
Digital Imaging (3,868) 1,108 10,038
Mini C-Arm Imaging (47) 15,402 17,539
General radiography (5) 10,002 20,637
-------------- -------------- --------------
$ 184,275 $ 195,119 $ 219,655
============== ============== ==============
Depreciation and amortization:
Osteoporosis Assessment $ 3,229 $ 3,422 $ 2,959
Mammography 1,795 3,143 143
Digital Imaging 2,376 1,499 1,085
Mini C-Arm Imaging 76 173 233
General radiography - 498 -
-------------- -------------- --------------
$ 7,476 $ 8,735 $ 4,420
============== ============== ==============
</TABLE>
F-36
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
11. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION (CONTINUED)
YEARS ENDED
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 30,
2002 2001 2000
-------------- -------------- --------------
Capital expenditures, net:
Osteoporosis Assessment $ 3,121 $ 1,279 $ 2,890
Mammography 1,550 1,168 20
Digital Imaging 1,467 1,744 2,593
Mini C-Arm Imaging - 162 318
General radiography - (23) -
-------------- -------------- --------------
$ 6,138 $ 4,330 $ 5,821
============== ============== ==============
Export sales from the United States to unaffiliated customers, primarily in
Europe, Asia and Latin America during fiscal 2002, 2001 and 2000 totaled
approximately $29,405, $38,177 and $25,334, respectively.
Transfers between the Company and its European subsidiaries generally are
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:
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 30,
2002 2001 2000
------------- ------------- -------------
Europe 9% 14% 21%
Asia 8 8 7
All others 3 6 5
------------- ------------- -------------
20% 28% 33%
============= ============= =============
F-37
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
12. ACCRUED EXPENSES
Accrued expenses consist of the following:
SEPTEMBER 28 SEPTEMBER 29,
2002 2001
------------ -------------
Accrued payroll and employee benefits $ 4,282 $ 4,757
Accrued commissions 3,756 3,521
Accrued income taxes 1,481 176
Accrued warranty 4,952 6,480
Accrued tradeshow 81 980
Accrued acquisition reserve 907 1,708
Accrued restructuring 107 784
Accrued professional fees 732 830
Other accrued expenses 2,637 6,271
------------ -------------
$ 18,935 $ 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 (4.75% at September 28, 2002) plus 1%. As of
September 28, 2002, there was approximately $842 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 recognized the amount
deferred in excess of the settlement totaling $2,147 as revenue in the third
quarter of 2001. In addition, the Company reversed $500 of related warranty
reserves that were no longer necessary through a reduction of cost of product
sales during the same period.
In connection with the acquisition of the U.S. assets of Trex Medical, the
Company assumed the liability for a lawsuit filed by Fischer Imaging against
Trex Medical alleging that the Lorad prone biopsy system infringes upon two
Fischer Imaging patents, subject to indemnification from Trex Medical and its
parent, Thermo Electron Corporation, for any damages and related costs,
including attorneys' fees, up to the adjusted purchase price
F-38
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
13. LITIGATION (CONTINUED)
for the Trex Medical assets. In June 2002, Trex Medical and Fischer Imaging
reached a settlement in this lawsuit. Under the settlement, Fischer Imaging has
dismissed all actions against the Company, the Company retains the right to
continue to sell this product, and the Company is not required to pay any
damages or ongoing royalties.
In the ordinary course of business, the Company is party to 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
reasonably be likely to have a material effect on the Company's financial
condition or results of operations.
14. RESTRUCTURING AND NONRECURRING CHARGES
In fiscal 2001, the Company incurred a restructuring charge of $1,018 in
accordance with Emerging Issues Task Force Issue (EITF) 94-3 and SEC Staff
Accounting Bulletin 100 (SAB 100). The restructuring charge included
severance-related costs associated with workforce reductions of approximately
102 persons across all functional areas. In addition, the Company recorded $500
of moving and other costs incurred to move the Fluoroscan operations to the
corporate headquarters from Northbrook, Illinois.
During the first quarter of fiscal 2002, the Company announced the finalization
of an exit strategy for the Hologic Systems Division. As part of this exit
strategy, the Company closed its conventional general radiography manufacturing
facility in Littleton, Massachusetts, and relocated certain of its product lines
and sales and support personnel to the corporate headquarters in Bedford,
Massachusetts. The Company accrued costs of approximately $3,500 related to the
closing as part of the final Trex Medical purchase price allocation in the
fourth quarter of fiscal 2001. These costs included amounts for lease
abandonment, as well as for the write-off of certain fixed assets and accounts
receivable. The Company commenced the closure for the Littleton manufacturing
facility in the first quarter of fiscal 2002 and completed the closure in
January 2002. The Company also incurred a restructuring charge of approximately
$806 in the first quarter of fiscal 2002 that primarily comprised severance
costs related to the termination of 80 employees at the Littleton facility. In
addition, the Company incurred severance costs of approximately $561 and $208 in
the first quarter of 2002 in connection with the closure of the Company's direct
sales and service office in Paris, France and the continued reduction of Lorad's
workforce, respectively. The severance charges related to the workforce
reductions of five persons in France and 20 persons at Lorad and were across all
functional areas.
F-39
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
14. RESTRUCTURING AND NONRECURRING CHARGES (CONTINUED)
In the second quarter of fiscal 2002, the Company incurred additional severance
costs of approximately $495 that primarily comprised severance costs in
connection with the reduction of the Company's workforce in the United States
and Europe by 13 persons across all functional areas.
The following table summarizes the restructuring activity for the year ended
September 28, 2002:
BALANCE AT CHARGED TO BALANCE AT
SEPTEMBER 29, COSTS AND SEPTEMBER 28,
2001 EXPENSES PAYMENTS 2002
------------- ---------- ----------- ---------------
$784 $2,070 $(2,747) $107
15. QUARTERLY STATEMENT OF OPERATIONS INFORMATION (UNAUDITED)
The following table presents a summary of quarterly results of operations for
2002, 2001 and 2000:
<TABLE>
<CAPTION>
2002
---------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenue $ 47,585 $ 46,401 $ 48,008 $ 48,198
Gross profit 17,669 18,028 18,148 17,971
Net (loss) income (1,573) 4,426 492 (3,166)
Diluted net income (loss) per common and
common equivalent share (0.10) 0.22 0.02 (0.16)
<CAPTION>
2001
---------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenue $ 44,978 $ 44,090 $ 45,380 $ 45,748
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
common equivalent share (0.44) (0.51) (0.08) (0.32)
</TABLE>
F-40
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
15. QUARTERLY STATEMENT OF OPERATIONS INFORMATION (UNAUDITED)(CONTINUED)
<TABLE>
<CAPTION>
2000
---------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenue $ 21,443 $ 23,359 $ 22,254 $ 27,281
Gross profit 8,263 9,728 8,108 4,043
Net loss (2,870) (2,184) (2,643) (10,922)
Diluted net loss per common and common
equivalent share (0.19) (0.14) (0.17) (0.72)
</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.
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.
The significant increase in net income in the second quarter of fiscal 2002 is
directly attributable to $4,500 tax benefit as a result of the signing of the
Ecomonic Stimulus Bill.
The significant decrease in net income in the fourth quarter of fiscal 2002 is
directly attributable to the $3,900 tax provision recorded to reduce our net
deferred tax asset to $3,600.
F-41
<PAGE>
Hologic, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
16. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND ACQUIRED WRITE-OFFS/ END OF
PERIOD EXPENSES RESERVES PAYMENTS PERIOD
------------ ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for Uncollectible Amounts
Period Ended:
September 28, 2002 $ 4,668 $ 742 $ - $ (845) $ 4,565
September 29, 2001 7,923 1,021 (1,702) (2,574) 4,668
September 30, 2000 3,480 1,965 3,226 (748) 7,923
Accrued Acquisition Reserve
Period Ended:
September 28, 2002 $ 1,708 $ - $ - $ (801) $ 907
September 29, 2001 2,000 (1,708) 1,416 - 1,708
September 30, 2000 - 2,000 - - 2,000
Allowance for Sales Returns
Period Ended:
September 28, 2002 $ 255 $ - $ - $ (127) $ 128
September 29, 2001 537 50 - (332) 255
September 30, 2000 - 252 285 - 537
Restructuring Accrual
September 28, 2002 $ 784 $ 2,070 $ - $ (2,747) $ 107
September 29, 2001 - 1,018 - (234) 784
September 30, 2000 - - - - -
</TABLE>
F-42
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.24
<SEQUENCE>3
<FILENAME>dex1024.txt
<DESCRIPTION>BILL OF SALE
<TEXT>
<PAGE>
EXHIBIT 10.24
BILL OF SALE
HOLOGIC, INC.,
a Delaware corporation
to
BONE (DE) QRS 15-12, INC.,
a Delaware corporation
KNOW ALL MEN BY THESE PRESENTS, that HOLOGIC, INC., a Delaware corporation
("Seller"), for and in consideration of Ten Dollars ($10.00) and other good and
valuable consideration, to it in hand paid by BONE (DE) QRS 15-12, INC., a
Delaware corporation ("Purchaser"), at or before the sealing and delivery of
these presents, the receipt and sufficiency of which is hereby acknowledged, has
granted, bargained, sold, transferred and delivered, and by these presents does
grant, bargain, sell, transfer and deliver unto Purchaser all and singular the
following described machinery and equipment owned by Seller and located on that
certain property situated in Bedford, Massachusetts as described on Exhibit A-1
attached hereto and made a part hereof and that certain property situated in
Danbury, Connecticut as described on Exhibit A-2 attached hereto and made a part
hereof (collectively, the "Premises"), to wit:
The machinery and equipment listed and described on Exhibit B attached
hereto and made a part hereof (the "Machinery and Equipment").
TO HAVE AND TO HOLD the Machinery and Equipment unto Purchaser, its
successors and assigns, to and for its own proper use and benefit forever.
AND Seller for itself and for its successors and assigns, does hereby
covenant with Purchaser, its successors and assigns, that it is the true and
lawful owner of the Machinery and Equipment hereby sold, and has full power to
sell and convey the same; that the title so conveyed is clear, free and
unencumbered; and further that it does warrant and will forever defend the same
against the claim or claims of all persons whomsoever claiming or to claim the
same or any part thereof.
IN WITNESS WHEREOF, Seller has caused its corporate name to be hereunto
subscribed and its corporate seal to be hereunto affixed, this 28th day of
August, 2002.
ATTEST: HOLOGIC, INC.
By: /s/ Colleen P. Hussey By: /s/ Glenn P. Muir
------------------------- -------------------------------------------
Title: Title: Treasurer and Executive Vice President,
---------------------- Finance and Administration
---------------------------------------
<PAGE>
EXHIBIT A-1
PROPERTY DESCRIPTION - BEDFORD, MASSACHUSETTS
That certain parcel of land situated in Bedford in the County of Middlesex,
Commonwealth of Massachusetts being shown as Lot 12 on a plan of land entitled
"Plan of Land in Bedford, Mass. (Middlesex County), Being a Subdivision of Lot 5
on Land Court Plan Number 34759C, Prepared for: Hologic, Inc., Scale 1" = 100'"
by the BSC Group, Inc. dated July 26, 2002, and containing approximately 152,128
square feet as shown on said plan. Said parcel of land is shown as Lot 12 on
Land Court Plan Number 34759F.
<PAGE>
EXHIBIT A-2
PROPERTY DESCRIPTION - DANBURY, CONNECTICUT
Parcel 1
A certain piece or parcel of land, with the buildings and improvements thereon,
located in the Town of Danbury, County of Fairfield and State of Connecticut,
more particularly bounded and described as follows:
Beginning at a point on the easterly highway line of Ye Old Road at the
northwesterly corner of the herein described parcel, thence running in an
easterly, southerly and easterly direction along the southerly boundary line of
land now or formerly of Seymour R. Powers, Trustee, et als (Parcel "Br") the
following courses and distances.
-----------------------------
N 70 DEG. 54' 11" E 320.000'
-----------------------------
S 19 DEG. 05' 49" E 69.445'
-----------------------------
N 72 DEG. 28' 55" E 93.118'
-----------------------------
to a point on the westerly highway line of Apple Ridge Road (property of Seymour
R. Powers, Trustee, et als) and the northeasterly corner of the herein described
parcel, thence running along said westerly highway line the following courses
and distances:
-----------------------------
S 20 DEG. 05' 04" E 111.00'
-----------------------------
thence along a curve to the left with a central angle of 87 DEG. 00' 19", a
radius of 365.00' and an arc length of 554.263' to a point, thence turning and
running in a southerly direction along land of Seymour R. Powers, Trustee, et
als on a course bearing S 17 DEG. 05' 23" E a distance of 91.332' to a point
on the northerly boundary line of land now or formerly of Mary A. Farwell,
thence turning and running along the northerly and westerly boundary lines of
said Mary A. Farwell the following courses and distances:
-----------------------------
S 49 DEG. 44' 28" W 611.97'
-----------------------------
S 30 DEG. 30' 08" E 135.00'
-----------------------------
to a point on the northerly highway line of Ye Old Road, thence turning and
running along the northerly and easterly highway lines of said Ye Old Road (an
unimproved highway) the following courses and distances:
-----------------------------
S 57 DEG. 15' 16" W 170.10'
-----------------------------
S 50 DEG. 48' 11" W 37.62'
-----------------------------
<PAGE>
-----------------------------
S 52 DEG. 15' 10" W 78.01'
-----------------------------
N 11 DEG. 49' 23" W 36.98'
-----------------------------
N 13 DEG. 35' 48" W 109.08'
-----------------------------
N 16 DEG. 35' 03" W 201.38'
-----------------------------
N 15 DEG. 44' 38" W 264.38'
-----------------------------
N 16 DEG. 19' 21" W 186.64'
-----------------------------
N 23 DEG. 48' 32" W 32.66'
-----------------------------
N 16 DEG. 56' 54" W 234.849'
-----------------------------
to the point of place of beginning. Said parcel contains 10.973 Acres and is
more particularly shown and described on a map entitled "ALTA/ACSM Land Title
Survey, Plan of Land in City of Danbury, Connecticut, Prepared for Hologic,
Inc.", Dated August 7, 2002 Prepared by the BSC Group, Inc., Rohan Freeman, L.S.
70046.
Together with the perpetual right to pass and repass over, through, under and
across the entire length and width of a certain roadway shown and designated as
Apple Ridge Road on the above referenced map, for the purpose of egress and
ingress and for the purpose of obtaining water, gas electric and telephone
service and other utilities, and for the purpose of installing thereon and
thereunder all improvements, equipment and appurtenances required for such
services and for such ingress and egress, to the above described premises from
the public highway known as Kenosia Avenue.
Together with a perpetual drainage and sewer easement as set forth in a deed
from Seymour R. Powers to Seymour R. Powers, Trustee dated September 5, 1989 and
recorded September 17, 1989 in Volume 931, Page 1002 of the Danbury Land
Records. Said easement was partially released by instrument dated May 8, 1996
and recorded in Book 1147, Page 1142 of the Danbury Land Records.
Together with the right to use, pass and repass for all purposes on, over,
across and under the roadway known as Ye Old Road, Danbury, Connecticut.
Together with and subject to the provisions of a Road Maintenance Agreement with
Thermotrex Corporation dated as of March 31, 1993 and recorded in Book 1045,
Page 238 of the Danbury Land Records.
Together with a scenic view easement as set forth in (i) a warranty deed from
Seymour R. Powers to Thermotrex Corporation dated March 26, 1993 and recorded
April 1, 1993 in Book 1043, Page 819 of the Danbury Land Records; (ii) a
warranty deed from Melvyn J. Powers to Thermotrex Corporation dated March 30,
1993 and recorded April 1, 1993 in Book 1043, Page 826 of the Danbury Land
Records; (iii) a trustee's deed from Melvyn J. Powers and Union Trust Company,
as trustees for Gary S. Kepniss, to Thermotrex Corporation dated March 30, 1993
and recorded April 1, 1993 in Book 1043, Page 833 of the Danbury Land Records;
(iv) a
<PAGE>
warranty deed from Alice Powers to Thermotrex Corporation dated March 26, 1993
and recorded April 1, 1993 in Book 1043, Page 812 of the Danbury Land Records;
(v) a trustee's deed from Seymour R. Powers, as trustee of the Seymour R. Powers
Revocable Trust Agreement, to Thermotrex Corporation dated March 26, 1993 and
recorded April 1, 1993 in Book 1043, Page 839 of the Danbury Land Records; and
(vi) a quitclaim deed from Pow-Dan II Corporation to Thermotrex Corporation
dated March 30, 1993 and recorded in Book 1043, Page 844 of the Danbury Land
Records.
Parcel 2
A certain piece or parcel of land, with any buildings and improvements thereon,
located in the Town of Danbury, County of Fairfield and State of Connecticut,
which parcel contains 0.434 Acres more particularly shown and described on map
No. 10206 of the Danbury Land Records and is more particularly bounded and
described as follows:
Beginning at a point on the easterly highway line of Ye Old Road at the
southeasterly corner of the herein described parcel, thence running west S
78 DEG. 10'37" W a distance of 17.50' to a point;
Thence running N 13 DEG. 58'10" W a distance of 144.99' to a point;
Thence running N 15 DEG. 22'00" W a distance of 57.18' to a point;
Thence running N 15 DEG. 37'24" W a distance of 144.37' to a point;
Thence running N 15 DEG. 0l'25" W a distance of 75.46' to a point;
Thence running N 16 DEG. 49'37' W a distance of 152.31' to a point;
Thence running N 16 DEG. 28'35" W a distance of 222.57' to a point;
Thence running N l9 DEG. 57'59" W a distance of 35.75' to a point;
Thence running N 17 DEG. 28'32" W a distance of 231.51' to a point; the last
eight courses running along land now or formerly of Wooster School Corp;
Thence running N 73 DEG. 03'06" E a distance of 18.95' to a point; which
point marks the northeasterly corner of the herein described parcel;
Thence running S 16 DEG. 56'54" E a distance of 234.849' to a point;
Thence running S 23 DEG. 48'32" E a distance of 32.66' to a point;
Thence running S 16 DEG. 19'21" E a distance of 186.64' to a point;
Thence running S 15 DEG. 44'38" E a distance of 264.38' to a point;
Thence running S 16 DEG. 35'03" E a distance of 201.38' to a point;
Thence running S 13 DEG. 35'48" E a distance of 109.08 to a point;
Thence running S 11 DEG. 49'23" E a distance of 36.98' to the point and place
of beginning; which last six courses are along Parcel 1 described herein.
<PAGE>
EXHIBIT B
MACHINERY AND EQUIPMENT
All fixtures, machinery, apparatus, equipment, fittings and appliances of every
kind and nature whatsoever now or hereafter affixed or attached to or installed
in any of the Premises (except as hereafter provided), including all electrical,
anti-pollution, heating, lighting (including hanging fluorescent lighting),
incinerating, power, air cooling, air conditioning, humidification, sprinkling,
plumbing, lifting, cleaning, fire prevention, fire extinguishing and ventilating
systems, devices and machinery and all engines, pipes, pumps, tanks (including
exchange tanks and fuel storage tanks), motors, conduits, ducts, steam
circulation coils, blowers, steam lines, compressors, oil burners, boilers,
doors, windows, loading platforms, lavatory facilities, stairwells, fencing
(including cyclone fencing), passenger and freight elevators, overhead cranes
and garage units, together with all additions thereto, substitutions therefor
and replacements thereof required or permitted by that certain Lease Agreement
of even date hereof between Purchaser, as landlord, and Seller, as tenant, but
excluding all trade fixtures and all personal property, including without
limitation all machinery, office, manufacturing and warehouse equipment and
furniture used in connection with the operation of Seller's business and which
are not necessary to the operation of the buildings which constitute part of the
Premises.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.25
<SEQUENCE>4
<FILENAME>dex1025.txt
<DESCRIPTION>DEED (DANBURY)
<TEXT>
<PAGE>
EXHIBIT 10.25
SPECIAL WARRANTY DEED
TO ALL PEOPLE TO WHOM THESE PRESENTS SHALL COME, GREETING:
KNOW YE, That HOLOGIC, INC., a Delaware corporation with an office at 35
Crosby Drive, Bedford, Massachusetts ("Grantor"), for good and valuable
consideration received to Grantor's full satisfaction does give, grant, bargain,
sell and confirm unto the said BONE (DE) QRS 15-12, Inc., a Delaware corporation
with an address c/o W.P. Carey & Co., LLC, 50 Rockefeller Plaza, Second Floor,
New York, New York 10020 ("Grantee"), and to the Grantee's successors, and
assigns forever all of its right, title, interest, claim and demand whatsoever
in the premises bounded and described in Exhibit A attached hereto and made a
part hereof ("Premises").
TO HAVE AND TO HOLD the above-granted and bargained Premises, with the
appurtenances thereof unto the said Grantee, its successors and assigns forever,
to Grantee and its own proper use and behoof.
AND ALSO, the said Grantor does for his heirs, executors, administrators,
successors and assigns covenant with the said Grantee, its successors and
assigns, that at and until the ensealing of these presents Grantor is well
seised of the Premises, has a good indefeasible estate in fee simple; and has
good right to bargain and sell the same in manner and form as is above written;
and that the same is free from all encumbrances created by or through Grantor
only (and none other), subject to and with the benefit of all restrictions,
easements, covenants, conditions, agreements and other appurtenant rights of
record.
AND FURTHERMORE, the said Grantor does by these presents bind himself and
his heirs, successors and assigns forever to warrant and defend the above
granted and bargained Premises to the said Grantee, its successors and assigns,
against defects, liens and encumbrances created by or through Grantor only (and
none other), except as hereinbefore mentioned.
IN WITNESS WHEREOF, Grantor has caused these presents to be signed by its
corporate officer and its corporate seal to be hereto affixed this 28th day of
August, 2002.
Signed, sealed and delivered in
the presence of or attested by: HOLOGIC, INC., a Delaware corporation
/s/ Stephen P. Campbell By: /s/ Glenn P. Muir
- ------------------------------- -----------------------------------
Name: Glenn P. Muir
Title: Treasurer and Executive Vice
President, Finance and
Administration
/s/ Carl E. Axelrod
- -------------------------------
<PAGE>
COMMONWEALTH OF MASSACHUSETTS )
) ss.
COUNTY OF SUFFOLK )
Before me, the undersigned, this 26th day of August, 2002, personally appeared
Glenn P. Muir, known to me to be the Treasurer and Executive Vice President -
Finance and Administration of Hologic, Inc., and that he as such officer, signer
and sealer of the foregoing instrument, acknowledged the execution of the same
to be his free act and deed as such officer, and the free act and deed of said
Hologic, Inc.
In Witness Whereof, I hereunto set my hand.
/s/ Colleen P. Hussey
-------------------------------------
Commissioner of the Superior Court
Notary Public
My Commission Expires: June 14, 2007
<PAGE>
EXHIBIT A
Legal Description of Premises
PARCEL 1
A certain piece or parcel of land, with the buildings and improvements thereon,
located in the Town of Danbury, County of Fairfield and State of Connecticut,
more particularly bounded and described as follows:
Beginning at a point on the easterly highway line of Ye Old Road at the
northwesterly corner of the herein described parcel, thence running in an
easterly, southerly and easterly direction along the southerly boundary line of
land now or formerly of Seymour R. Powers, Trustee, et als (Parcel "Br") the
following courses and distances.
N 70 DEG. 54'11" E 320.000'
S 19 DEG. 05'49" E 69.445'
N 72 DEG. 28'55" E 93.118'
to a point on the westerly highway line of Apple Ridge Road (property of Seymour
R. Powers, Trustee, et als) and the northeasterly corner of the herein described
parcel, thence running along said westerly highway line the following courses
and distances:
S 20 DEG. 05'04" E 111.00'
thence along a curve to the left with a central angle of 87 DEG. 00'19", a
radius of 365.00' and an arc length of 554.263' to a point, thence turning and
running in a southerly direction along land of Seymour R. Powers, Trustee, et
als on a course bearing S 17 DEG. 05'23" E a distance of 91.332' to a point
on the northerly boundary line of land now or formerly of Mary A. Farwell,
thence turning and running along the northerly and westerly boundary lines of
said Mary A. Farwell the following courses and distances:
S 49 DEG. 44'28" W 611.97'
S 30 DEG. 30'08" E 135.00'
to a point on the northerly highway line of Ye Old Road, thence turning and
running along the northerly and easterly highway lines of said Ye Old Road (an
unimproved highway) the following courses and distances:
S 57 DEG. 15'16" W 170.10'
S 50 DEG. 48'11" W 37.62'
S 52 DEG. 15'10" W 78.01'
N 11 DEG. 49'23" W 36.98'
N 13 DEG. 35'48" W 109.08'
N 16 DEG. 35'03" W 201.38'
N 15 DEG. 44'38" W 264.38'
N 16 DEG. 19'21" W 186.64'
<PAGE>
N 23 DEG. 48'32" W 32.66'
N 16 DEG. 56'54" W 234.849'
to the point of place of beginning. Said parcel contains 10.973 Acres and is
more particularly shown and described on a map entitled "ALTA/ACSM Land Title
Survey, Plan of Land in City of Danbury, Connecticut, Prepared for Hologic,
Inc.", Dated August 7, 2002 Prepared by the BSC Group, Inc., Rohan Freeman, L.S.
70046.
Together with the perpetual right to pass and repass over, through, under and
across the entire length and width of a certain roadway shown and designated as
Apple Ridge Road on the above referenced map, for the purpose of egress and
ingress and for the purpose of obtaining water, gas electric and telephone
service and other utilities, and for the purpose of installing thereon and
thereunder all improvements, equipment and appurtenances required for such
services and for such ingress and egress, to the above described premises from
the public highway known as Kenosia Avenue.
Together with a perpetual drainage and sewer easement as set forth in a deed
from Seymour R. Powers to Seymour R. Powers, Trustee dated September 5, 1989 and
recorded September 17, 1989 in Volume 931, Page 1002 of the Danbury Land
Records. Said easement was partially released by instrument dated May 8, 1996
and recorded in Book 1147, Page 1142 of the Danbury Land Records.
Together with the right to use, pass and repass for all purposes on, over,
across and under the roadway known as Ye Old Road, Danbury, Connecticut.
Together with and subject to the provisions of a Road Maintenance Agreement with
Thermotrex Corporation dated as of March 31, 1993 and recorded in Book 1045,
Page 238 of the Danbury Land Records.
Together with a scenic view easement as set forth in (i) a warranty deed from
Seymour R. Powers to Thermotrex Corporation dated March 26, 1993 and recorded
April 1, 1993 in Book 1043, Page 819 of the Danbury Land Records; (ii) a
warranty deed from Melvyn J. Powers to Thermotrex Corporation dated March 30,
1993 and recorded April 1, 1993 in Book 1043, Page 826 of the Danbury Land
Records; (iii) a trustee's deed from Melvyn J. Powers and Union Trust Company,
as trustees for Gary S. Kepniss, to Thermotrex Corporation dated March 30, 1993
and recorded April 1, 1993 in Book 1043, Page 833 of the Danbury Land Records;
(iv) a warranty deed from Alice Powers to Thermotrex Corporation dated March 26,
1993 and recorded April 1, 1993 in Book 1043, Page 812 of the Danbury Land
Records; (v) a trustee's deed from Seymour R. Powers, as trustee of the Seymour
R. Powers Revocable Trust Agreement, to Thermotrex Corporation dated March 26,
1993 and recorded April 1, 1993 in Book 1043, Page 839 of the Danbury Land
Records; and (vi) a quitclaim deed from Pow-Dan II Corporation to Thermotrex
Corporation dated March 30, 1993 and recorded in Book 1043, Page 844 of the
Danbury Land Records.
PARCEL 2
<PAGE>
A certain piece or parcel of land, with any buildings and improvements thereon,
located in the Town of Danbury, County of Fairfield and State of Connecticut,
which parcel contains 0.434 Acres more particularly shown and described on map
No. 10206 of the Danbury Land Records and is more particularly bounded and
described as follows:
Beginning at a point on the easterly highway line of Ye Old Road at the
southeasterly corner of the herein described parcel, thence running west S
78 DEG. 10' 37" W a distance of 17.50' to a point;
Thence running N 13 DEG. 58'10" W a distance of 144.99' to a point;
Thence running N 15 DEG. 22'00" W a distance of 57.18' to a point;
Thence running N 15 DEG. 37'24" W a distance of 144.37' to a point;
Thence running N 15 DEG. 0l'25" W a distance of 75.46' to a point;
Thence running N 16 DEG. 49'37' W a distance of 152.31' to a point;
Thence running N 16 DEG. 28'35" W a distance of 222.57' to a point;
Thence running N l9 DEG. 57'59" W a distance of 35.75' to a point;
Thence running N 17 DEG. 28'32" W a distance of 231.51' to a point; the last
eight courses running along land now or formerly of Wooster School Corp;
Thence running N 73 DEG. 03'06" E a distance of 18.95' to a point; which
point marks the northeasterly corner of the herein described parcel;
Thence running S 16 DEG. 56'54" E a distance of 234.849' to a point;
Thence running S 23 DEG. 48'32" E a distance of 32.66' to a point;
Thence running S 16 DEG. 19'21" E a distance of 186.64' to a point;
Thence running S 15 DEG. 44'38" E a distance of 264.38' to a point;
Thence running S 16 DEG. 35'03" E a distance of 201.38' to a point;
Thence running S 13 DEG. 35'48" E a distance of 109.08 to a point;
Thence running S 11 DEG. 49'23" E a distance of 36.98' to the point and place
of beginning; which last six courses are along Parcel 1 described herein.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.26
<SEQUENCE>5
<FILENAME>dex1026.txt
<DESCRIPTION>DEED (BEDFORD)
<TEXT>
<PAGE>
EXHIBIT 10.26
QUITCLAIM DEED
Hologic, Inc., a Delaware corporation having a place of business at 35
Crosby Drive, Bedford, MA ("Grantor"), for consideration of Twenty Six Million
Two Hundred Fifty Thousand and 00/100 Dollars ($26,250,000.00) paid, hereby
grants to BONE (DE) QRS 15-12, Inc., a Delaware corporation having a place of
business c/o W.P. Carey & Co., LLC, 50 Rockefeller Plaza, Second Floor, New
York, New York 10020, with QUITCLAIM COVENANTS.
That certain parcel of land situated in Bedford in the County of Middlesex,
Commonwealth of Massachusetts being shown as Lot 12 on a plan of land entitled
"Plan of Land in Bedford, Mass. (Middlesex County), Being a Subdivision of Lot 5
on Land Court Plan Number 34759C, Prepared for: Hologic, Inc., Scale 1" = 100'"
by the BSC Group, Inc. dated July 26, 2002, and containing approximately 903,621
square feet as shown on said plan. Said parcel of land is shown as Lot 12 on
Land Court Plan Number 34759F.
The premises are conveyed subject to, and with the benefit of, all
restrictions, easements, covenants, conditions, agreements, and other
appurtenant rights of record insofar as the same may be now in force and
applicable.
Being a portion of the premises conveyed to Grantor by deed dated July 27,
1998 filed with the Middlesex South Registry District of the Land Court as
Document No. 1074531 and Transfer Certificate No. 212281.
This conveyance does not constitute a sale or transfer of all or
substantially all of the assets of Grantor in Massachusetts.
Deed stamps in the amount of $119,700.00 are affixed to this deed.
IN WITNESS WHEREOF, said Hologic, Inc. has caused this instrument to be
executed under seal, this 4th day of September, 2002.
Hologic, Inc.
By: /s/ Glenn P. Muir
------------------------------------
Name: Glenn P. Muir
Title: Treasurer and Executive Vice President, Finance and Administration
Hereunto duly authorized
COMMONWEALTH OF MASSACHUSETTS
Middlesex, ss September 4, 2002
Then personally appeared before me Glenn P. Muir, the Treasurer and
Executive Vice President, Finance and Administration, of Hologic, Inc., who
acknowledged that he executed the foregoing instrument as his free act and deed
in such capacity and the free act and deed of Hologic, Inc.
/s/ Laureen E. McQuaid
--------------------------------
Notary Public Laureen E. McQuaid
My Commission Expires: 6/5/09
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.27
<SEQUENCE>6
<FILENAME>dex1027.txt
<DESCRIPTION>LEASE AGREEMENT
<TEXT>
<PAGE>
EXHIBIT 10.27
LEASE AGREEMENT
by and between
BONE (DE) QRS 15-12, INC.,
a Delaware corporation
as LANDLORD
and
HOLOGIC, INC.,
a Delaware corporation,
as TENANT
Premises: 35 Crosby Drive, Bedford, MA
36 Apple Ridge, Danbury, CT
Dated as of: August 28th, 2002
<PAGE>
TABLE OF CONTENTS
PAGE
LEASE SUMMARY SHEET................................................. iii
LEASE GRANT; TITLE; CONDITION AND NON-TERMINABILITY; SINGLE LEASE... 1
CERTAIN DEFINITIONS................................................. 3
EXTENSION TERMS; NOTICE OF LEASE.................................... 10
USE................................................................. 11
RENT................................................................ 11
IMPOSITIONS......................................................... 13
MAINTENANCE AND REPAIRS............................................. 14
ALTERATIONS......................................................... 15
ASSIGNMENT AND SUBLETTING........................................... 17
LEASEHOLD MORTGAGE.................................................. 21
ENCUMBRANCES BY LANDLORD............................................ 21
RIGHT OF FIRST OFFER................................................ 22
INTENTIONALLY DELETED............................................... 24
LIMITED RIGHT OF FIRST REFUSAL...................................... 24
INSURANCE........................................................... 25
INDEMNIFICATION..................................................... 29
CASUALTY; CONDEMNATION.............................................. 30
TERMINATION EVENTS.................................................. 31
RESTORATION......................................................... 32
PROCEDURES UPON PURCHASE............................................ 34
ACCESS TO THE PREMISES.............................................. 35
ENVIRONMENTAL MATTERS............................................... 36
SUBDIVISION OF BEDFORD PREMISES & POST CLOSING OBLIGATIONS.......... 37
EVENTS OF DEFAULT................................................... 38
REMEDIES AND DAMAGES UPON DEFAULT................................... 40
ESTOPPEL CERTIFICATES............................................... 43
LEGAL REQUIREMENTS.................................................. 43
SURRENDER; HOLD-OVER................................................ 44
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
PAGE
NO MERGER OF TITLE.................................................. 44
BOOKS AND RECORDS................................................... 45
SIGNAGE............................................................. 45
QUIET ENJOYMENT..................................................... 46
NOTICES............................................................. 46
FINANCIAL COVENANTS; SECURITY DEPOSIT............................... 46
NON-RECOURSE........................................................ 48
MISCELLANEOUS....................................................... 48
EXHIBITS
Exhibit A Legal Description of Land
Exhibit B Description of Equipment
Exhibit C Permitted Encumbrances
Exhibit D Basic Rent Payments
Exhibit E Percentage Allocation of Basic Rent
Exhibit F Covenants
Exhibit G Termination Values
Exhibit H Form of Leasehold Mortgage Agreement
Exhibit 1 Legal Description
Exhibit 2 Equipment
Exhibit I Form Of Recognition Agreement
Exhibit J Plan Of 3-Acre Parcel
Exhibit K Tenant's Post-Closing Environmental Obligations
-ii-
<PAGE>
LEASE SUMMARY SHEET
Commencement Date: August 28, 2002
Tenant: Hologic, Inc., a Delaware corporation
35 Crosby Drive
Bedford, MA 01730
Landlord: BONE (DE) QRS 15-12, INC., a Delaware corporation
Bedford Premises: That certain parcel of land, consisting of
approximately 20.74 acres and more particularly
described on Exhibit A attached hereto and
incorporated herein (the "Bedford Land"),
together with all of the improvements now or
hereafter constructed on the Land, including,
without limitation, that certain building (the
"Bedford Building") containing approximately
207,000 square feet and commonly known as 35
Crosby Drive, Bedford, MA (the "Bedford
Improvements") and the fixtures, machinery,
equipment and other property described in
Exhibit B attached hereto and incorporated
herein (collectively, the "Bedford Equipment"),
and the appurtenances, rights, privileges and
easements benefiting, belonging or pertaining
thereto.
Danbury Premises: That certain parcel of land, consisting of
approximately 11.4 acres and more particularly
described on Exhibit A-2 attached hereto and
incorporated herein (the "Danbury Land"),
together with all of the improvements now or
hereafter constructed on the Danbury Land,
including, without limitation, that certain
building (the "Danbury Building") containing
approximately 62,042 square feet and commonly
known as 36 Apple Ridge Way, Danbury, CT (the
"Danbury Improvements") and the fixtures,
machinery, equipment and other property
described in Exhibit B attached hereto and
incorporated herein (collectively, the "Danbury
Equipment"), and the appurtenances, rights,
privileges and easements benefiting, belonging
or pertaining thereto.
Initial Term: Commencing on the Commencement Date and expiring
on the twentieth anniversary of the last day of
the month in which the Commencement Date occurs,
unless earlier terminated or extended as set
forth herein.
Extension Terms: Four (4) options to extend the Initial Term for
five (5) years each, as more particularly set
forth in Section 3 below.
Basic Rent: See Exhibit "D"
Right of First Offer: See Section 12.
Limited Right of First
Refusal: See Section 14.
iii
<PAGE>
LEASE AGREEMENT
This Lease ("Lease") dated as of the Commencement Date is hereby entered
into by and between Landlord and Tenant.
Each reference in this Lease to any of the terms and titles contained in
any Exhibit attached to this Lease shall be deemed and construed to incorporate
the data stated under that term or title in such Exhibit. All capitalized terms
not otherwise defined herein shall have the meanings ascribed to them as set
forth in the Lease Summary Sheet which is attached hereto and incorporated
herein by reference.
1. LEASE GRANT; TITLE; CONDITION AND NON-TERMINABILITY; SINGLE LEASE.
(a) Upon and subject to the terms, conditions, covenants and
provisions hereof, Landlord hereby leases to Tenant, and Tenant hereby leases
from Landlord, the Premises for the Term.
(b) The Premises are leased subject to (i) applicable Legal
Requirements (hereinafter defined), (ii) the existing state of title of the
Premises, including any Permitted Encumbrances (hereinafter defined), (iii) any
state of facts which an accurate survey or physical inspection of the Premises
might show, (iv) rights of parties in possession and (v) the condition of the
Premises as of the Commencement Date, without representation or warranty by
Landlord.
(c) Tenant acknowledges that the Premises are in good condition and
repair at the inception of this Lease. LANDLORD LEASES AND WILL LEASE AND TENANT
TAKES AND WILL TAKE THE PREMISES AS IS. TENANT ACKNOWLEDGES THAT LANDLORD
(WHETHER ACTING AS LANDLORD HEREUNDER OR IN ANY OTHER CAPACITY) HAS NOT MADE AND
WILL NOT MAKE, NOR SHALL LANDLORD BE DEEMED TO HAVE MADE, ANY WARRANTY OR
REPRESENTATION, EXPRESS OR IMPLIED, WITH RESPECT TO ANY OF THE PREMISES,
INCLUDING ANY WARRANTY OR REPRESENTATION AS TO (i) THEIR FITNESS, DESIGN OR
CONDITION FOR ANY PARTICULAR USE OR PURPOSE, (ii) THE QUALITY OF THE MATERIAL OR
WORKMANSHIP THEREIN, (iii) THE EXISTENCE OF ANY DEFECT, LATENT OR PATENT, (iv)
LANDLORD'S TITLE THERETO, (v) VALUE, (vi) COMPLIANCE WITH SPECIFICATIONS, (vii)
LOCATION, (viii) USE, (ix) CONDITION, (x) MERCHANTABILITY, (xi) QUALITY, (xii)
DESCRIPTION, (xiii) DURABILITY, (xiv) OPERATION, (xv) THE EXISTENCE OF ANY
HAZARDOUS SUBSTANCE, HAZARDOUS CONDITION OR HAZARDOUS ACTIVITY OR (xvi)
COMPLIANCE OF THE PREMISES WITH ANY APPLICABLE LAW OR LEGAL REQUIREMENT; AND ALL
RISKS INCIDENTAL THERETO ARE TO BE BORNE BY TENANT. TENANT ACKNOWLEDGES THAT THE
PREMISES ARE OF ITS SELECTION AND TO ITS SPECIFICATIONS AND THAT THE PREMISES
HAVE BEEN INSPECTED BY TENANT AND ARE SATISFACTORY TO IT. IN THE EVENT OF ANY
DEFECT OR DEFICIENCY IN ANY OF THE PREMISES OF ANY NATURE, WHETHER LATENT OR
PATENT, LANDLORD SHALL NOT HAVE ANY RESPONSIBILITY OR LIABILITY WITH RESPECT
THERETO OR FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING STRICT
1
<PAGE>
LIABILITY IN TORT). THE PROVISIONS OF THIS SECTION 1(c) HAVE BEEN NEGOTIATED,
AND ARE INTENDED TO BE A COMPLETE EXCLUSION AND NEGATION OF ANY WARRANTIES BY
LANDLORD, EXPRESS OR IMPLIED, WITH RESPECT TO ANY OF THE PREMISES, ARISING
PURSUANT TO THE UNIFORM COMMERCIAL CODE OR ANY OTHER APPLICABLE LAW NOW OR
HEREAFTER IN EFFECT OR ARISING OTHERWISE.
(d) Tenant represents to Landlord that Tenant has examined the title
to the Premises prior to the execution and delivery of this Lease and has found
the same to be satisfactory for the purposes contemplated hereby. Tenant
acknowledges that (i) except as provided in Section 12 hereof with respect to a
right of first offer, and Section 14 with respect to a limited right of first
refusal, Tenant has only the leasehold right of possession and use of the
Premises, as provided herein and (ii) all contractors and subcontractors who
have performed work on or supplied materials to the Premises have been fully
paid, and all materials and supplies have been fully paid for.
(e) This Lease and the rights of Landlord and the obligations of
Tenant hereunder shall not be affected by any event or for any reason or cause
whatsoever foreseen or unforeseen. The obligations of Tenant hereunder shall be
separate and independent covenants and agreements, all Monetary Obligations (as
hereinafter defined) shall continue to be payable in all events (or, in lieu
thereof, Tenant shall pay amounts equal thereto), and the obligations of Tenant
hereunder shall continue unaffected unless the requirement to pay or perform the
same shall have been terminated or modified pursuant to an express provision of
this Lease. All Rent payable by Tenant hereunder shall constitute "rent" for all
purposes (including Section 502(b)(6) of the Federal Bankruptcy Code).
(f) Tenant, on behalf of itself and any trustee or legal
representative (under the Federal Bankruptcy Code or any similar state
insolvency proceeding) expressly acknowledges and agrees that, notwithstanding
any provision in this Lease to the contrary, it is the express intent of
Landlord and Tenant to create, and that this Lease constitutes, a single lease
with respect to each and every parcel of Land, Improvements and Equipment
included in the Premises (wherever located), and this Lease shall not be (or be
deemed to be) divisible or severable into separate leases for any purpose
whatsoever, and Tenant, on behalf of itself and any such trustee or legal
representative, hereby waives any right to claim or assert a contrary position
in any action or proceeding. Tenant further acknowledges and agrees that the
allocation of Acquisition Cost and Basic Rent are included to provide a formula
for Basic Rent adjustment and lease termination under certain circumstances and
as an accommodation to Tenant. Any Event of Default hereunder in connection with
either the Bedford Premises or the Danbury Premises shall be deemed to be an
Event of Default with respect to the entire Premises (wherever located). The
foregoing agreements and waivers by Tenant in this Paragraph 1(f) are made as a
material inducement to Landlord to enter into the transaction contemplated by
this Lease and that, but for the foregoing agreements and waivers by Tenant,
Landlord would not consummate this Lease transaction.
2
<PAGE>
2. CERTAIN DEFINITIONS.
"3-acre Parcel" shall mean that parcel containing approximately
3.4 acres and designated as Lot 13 on Land Court Plan No. 34759F on file with
the Middlesex South Registry of Deeds, a copy of which is attached hereto as
Exhibit "J".
"Acquisition Cost" shall mean $33,769,634, of which $27,486,911
is allocated to the Bedford Premises and $6,282,723 is allocated to the Danbury
Premises.
"Additional Rent" shall mean Additional Rent as defined in
Section 5.
"Adjoining Property" shall mean all sidewalks, driveways, curbs,
gores and vault spaces adjoining any of the Premises.
"Affiliate" shall mean with respect to a specified Person,
another Person who is controlled by, in control of, or under common control with
the Person specified, and for purposes of this definition, "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of a Person, whether through the ability
to exercise voting power, by contract or otherwise.
"Alterations" shall mean all changes, additions or improvements
to, all alterations, reconstructions or removals of and all substitutions or
replacements for any of the Improvements or Equipment, both interior and
exterior, structural and non-structural, and ordinary and extraordinary.
"Appurtenances" shall mean all tenements, hereditaments,
easements, rights-of-way, rights, privileges in and to the Land, including (a)
easements over other lands granted by any Easement Agreement and (b) any
streets, ways, alleys, vaults, gores or strips of land adjoining the Land.
"Assignment" shall mean any assignment of rents and leases from
Landlord to a Lender which (a) encumbers any of the Premises and (b) secures
Landlord's obligation to repay a Loan, as the same may be amended, supplemented
or modified from time to time.
"Basic Rent" shall mean, collectively, Basic Rent for the Bedford
Premises and Basic Rent for the Danbury Premises as set forth in Exhibit "D".
"Basic Rent Payment Dates" shall mean the Basic Rent Payment
Dates as defined in Section 5.
"Bedford Building" shall mean Bedford Building as defined in the
Lease Summary Sheet.
3
<PAGE>
"Bedford Premises" shall mean Bedford Premises as defined in the
Lease Summary Sheet.
"Business day(s)" shall mean any day except Saturday, Sunday or
days on which national banks in the Commonwealth of Massachusetts are closed for
business.
"Casualty" shall mean any damage to or destruction of or which
affects the Premises.
"Commencement Date" shall mean Commencement Date as defined in
the Lease Summary Sheet.
"Competitor" shall mean a direct business competitor of Tenant in
any area of Tenant's business which accounts for more than five percent (5%) of
Tenant's gross revenue at the time.
"Condemnation" shall mean (a) any taking of all or a portion of
any of the Premises (i) in or by condemnation or other eminent domain
proceedings pursuant to any Law, general or special, or (ii) by reason of any
agreement with any condemnor in settlement of or under threat of any such
condemnation or other eminent domain proceeding, or (b) any de facto
condemnation.
"Condemnation Notice" shall mean notice or knowledge of the
institution of or intention to institute any proceeding for Condemnation.
"Costs" of a Person or associated with a specified transaction
shall mean all reasonable costs and expenses incurred by such Person or
associated with such transaction, including without limitation, attorneys' fees
and expenses.
"Covenants" shall mean the covenants and agreements described on
Exhibit "F".
"CPA 15" shall mean CPA 15 as defined in Paragraph 12(e).
"CPI Ratio" shall mean a fraction, the numerator of which is the
CPI-U in effect as of the calendar month two (2) months before the applicable
adjustment date, and the denominator of which is the CPI-U in effect as of the
calendar month fourteen (14) months before the applicable adjustment date.
"CPI-U" shall mean the Consumer Price Index as published by the
United States Department of Labor, Bureau of Labor Statistics for all Urban
Consumers, Boston, Subgroup "all items" (1982-84=100).
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"Danbury Building" shall mean Danbury Building as defined in the
Lease Summary Sheet.
"Danbury Premises" shall mean Danbury Premises as defined in the
Lease Summary Sheet.
"Default Rate" shall mean the Default Rate as defined in Section
5(c)(iv).
"Easement Agreement" shall mean any conditions, covenants,
restrictions, easements, declarations, licenses and other agreements listed as
Permitted Encumbrances or as may hereafter be agreed to in writing by Tenant.
"Environmental Law" shall mean (i) whenever enacted or
promulgated, any applicable federal, state and local law, statute, ordinance,
rule, regulation, license, permit, authorization, approval, consent, court
order, judgment, decree, injunction, code, requirement or agreement with any
governmental entity, (x) relating to pollution (or the cleanup thereof), or the
protection of air, water vapor, surface water, groundwater, drinking water
supply, land (including land surface or subsurface), plant, aquatic and animal
life from injury caused by a Hazardous Substance, or (y) concerning exposure to,
or the use, containment, storage, recycling, reclamation, reuse, treatment,
generation, discharge, transportation, processing, handling, labeling,
production, disposal or remediation of Hazardous Substances, Hazardous
Conditions or Hazardous Activities, in each case as amended and as now or
hereafter in effect, and (ii) any common law or equitable doctrine (including,
without limitation, injunctive relief and tort doctrines such as negligence,
nuisance, trespass and strict liability) that may impose liability or
obligations or injuries or damages due to or threatened as a result of the
presence of, exposure to, or ingestion of, any Hazardous Substance. The term
Environmental Law includes, without limitation, the federal Comprehensive
Environmental Response Compensation and Liability Act of 1980, the Superfund
Amendments and Reauthorization Act, the federal Water Pollution Control Act, the
federal Clean Air Act, the federal Clean Water Act, the federal Resources
Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste
Amendments to RCRA), the federal Solid Waste Disposal Act, the federal Toxic
Substance Control Act, the federal Insecticide, Fungicide and Rodenticide Act,
the federal Occupational Safety and Health Act of 1970, the federal National
Environmental Policy Act and the federal Hazardous Materials Transportation Act,
each as amended and as now or hereafter in effect and any similar state or local
Law.
"Environmental Violation" shall mean (a) any direct or indirect
discharge, disposal, spillage, emission, escape, pumping, pouring, injection,
leaching, release, seepage, filtration or transporting of any Hazardous
Substance at, upon, under, onto or within the Premises, or from the Premises to
the environment, in violation of any Environmental Law or in excess of any
reportable quantity established under any Environmental Law or which is
reasonably likely to result in any liability to Landlord, Tenant or Lender, any
Federal, state or local government or any other Person for the costs of any
removal or remedial action or natural
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resources damage or for bodily injury or property damage, (b) any deposit,
storage, dumping, placement or use of any Hazardous Substance at, upon, under or
within the Premises or which extends to any Adjoining Property in violation of
any Environmental Law or in excess of any reportable quantity established under
any Environmental Law or which is reasonably likely to result in any liability
to any Federal, state or local government or to any other Person for the costs
of any removal or remedial action or natural resources damage or for bodily
injury or property damage, (c) the abandonment or discarding of any barrels,
containers or other receptacles containing any Hazardous Substances at, upon,
under, onto, within or from the Premises in violation of any Environmental Laws,
(d) any activity, occurrence or condition which is reasonably likely to result
in any liability, cost or expense to Landlord or Lender or any other owner or
occupier of the Premises, or which is reasonably likely to result in a creation
of a lien on the Premises under any Environmental Law, or (e) any violation of
or noncompliance with any Environmental Law which, in any such case of
subsections (a) through (e) above, occurs, exists or arises prior to the
expiration or termination of this Lease.
"Equipment" shall mean, collectively, the Bedford Equipment and
the Danbury Equipment.
"Event of Default" shall mean an Event of Default as defined in
Section 24.
"Expansions" shall mean any addition to the Bedford Building or
the Danbury Premises which increases square footage and requires the
reconstruction of any exterior wall.
"Extension Notice" shall mean Extension Notice as defined in
Section 3.
"Extension Term(s)" shall mean Extension Term as defined in the
Lease Summary Sheet and Section 3.
"Fair Market Rental Value" shall mean the fair market rental
value of the Premises for the relevant Extension Term determined in accordance
with the procedure specified in Exhibit "D".
"Federal Funds" shall mean federal or other immediately available
funds which at the time of payment are legal tender for the payment of public
and private debts in the United States of America.
"GAAP" shall mean generally accepted accounting principles,
consistently applied.
"Hazardous Activity" means any activity, process, procedure or
undertaking which directly or indirectly (i) procures, generates or creates any
Hazardous
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Substance; (ii) causes or results in (or threatens to cause or result in) the
release, seepage, spill, leak, flow, discharge or emission of any Hazardous
Substance into the environment (including the air, ground water, watercourses or
water systems); (iii) involves the containment or storage of any Hazardous
Substance; or (iv) would cause the Premises or any portion thereof to become a
hazardous waste treatment, recycling, reclamation, processing, storage or
disposal facility within the meaning of any Environmental Law.
"Hazardous Condition" means any condition which would support any
claim or liability under any Environmental Law, including the presence of
underground storage tanks.
"Hazardous Substance" means (i) any substance, material, product,
petroleum, petroleum product, derivative, compound or mixture, mineral
(including asbestos), chemical, gas, medical waste, or other pollutant, in each
case whether naturally occurring, man-made or the by-product of any process,
that is toxic, harmful or hazardous or acutely hazardous to the environment or
public health or safety or (ii) any substance supporting a claim under any
Environmental Law, whether or not defined as hazardous as such under any
Environmental Law. Hazardous Substances include, without limitation, any toxic
or hazardous waste, pollutant, contaminant, industrial waste, petroleum or
petroleum-derived substances or waste, radon, radioactive materials, asbestos,
asbestos containing materials, urea formaldehyde foam insulation, lead and
polychlorinated biphenyls.
"Impositions" shall mean the Impositions as defined in Section 6.
"Improvements" shall mean, collectively, the Bedford Improvements
and the Danbury Improvements.
"Indemnitee" shall mean an Indemnitee as defined in Section 16.
"Initial Term" shall mean Initial Term as defined in the Lease
Summary Sheet.
"Insurance Requirements" shall mean the requirements of all
insurance policies required to be maintained in accordance with this Lease.
"Land" shall mean, collectively, the Bedford Land and the Danbury
Land.
"Landlord's Non-Bifurcation Obligation" shall mean Landlord's
obligation not to offer to sell to any Person only the Bedford Premises or only
the Danbury Premises.
"Landlord Parties" shall mean Landlord, its agents and employees.
"Law" shall mean any constitution, statute, rule of law, code,
ordinance, order, judgment, decree, injunction, rule, regulation, policy,
requirement or administrative or
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judicial determination, even if unforeseen or extraordinary, of every duly
constituted governmental authority, court or agency, now or hereafter enacted or
in effect.
"Lease" shall mean this Lease Agreement.
"Lease Summary Sheet" shall mean the Lease Summary Sheet attached
hereto which is incorporated in this Lease and made a part hereof.
"Lease Year" shall mean, with respect to the first Lease Year,
the period commencing on the Commencement Date and ending at midnight on the
last day of the twelfth (12th) consecutive calendar month following the month in
which the Commencement Date occurred, and each succeeding twelve (12) month
period during the Term.
"Leasehold Mortgage" shall mean any first lien leasehold
mortgage, deed of trust, pledge or similar security device covering all of
Tenant's leasehold estate in the Premises.
"Leasehold Mortgagee" shall mean a national banking association,
state chartered bank, savings and loan association, insurance company, savings
bank, foreign bank authorized to do business in the United States, trust
company, real estate investment trust or pension fund, each of which shall have
net assets in excess of $500,000,000.
"Legal Requirements" shall mean the requirements of all present
and future Laws (including but not limited to Environmental Laws and Laws
relating to accessibility to, usability by, and discrimination against, disabled
individuals) and all covenants, restrictions and conditions now or hereafter of
record which may be applicable to Tenant or to any of the Premises, or to the
use, manner of use, occupancy, possession, operation, maintenance, alteration,
repair or restoration of any of the Premises, even if compliance therewith
necessitates structural changes or improvements or results in interference with
the use or enjoyment of any of the Premises or requires Tenant to carry
insurance other than as required by this Lease.
"Lender" shall mean any person or entity (and its respective
successors and assigns) which may, on or after the date hereof, make a Loan to
Landlord or be the holder of a Note.
"Loan" shall mean any loan made by one or more Lenders to
Landlord, which loan is secured by a Mortgage and an Assignment and evidenced by
a Note.
"Monetary Obligations" shall mean Rent and all other sums payable
by Tenant under this Lease to Landlord, to any third party on behalf of Landlord
or to any Indemnitee.
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"Mortgage" shall mean any mortgage or deed of trust from Landlord
to a Lender which (a) encumbers all of the Premises and (b) secures Landlord's
obligation to repay a Loan, as the same may be amended, supplemented or
modified.
"Net Award" shall mean (a) the entire award payable to Landlord
or Lender by reason of a Condemnation whether pursuant to a judgment or by
agreement or otherwise, or (b) the entire proceeds of any insurance required
under clauses (i), (ii) (to the extent payable to Landlord or Lender), (iv), (v)
or (vi) of Section 15(a), as the case may be, less any reasonable expenses
incurred by Landlord and Lender in collecting such award or proceeds.
"Note" shall mean any promissory note evidencing Landlord's
obligation to repay a Loan, as the same may be amended, supplemented or
modified.
"Permitted Encumbrances" shall mean those covenants,
restrictions, reservations, liens, conditions and easements and other
encumbrances, other than any Mortgage or Assignment, listed on Exhibit C hereto
(but such listing shall not be deemed to revive any such encumbrances that have
expired or terminated or are otherwise invalid or unenforceable).
"Person" shall mean an individual, partnership, association,
corporation or other entity.
"Preapproved Assignee" shall mean Preapproved Assignee as defined
in Section 9(a).
"Premises" shall mean, singly, either the Bedford Premises or the
Danbury Premises and collectively, the Bedford Premises and the Danbury
Premises, as the context shall require.
"Present Value" of any amount shall mean such amount discounted
by seven percent (7%) per annum.
"Prime Rate" shall mean the annual interest rate as published,
from time to time, in The Wall Street Journal as the "Prime Rate" in its column
entitled "Money Rate". The Prime Rate may not be the lowest rate of interest
charged by any "large U.S. money center commercial banks" and Landlord makes no
representations or warranties to that effect. In the event The Wall Street
Journal ceases publication or ceases to publish the "Prime Rate" as described
above, the Prime Rate shall be the average per annum discount rate (the
"Discount Rate") on ninety-one (91) day bills ("Treasury Bills") issued from
time to time by the United States Treasury at its most recent auction, plus
three hundred (300) basis points. If no such 91-day Treasury Bills are then
being issued, the Discount Rate shall be the discount rate on Treasury Bills
then being issued for the period of time closest to ninety-one (91) days.
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"Relevant Date" shall mean the date immediately prior to the date
on which the applicable Condemnation Notice is received, in the event of a
Termination Notice under Section 18 which is occasioned by a Taking.
"Rent" shall mean, collectively, Basic Rent and Additional Rent.
"Site Assessment" shall mean a Site Assessment as defined in
Section 22.
"Surviving Obligations" shall mean any obligations of Tenant
under this Lease, actual or contingent, which arise on or prior to the
expiration or prior termination of this Lease or which survive such expiration
or termination by their own terms.
"Term" shall mean, collectively, the Initial Term and the
effective Extension Term(s).
"Termination Amount" shall mean the applicable amount set forth
on Exhibit G, "Termination Values".
"Termination Date" shall mean Termination Date as defined in
Section 18.
"Termination Event" shall mean a Termination Event as defined in
Section 18.
"Termination Notice" shall mean Termination Notice as defined in
Section 18.
"Third Party Purchaser" shall mean Third Party Purchaser as
defined in Paragraph 9(i).
3. EXTENSION TERMS; NOTICE OF LEASE.
(a) Provided no Event of Default has occurred as of the date of (i)
the applicable Extension Notice (hereinafter defined), and (ii) commencement of
the applicable Extension Term (hereinafter defined), Tenant shall have the right
(but not the obligation) to extend the Term for four (4) additional terms of
five (5) years each (each, an "Extension Term"), commencing as of the expiration
of the initial term of the Lease or the prior Extension Term, as the case may
be. If Tenant elects to exercise such option, Tenant shall give Landlord written
notice (the "Extension Notice") on or before the date that is one (1) year prior
to the expiration of the then-current term of the Lease. Upon the timely giving
of such notice, the Term shall be deemed extended upon all of the terms and
conditions of this Lease, except that Basic Rent during each Extension Term
shall be calculated in accordance with Section 5 below and Tenant shall have one
(1) fewer option to further extend the Term. If Tenant fails to give timely
notice,
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as aforesaid, Tenant shall have no further right to extend the Term.
Notwithstanding the fact that Tenant's proper and timely exercise of each option
to extend the Term shall be self-executing, the parties shall promptly execute a
lease amendment reflecting such Extension Term after Tenant exercises such
option.
(b) Landlord and Tenant each agrees to join in the execution, in
recordable form, of a statutory notice of lease in which shall be stated the
Term, Tenant's right of first offer (as described in Section 12 below), Tenant's
options to purchase (as described in Section 13 below), and limited right of
first refusal (as described in Section 14 below) and other non-economic
information typically contained in a notice of lease. Tenant shall have the
right to file such notice of lease with the Middlesex South Registry District of
the Land Court and the Danbury Land Records at Tenant's sole cost and expense.
4. USE.
(a) Subject to Legal Requirements, during the Term Tenant shall use
the Premises for any or all of the current uses and any or all of the following
purposes: office, assembly, laboratory, distribution, warehousing and light
manufacturing and purposes related to the foregoing, and with Landlord's
consent, which shall not be unreasonably withheld conditioned or delayed, any
other lawful use, and no other purposes.
(b) Tenant shall not use the Premises or any part thereof, or suffer
or permit the use or occupancy of the Premises or any part thereof by Tenant's
agents, servants, employees, consultants, contractors, subcontractors, licensees
and/or subtenants in any manner which would (i) violate any Law, Legal
Requirement or Permitted Encumbrance; (ii) increase insurance rates on the
Improvements or on property located therein over that applicable when Tenant
first took occupancy of the Premises hereunder; or (iii) constitute a public or
private nuisance or waste.
5. RENT.
(a) During the Term, Tenant shall pay to Landlord the Basic Rent and
Additional Rent (as hereinafter defined). It is expressly understood and agreed
by and between the parties that this lease is a net lease, and Rent shall be
paid without notice or demand, and without setoff, counterclaim, defense,
abatement, suspension, deferment, reduction or deduction, except as expressly
provided herein.
(b) Basic Rent shall be paid in advance on the twenty-fifth day of
each November, February, May and August during the Term (each such date, a
"Basic Rent Payment Date"). Each such rental payment shall be made, at
Landlord's sole discretion, (i) to Landlord in accordance with wire transfer
instructions delivered to Tenant and/or to one other Person, in accordance with
wire transfer instructions delivered to Tenant at such addresses and in such
proportions as Landlord may direct by fifteen (15) days' prior written notice to
Tenant (in which event Tenant shall give Landlord notice of each such payment
concurrent with the making
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thereof), and (ii) by wire transfer in Federal Funds no later than the
applicable Basic Rent Payment Date. Any change of wire instructions shall be
delivered to Tenant in written form not less than fifteen (15) days prior to the
payment date for which such instructions are to be effective.
(c) Tenant shall pay and discharge, as additional rent (collectively,
"Additional Rent"):
(i) except as otherwise specifically provided herein, all
reasonable costs and expenses of Tenant, Landlord and any other Persons
specifically referenced herein which are incurred in connection or associated
with (A) the performance of any of Tenant's obligations under this Lease, (B)
any sale or other transfer of any of the Premises to Tenant under Sections 12 or
18 of this Lease, (C) the exercise or enforcement by Landlord, its successors
and assigns, of any of its rights under this Lease, (D) any amendment to or
modification or termination of this Lease made at the request of Tenant, (E)
reasonable Costs of Landlord's counsel incurred in connection with any act
undertaken by Landlord (or its counsel) at the request of Tenant, (F) all costs
and fees associated with the wire transfers of Rent payments, and (G) any other
items specifically required to be paid by Tenant under this Lease;
(ii) after the date all or any portion of any installment of
Basic Rent is due and not paid within three (3) business days after the
applicable Basic Rent Payment Date, an amount (the "Late Charge") equal to three
percent (3%) of the amount of such unpaid installment or portion thereof;
(iii) a sum equal to any additional sums (including any late
charge, default penalties, interest and fees of Lender's counsel) which are
payable by Landlord to any Lender under any Note by reason of Tenant's late
payment or non-payment of Basic Rent or by reason of an Event of Default; and
(iv) interest at the rate (the "Default Rate") of three
percent (3%) over the Prime Rate per annum on the following sums until paid in
full: (A) all overdue installments of Basic Rent from the respective due dates
thereof if not paid within three (3) business days after the due date therefor,
(B) all overdue amounts of Additional Rent relating to obligations which
Landlord shall have paid on behalf of Tenant pursuant to the terms of this Lease
if not paid within three (3) business days after notice from Landlord, and (C)
all other overdue amounts of Additional Rent if not paid within ten (10) days
after the notice thereof, from the date when any such amount becomes overdue.
(d) Tenant shall pay and discharge (i) any Additional Rent referred
to in Section 5(c) when the same shall become due, provided that amounts which
are billed to Landlord or any third party, but not to Tenant, shall be paid
within thirty (30) days after Landlord's demand for payment thereof, and (ii)
any other Additional Rent, within thirty (30) days after Landlord's demand for
payment thereof.
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(e) In no event shall amounts payable under Section 5(c)(ii), (iii)
and (iv) exceed the maximum amount permitted by applicable Law.
6. IMPOSITIONS.
(a) Tenant shall, before interest or penalties are due thereon, pay
and discharge or cause the payment and discharge of all taxes (including real
and personal property, franchise, sales, use, gross receipts and rent taxes),
all charges for any Easement Agreement maintained for the benefit of any of the
Premises, all assessments and levies, all permit, inspection and license fees,
all rents and charges for water, sewer, utility and communication services
relating to any of the Premises, all ground rents and all other public charges
whether of a like or different nature, even if unforeseen or extraordinary,
imposed upon or assessed against (i) Tenant, (ii) Tenant's leasehold interest in
the Premises, (iii) any of the Premises, (iv) Landlord as a result of or arising
in respect of the acquisition, ownership, occupancy, leasing, use, possession or
sale of any of the Premises, any activity conducted on any of the Premises, or
the Rent, or (v) the 3-acre Parcel, including any Easement Agreement in
connection therewith, for so long as the Town of Bedford, Massachusetts does not
recognize the 3-acre Parcel as a separate and distinct tax lot and does not
issue a separate tax bill in connection therewith (collectively, the
"Impositions"); provided, that nothing herein shall obligate Tenant to pay (A)
income, excess profits or other taxes of Landlord which are determined on the
basis of Landlord's net income or net worth (unless such taxes are in lieu of or
a substitute for any other tax, assessment or other charge upon or with respect
to the Premises which, if it were in effect, would be payable by Tenant under
the provisions hereof or by the terms of such tax, assessment or other charge),
(B) any estate, inheritance, succession, gift or similar tax imposed on Landlord
or (C) any capital gains tax imposed on Landlord in connection with the sale of
the Premises to any Person. If any Imposition may be paid in installments
without interest or penalty, Tenant shall have the option to pay such Imposition
in installments; in such event, Tenant shall be liable only for those
installments which become due and payable during the Term or are attributable to
any period prior to the expiration or termination of this Lease. Tenant shall
prepare and file all tax reports required by governmental authorities which
relate to the Impositions. Tenant shall deliver to Landlord (1) copies of all
settlements and notices pertaining to the Impositions which may be issued by any
governmental authority within ten (10) days after Tenant's receipt thereof, (2)
receipts for or evidence of payment of all taxes required to be paid by Tenant
hereunder within thirty (30) days after the due date thereof and (3) receipts
for payment of all other Impositions within ten (10) days after Landlord's
request therefor.
(b) Following the occurrence of an Event of Default Tenant shall pay
to Landlord such amounts (each an "Escrow Payment") quarterly together with
payments of Basic Rent so that there shall be in an escrow account an amount
sufficient to pay the Escrow Charges (as hereinafter defined) as they become
due. As used herein, "Escrow Charges" shall mean real estate taxes and
assessments on or with respect to the Premises or payments in lieu thereof and
premiums on any insurance required by this Lease and any reserves for capital
improvements, deferred maintenance and repair reasonably required by any Lender.
Landlord shall reasonably
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determine the amount of the Escrow Charges (it being agreed that such amounts
shall equal any corresponding escrow installments required to be paid by
Landlord to a Lender as a result of an Event of Default) and the amount of each
Escrow Payment. As long as the Escrow Payments are being held by Landlord, the
Escrow Payments shall not be commingled with other funds of Landlord or other
Persons and interest thereon shall accrue for the benefit of Tenant from the
date such monies are received and invested until the date such monies are
disbursed to pay Escrow Charges. Landlord shall apply the Escrow Payments to the
payment of the Escrow Charges in such order or priority as Landlord shall
determine or as required by law. If at any time the Escrow Payments theretofore
paid to Landlord shall be insufficient for the payment of the Escrow Charges,
Tenant, within ten (10) business days after Landlord's demand therefor, shall
pay the amount of the deficiency to Landlord.
(c) Tenant or its designees shall have the right to contest or review
all such Impositions by legal proceedings, or in such other manner as it may
deem suitable (which, if instituted, Tenant or its designees shall conduct
promptly at its own cost and expense, and free of any expense to Landlord).
Notwithstanding the foregoing, to the extent required by any Lender, Tenant
shall provide Landlord security which is satisfactory (but not in excess of the
sum of the amount in controversy and reasonable estimates of Costs in connection
with such controversy, including interest, penalties, court costs and legal
fees), in Landlord's reasonable judgment, to assure that such Impositions are
paid, including all Costs that may be incurred or become due in connection
therewith, and Tenant shall promptly pay all such Impositions if at any time the
Premises or any part thereof shall then be immediately subject to forfeiture or
if Landlord shall be subject to any criminal liability, arising out of the
nonpayment thereof. The legal proceedings referred to in this Section 6(c) shall
include appropriate proceedings and appeals from orders therein and appeals from
any judgments, decrees or orders. In the event of any reduction, cancellation or
discharge, Tenant shall pay the amount finally levied or assessed against the
Premises or adjudicated to be due and payable on any such contested Impositions.
If requested by Tenant, Landlord shall join in any contest or proceeding
required to be brought by or in the name of Landlord and otherwise cooperate in
all reasonable respects with Tenant in the prosecution thereof; provided,
however, that Landlord will not be subjected to any liability for the payment of
any Costs in connection with any contest or proceedings, and Tenant shall be
responsible for any and all Costs reasonably incurred by Landlord in connection
therewith, including but not limited to reasonable attorney's fees.
(d) Landlord covenants and agrees that if there shall be any refunds
or rebates on account of the Impositions paid by Tenant under the provisions of
this Lease, such refund or rebate shall belong to Tenant. Any refunds received
by Landlord shall be deemed trust funds and as such are to be received by
Landlord in trust and paid to Tenant forthwith. Landlord will, upon the request
of Tenant, sign any receipts which may be necessary to secure the payment of any
such refund or rebate, and will pay over to Tenant such refund or rebate
promptly following receipt thereof by Landlord.
7. MAINTENANCE AND REPAIRS.
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(a) Tenant shall, at all times during the Term and at its sole cost
and expense keep and maintain (or cause to be kept and maintained) the Premises
in as good order, condition and repair as on the date hereof and fit to be used
for its intended use, ordinary wear and tear and permanent loss by Condemnation
excepted. Such maintenance shall include, without limitation, all structural,
non-structural, ordinary and extraordinary repairs and replacements which may be
required to keep all parts of the Premises (including without limitation the
roof, structure, fixtures and equipment, building systems, wiring, plumbing of
the Bedford Building and Danbury Building and the parking areas and landscaped
areas appurtenant thereto) in good order, condition and repair. Tenant shall
promptly make all Alterations of every kind and nature, whether foreseen or
unforeseen, which may be required to comply with the foregoing requirements of
this Section 7. Landlord shall not be required to make any Alteration, whether
foreseen or unforeseen, or to maintain any of the Premises or Adjoining Property
in any way, and Tenant hereby expressly waives any right which may be provided
for in any Law now or hereafter in effect to make Alterations at the expense of
Landlord or to require Landlord to make Alterations. Any Alteration made by
Tenant pursuant to this Section 7 shall be made in conformity with the
provisions of Section 8.
(b) If any Improvement, now or hereafter constructed, shall (i)
encroach upon any setback or any property, street or right-of-way adjoining the
Premises, (ii) violate the provisions of any restrictive covenant affecting the
Premises, (iii) hinder or obstruct any easement or right-of-way to which any of
the Premises is subject or (iv) impair the rights of others in, to or under any
of the foregoing, Tenant shall, promptly after receiving notice or otherwise
acquiring knowledge thereof, at Tenant's election, either (A) obtain from all
necessary parties waivers or settlements of all claims, liabilities and damages
resulting from each such encroachment, violation, hindrance, obstruction or
impairment, whether the same shall affect Landlord, Tenant or both, or (B) take
such action as shall be necessary to remove all such encroachments, hindrances
or obstructions and to end all such violations or impairments, including, if
necessary, making Alterations.
(c) Tenant, at its sole cost and expense, will at all times promptly
and faithfully abide by, discharge and perform all of the covenants, conditions
and agreements contained in any Easement Agreement on the part of landlord or
the occupier to be kept and performed thereunder. Neither Landlord nor Tenant
will alter, modify, amend or terminate any Easement Agreement, give any consent
or approval thereunder, or enter into any new Easement Agreement without, in
each case, prior written consent of the other party.
8. ALTERATIONS.
(a) Tenant shall not make any Alterations in or to or Expansions to
the Premises without Landlord's prior written consent, which shall not be
unreasonably withheld, conditioned or delayed. Notwithstanding the foregoing,
provided there is no Event of Default, Tenant may, without Landlord's prior
written consent but with notice to Landlord and otherwise subject to the
provisions of this Lease, make (i) non-structural Alterations costing less than
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$1,000,000 (such amount to be increased on each anniversary of the Commencement
Date by the CPI Ratio), provided that Tenant hereby agrees to notify Landlord in
writing not less than fifteen (15) days prior to commencing any non-structural
Alterations costing more than $250,000 (as increased on each anniversary of the
Commencement Date by the CPI Ratio); (ii) decorative changes (such as
installation of office partitions, painting, carpeting and window treatments) to
the Premises; (iii) Alterations to move or remove any Equipment (provided that
any Equipment so removed shall be replaced in accordance with this Section 8);
and (iv) Alterations to parking areas, landscaping and other exterior areas. If
Tenant makes any Alterations or Expansions pursuant to this Section 8 (such
Alterations, Expansions and actions being hereinafter collectively referred to
as "Work") whether or not Landlord's consent is required, then the market value
of the Premises shall not be lessened in any material respect by any such Work,
its usefulness impaired in any material respect or its useful life decreased in
any material respect. Tenant shall not construct any additional buildings on the
Premises without Landlord's prior written consent, which consent shall not be
unreasonably withheld, conditioned or delayed. All Alterations and Expansions
shall be done at Tenant's sole cost and expense in a good and workmanlike manner
and in compliance with Legal Requirements. If Tenant shall make any Alterations,
then Landlord shall notify Tenant in writing, at the time of Landlord's approval
thereof or, in the case of Alterations for which Landlord's approval is not
required, within fifteen (15) business days after receipt of notice thereof
which shall be accompanied by a detailed description of the Alterations to be
made, whether Tenant will be required, at the expiration or earlier termination
of the Term, to restore the Premises to substantially the same condition as
existed immediately prior to such Alteration. Tenant shall provide Landlord with
a copy of any as-built plan prepared by or on behalf of Tenant, if any, with
respect to any structural Alteration. When Landlord's consent shall be required
under this Section 8(a), such consent shall be deemed given unless Landlord
gives Tenant written notice of its disapproval within fifteen (15) business days
after receipt of request therefor. Any such notice of disapproval from Landlord
to Tenant shall state with particularity Landlord's reasons for disapproval.
(b) Any mechanic's lien filed against the Premises for work claimed
to have been done for, or materials claimed to have been furnished to, Tenant
shall be discharged by Tenant within fifteen (15) business days after Tenant's
receipt of notice thereof, at Tenant's expense, by filing the bond required by
law or otherwise. Tenant shall have the right to contest any such liens by legal
proceedings, or in such other manner as it may deem suitable (which, if
instituted, Tenant or its designees shall conduct promptly at its or their own
cost and expense). Notwithstanding the foregoing, if the lien is not removed by
the filing of a bond, Tenant shall provide Landlord security which is
satisfactory (but not in excess of the sum of the amount in controversy and
reasonable estimates of costs in connection with such controversy, including
interest, penalties, court costs and legal fees) in Landlord's reasonable
judgment, to ensure that any such lien is paid. Tenant shall promptly pay and
remove all such liens if at any time the Premises or any part thereof shall then
be subject to immediate forfeiture as a result of the nonpayment thereof.
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(c) Tenant shall (i) procure or cause others to procure on its behalf
all necessary permits before undertaking any Alterations in or Expansions to the
Premises and submit copies of such permits to Landlord prior to the commencement
of any such Alterations or Expansions; (ii) perform all of such Alterations in a
good and workmanlike manner, employing materials of good quality and in
compliance with Legal Requirements; (iii) cause contractors employed by Tenant
to (A) carry Worker's Compensation Insurance in accordance with statutory
requirements, (B) carry Automobile Liability Insurance and Commercial General
Liability Insurance (1) naming Landlord as an additional insured, and (2)
covering such contractors on or about the Premises in the amounts stated in
Section 15 hereof, (C) provide the insurance to the extent required under
Section 15(a)(vi); and (D) submit insurance certificates evidencing such
coverage to Landlord prior to the commencement of any such Alterations or
Expansions; (iv) if any such Work involves the replacement of Equipment or parts
thereto, all replacement Equipment or parts shall have a value and useful life
equal to the greater of (A) the value and useful life on the date hereof of the
Equipment being replaced or (B) the value and useful life of the Equipment being
replaced immediately prior to the occurrence of the event which required its
replacement (assuming such replaced Equipment was then in the condition required
by this Lease); (v) Tenant shall procure and pay for all permits and licenses
required in connection with any such Work; (vi) all such Work shall be the
property of Landlord and shall be subject to this Lease, and Tenant shall
execute and deliver to Landlord any document requested by Landlord evidencing
the assignment to Landlord of all estate, right, title and interest (other than
the leasehold estate created hereby) of Tenant or any other Person thereto or
therein; and (vii) Tenant shall comply, to the extent requested by Landlord or
required by this Lease, with the provisions of Section 7 and Section 18(a),
whether or not such Work involves restoration of the Premises.
9. ASSIGNMENT AND SUBLETTING.
(a) Except as otherwise set forth herein, Tenant shall not, without
Landlord's prior written consent, assign, mortgage, transfer or encumber this
Lease in whole or in part. Any such notice of disapproval from Landlord to
Tenant shall state with particularity Landlord's reasons for disapproval.
(b)
(i) Notwithstanding anything to the contrary herein
contained, Tenant shall have the right, upon not less than thirty (30) days
prior written notice to Landlord, without obtaining Landlord's consent, to
assign this Lease ("Preapproved Assignment") to (any of the following, a
"Preapproved Assignee") (i) any Person which at all times during the Term is an
Affiliate of Tenant's, (ii) any Person into or with which Tenant is merged or
with which Tenant is consolidated or which acquires all or substantially all of
Tenant's stock or assets, provided immediately after such assignment such Person
has a tangible net worth (determined in accordance with GAAP) equal to or
greater than Tenant's tangible net worth (determined in accordance with GAAP)
immediately prior to such assignment, or (iii) to any Person that immediately
following such assignment will have a publicly traded unsecured senior debt
rating
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of "Baa1" or better from Moody's Investors Services, Inc. or a rating of "BBB+"
or better from Standard & Poor's Corporation (or, if such entity does not then
have rated debt, a determination to the reasonable satisfaction of Landlord that
its unsecured debt would be so rated by such rating agencies).
(ii) If Tenant desires to assign this Lease, whether by
operation of law or otherwise, to a Person ("Non-Preapproved Assignee") who
would not be a Preapproved Assignee ("Non-Preapproved Assignment") then Tenant
shall, not less than ninety (90) days prior to the date on which it desires to
make a Non-Preapproved Assignment submit to Landlord and Lender information
regarding the following with respect to the Non-Preapproved Assignee
(collectively, the "Review Criteria"): (A) credit, (B) capital structure, (C)
management, (D) operating history, (E) proposed use of the Premises and (F) risk
factors associated with the proposed use of the Premises by the Non-Preapproved
Assignee, taking into account factors such as environmental concerns, product
liability and the like. Landlord and Lender shall review such information and
shall approve or disapprove the Non-Preapproved Assignee no later than the
thirtieth (30th) day following receipt of all such information, and Landlord and
Lender shall be deemed to have acted reasonably in granting or withholding
consent if such grant or disapproval is based on their review of the Review
Criteria applying prudent business judgment (provided that such approval shall
not be unreasonably withheld, delayed or conditioned as to the proposed use of
the Premises or risk factors associated therewith).
(c)
(i) Landlord hereby acknowledges that (A) pursuant to that
certain Lease dated April 20, 2000 by and between Tenant, as landlord, and
TechOnLine Incorporated ("TechOnLine"), as tenant, as amended by that certain
First Amendment to Lease dated as of February 28, 2002 and as further amended by
that certain Second Amendment to Lease dated August 20, 2002 (collectively, the
"TechOnLine Lease"), TechOnLine occupies approximately 10,120 square feet on the
second floor of the Bedford Building; and (B) pursuant to that certain Lease
dated June 1, 2001 by and between Tenant, as landlord, and Phonetic Systems,
Inc. ("Phonetic"), as tenant, as amended by that certain letter agreement dated
February 19, 2002 (collectively, the "Phonetic Lease"), Phonetic occupies
approximately 10,550 square feet on the third (3rd) floor of the Bedford
Building. Simultaneously with the execution hereof, Landlord shall execute a
subordination, non-disturbance and attornment agreement in favor of TechOnLine
substantially in the form attached hereto as Exhibit "I" (a "Recognition
Agreement"). In the event that the per-square-foot rent during the extension of
the term under the TechOnLine Lease is set at less than $24.50 per square foot,
Tenant shall provide Landlord, prior to the commencement of such extension term,
with a security deposit equal to the positive difference between (x) the total
rent under the TechOnLine Lease for the extension of the term at a rental rate
of $24.50 per square foot and (y) the total rent payable by TechOnLine for the
extension of the term.
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(ii) Tenant shall have the right, upon ten (10) days' prior
written notice to, but without the consent of, Landlord and Lender, to enter
into one or more additional subleases (a) that demise, in the aggregate (and
with regard to the Bedford Building, together with the TechOnLine Lease and the
Phonetic Lease), up to but not in excess of fifty Percent (50%) of the gross
rentable square footage in each of the Bedford Building and Danbury Building,
and (b) of all or any portion of the Premises to a Preapproved Assignee (each of
the foregoing, a "Preapproved Sublet"). Other than pursuant to Preapproved
Sublets (which include the TechOnLine Lease and the Phonetic Lease), at no time
during the Term shall subleases exist for more than fifty percent (50%) of the
gross rentable space in each of the Bedford Building and Danbury Building to any
Person without the prior written consent of Landlord which consent shall be
granted or withheld based on a review of the Review Criteria as they relate to
the proposed sublessee and the terms of the proposed sublease and shall not be
unreasonably withheld, delayed or conditioned with respect to the use or risk
factors associated therewith. Landlord and Lender shall be deemed to have acted
reasonably in granting or withholding consent if such grant or disapproval is
based on their review of the Review Criteria. Provided the net rent (gross per
square foot rent after deduction for Impositions, insurance and common area
maintenance charges) under any Preapproved Sublet or other sublease approved by
Landlord is proportionately equal to or greater than the Rent payable by Tenant
hereunder on a per-square-foot basis, the Preapproved Sublet or such otherwise
approved sublease is for not less than twenty-five (25%) of the gross rentable
square feet in the Danbury Building or ten percent (10%) of the rentable square
feet in the Bedford Building and the Preapproved Sublet or other such sublease
is on terms otherwise reasonably acceptable to Landlord, Landlord shall not
unreasonably withhold, condition or delay its consent to any request by Tenant
to execute a Recognition Agreement in connection therewith. With respect to any
Recognition Agreement required to be executed by Landlord pursuant to this
Subsection 9(c)(ii), Landlord, upon request of the subtenant, shall obtain from
Lender a recognition agreement substantially in the form of the Recognition
Agreement.
(d) If Tenant assigns all its rights and interest under this Lease,
the assignee under such assignment shall expressly assume all the obligations of
Tenant hereunder, actual or contingent, including obligations of Tenant which
may have arisen on or prior to the date of such assignment by a written
instrument delivered to Landlord at the time of such assignment. Any approved or
permitted sublease of the Premises shall (A) be expressly subject and
subordinate to this Lease and any Mortgage encumbering the Premises; (B) not
extend beyond the then current Term minus one day; and (C) terminate upon any
termination of this Lease (except for the TechOnLine Lease or any other
applicable sublease which shall be subject to a Recognition Agreement with
Landlord as required by Section 9(c)(i) or Section 9(c)(ii)), unless Landlord
elects in writing, to cause the sublessee to attorn to and recognize Landlord as
the lessor under such sublease, whereupon such sublease shall continue as a
direct lease between the sublessee and Landlord upon all the terms and
conditions of such sublease. No assignment or sublease shall affect or reduce
any of the obligations of Tenant hereunder, and all such obligations shall
continue in full force and effect as obligations of a principal and not as
obligations of a
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guarantor, as if no assignment or sublease had been made. No assignment or
sublease shall impose any additional obligations on Landlord under this Lease.
(e) With respect to any Preapproved Assignment or Preapproved Sublet,
Tenant shall provide to Landlord information reasonably required by Landlord to
establish that any proposed Preapproved Assignment or Preapproved Sublet
satisfies the criteria set forth above.
(f) Tenant shall, within ten (10) days after the execution and
delivery of any assignment or sublease, deliver a copy thereof to Landlord. In
the event of an assignment of the Lease, Tenant shall deliver to Landlord an
original notice of assignment of lease in recordable form executed by Tenant and
such assignee.
(g) As security for performance of its obligations under this Lease,
Tenant hereby grants, conveys and assigns to Landlord all right, title and
interest of Tenant in and to all subleases now in existence or hereafter entered
into for any or all of the Premises, any and all extensions, modifications and
renewals thereof and all rents, issues and profits therefrom. Landlord hereby
grants to Tenant a license to collect and enjoy all rents and other sums of
money payable under any sublease of any of the Premises, provided, however, that
after an Event of Default and so long as such Event of Default is continuing,
Landlord shall have the absolute right at any time upon notice to Tenant and any
subtenants to revoke said license and to collect such rents and sums of money
provided Landlord shall apply the same to Monetary Obligations payable by Tenant
hereunder. Tenant shall not consent to, cause or allow any modification or
alteration of any of the terms, conditions or covenants of any of the subleases
or the termination thereof, without the prior written approval of Landlord,
which consent shall not be unreasonably withheld, conditioned or delayed nor
shall Tenant accept any rents more than thirty (30) days in advance of the
accrual thereof nor do nor permit anything to be done, the doing of which, nor
omit or refrain from doing anything, the omission of which, will or could be a
breach of or default in the terms of any of the subleases.
(h) Except as provided in the following Section 10, Tenant shall not
have the power to mortgage, pledge or otherwise encumber its interest under this
Lease or any sublease of the Premises, and any such mortgage, pledge or
encumbrance made in violation of this Section 9 shall be void and of no force
and effect.
(i) Subject to the provisions of Sections 12 and 14 below, Landlord
may sell or transfer the Premises at any time without Tenant's consent to any
third party (each a "Third Party Purchaser"). In the event of any such transfer
provided such Third-Party Purchaser expressly assumes all of the obligations of
Landlord hereunder, actual or contingent, by a written instrument delivered to
Tenant, Tenant shall attorn to any Third Party Purchaser as Landlord so long as
such Third Party Purchaser and Landlord notify Tenant in writing of such
transfer. At the request of Landlord, Tenant will execute such documents
confirming the agreement referred to above and such other agreements as Landlord
may reasonably request, provided that such
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agreements do not increase the liabilities and obligations or reduce the rights
of Tenant hereunder.
10. LEASEHOLD MORTGAGE
Notwithstanding the provisions of Section 9 hereof, Tenant shall have the
absolute right, without the consent of Landlord, to mortgage or otherwise
encumber this Lease or its rights hereunder (the "Leasehold Estate") with a
Leasehold Mortgage to a Leasehold Mortgagee. The Leasehold Mortgagee shall
notify Landlord, in the manner hereinafter provided for the giving of notice, of
the execution of such Leasehold Mortgage and the name and place for service of
notice upon such Leasehold Mortgagee. In the event that at the time of the
creation of such Leasehold Mortgage, Landlord shall have mortgaged or otherwise
encumbered its fee interest in the Premises, then such notice of such Leasehold
Mortgage shall also be given to Lender. Landlord shall cooperate in all
reasonable respects with Tenant, at Tenant's sole Cost, in providing necessary
information in Landlord's possession or control as to the Premises or this Lease
(or any other agreement or instrument executed in connection with the Premises
or this Lease) to the Leasehold Mortgagee. Without limiting the foregoing,
Landlord shall, at Tenant's sole Cost, endeavor to cause any report by any third
party retained by Landlord (including without limitation architects, engineers
and title examiners) to address or re-address documents prepared by them,
respectively, to the Leasehold Mortgagee and to allow the Leasehold Mortgagee to
rely thereon. Upon such notification to Landlord that Tenant has entered into a
Leasehold Mortgage, Landlord hereby agrees for the benefit of the Leasehold
Mortgagee, and upon written request by Tenant, to execute and deliver to Tenant
and the Leasehold Mortgagee a recognition, attornment and assent to leasehold
mortgage agreement ("Leasehold Mortgage Agreement") in recordable form,
containing terms substantially similar to the terms of the form attached hereto
as Exhibit F and incorporated herein and otherwise reasonably acceptable to
Landlord and the Leasehold Mortgagee.
11. ENCUMBRANCES BY LANDLORD.
This Lease is and shall at all times be and remain subject and subordinate to
the lien of any Mortgage (and to any and all advances made thereunder) upon the
Landlord's fee interest in any of the Premises, (unless Landlord or such Lender
requires this Lease to be superior to any such Mortgage); provided Landlord
obtains and delivers to Tenant a subordination, non-disturbance and attornment
agreement from Lender in form and substance reasonably satisfactory to Lender
and Tenant, whereby such Lender agrees that, as long as there is not an Event of
Default under the Lease, this Lease will not be affected and Tenant's possession
and rights hereunder (including, without limitation, Tenant's rights to purchase
the Bedford Premises and/or the Danbury Premises pursuant to Sections 12 or 14
below) will not be disturbed by any default in, termination, and/or foreclosure
of, such Mortgage. Such subordination, nondisturbance and attornment agreement
may require Tenant to confirm that (a) Lender and its assigns will not be liable
for any misrepresentation, act or omission of Landlord and (b) Lender and its
assigns will not be subject to any counterclaim, demand or offset which Tenant
may have against Landlord. In the event any proceedings are brought for
foreclosure, or in the event of the exercise of the
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power of sale under any Mortgage made by the Landlord covering the Premises,
Tenant shall attorn to the purchaser at any such foreclosure, or to the grantee
of a deed in lieu of foreclosure, and recognize such purchaser or grantee as the
Landlord under this Lease, provided such successor executes an assumption
agreement whereby such successor assumes all of Landlord's obligations under the
Lease. Tenant shall agree, upon request of Landlord, to supply any such Lender
with such notices and information as Tenant is required to give to Landlord
hereunder and to extend the rights of Landlord hereunder to any such Lender and
to consent to such financing if such consent is requested by such Lender.
12. RIGHT OF FIRST OFFER.
(a) If, at anytime prior to the expiration or earlier termination of
this Lease, Landlord decides to offer the Premises (Landlord acknowledging
Landlord's Non-Bifurcation Obligation) for sale to any third party, Landlord
shall first offer by written notice (the "Offer") to sell the Premises to Tenant
for a specific purchase price (the "Purchase Price") and, upon such terms and
conditions as Landlord, in Landlord's sole discretion, would otherwise intend to
offer to sell the Premises, prior to Landlord's offering to sell the Premises to
any such third party except that (i) the terms and conditions of any such sale
to Tenant shall be (i) consistent with the terms and provisions of this Section
12 and (ii) the sale to Tenant shall be "as is", without representation or
warranty by Landlord except as provided in Section 20. If Landlord shall make
the Offer, then, whether or not Tenant has accepted the Offer, Landlord shall
have the unilateral right, in Landlord's sole discretion, to revoke the Offer if
an Event of Default exists under this Lease on the date on which Landlord shall
give, or would otherwise be required to give, Tenant the Offer.
(b) Tenant shall have the right in its name or in the name of any
Affiliate of Tenant to accept the Offer only by giving Landlord written notice
of such acceptance (the "ROFO Notice") within fifteen (15) business days after
delivery by Landlord to Tenant of the Offer. Time shall be of the essence with
respect to said fifteen (15) business day period and delivery of the ROFO Notice
by Tenant. Upon Tenant's acceptance of the Offer, Tenant shall execute, upon the
request of Landlord, any documentation reasonably required by Landlord to
reflect Tenant's acceptance of the Offer. Notwithstanding anything to the
contrary contained in this Lease, subject only to the provisions of Section
12(d) below, upon the delivery of the ROFO Notice by Tenant, no event or
circumstances affecting the Premises (other than the closing of the purchase of
the Premises pursuant to Paragraph 20) including, but not limited to, a
Condemnation or Casualty, shall give Tenant any right or option of Tenant to
cancel, surrender or otherwise terminate this Lease, and, if and only if the
failure to close the purchase of the Premises is due to Tenant's wrongful act or
omission, any other right or option of Tenant under the Lease to acquire the
Premises, shall automatically be deemed to have been waived by Tenant for all
purposes under this Lease.
(c) If Tenant does not accept, or fails to accept, the Offer in
accordance with the provisions herein, Landlord shall have no further obligation
with respect to such Offer
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pursuant to the terms contained herein, except as otherwise set forth below, and
Tenant shall have forever waived and relinquished its right to such Offer, but
not to any subsequent Offer, and Landlord shall at any and all times thereafter
be entitled to market the Premises to others upon such terms and conditions as
Landlord in its sole discretion may determine, except that if the price ("Third
Party Price") for which Landlord enters into a binding contract ("Third Party
Contract") to sell the Premises is less than ninety percent (90%) of the Offer,
Tenant shall have fifteen (15) days in which to accept the Third Party Price.
Tenant shall, within five (5) days after Landlord's request therefor, deliver an
instrument in form reasonably satisfactory to Landlord confirming the aforesaid
waiver, but no such instrument shall be necessary to make the provisions hereof
effective. If (i) Landlord has not sold the portion of the Premises that was the
subject of the Offer within twelve (12) months after the earlier to occur of (A)
the expiration of the 15 business-day response period, or (B) the day on which
Tenant refuses the Offer in writing, and (ii) Landlord still intends to sell the
Premises that was the subject of the Offer, then Landlord shall send to Tenant a
subsequent Offer to sell the Premises to Tenant for a specific purchase price
and, upon such terms and conditions as Landlord, in Landlord's sole discretion,
would otherwise intend to offer to sell the Premises.
(d) If Tenant does not timely deliver the ROFO Notice and the
Premises are transferred to a Third Party Purchaser, this Lease shall remain in
full force and effect, including the provisions of this Section 12 and the right
of Tenant to any subsequent Offer, Tenant will attorn to such Third Party
Purchaser as Landlord so long as such Third Party Purchaser and Landlord notify
Tenant in writing of such transfer and such Third Party Purchaser expressly
assumes all of the obligations of Landlord hereunder, actual or contingent, by a
written instrument delivered to Tenant. At the request of Landlord, Tenant will
execute such documents confirming the agreement referred to above and such other
agreements as Landlord may reasonably request, provided that such agreements do
not increase the liabilities and obligations or reduce the rights of Tenant
hereunder.
(e) Notwithstanding anything to the contrary contained herein, the
provisions of this Section 12 shall not apply to or prohibit (i) any mortgaging,
subjection to deed of trust or other hypothecation of Landlord's interest in the
Premises, (ii) any sale of the Premises pursuant to a private power of sale
under or judicial foreclosure of any Mortgage or other security instrument or
device to which Landlord's interest in the Premises is now or hereafter subject,
(iii) any transfer of Landlord's interest in the Premises to a Lender,
beneficiary under deed of trust or other hold of a security interest therein or
their designees by deed in lieu of foreclosure, (iv) any transfer of the
Premises to any governmental or quasi-governmental agency with power of
condemnation, (v) any transfer of the Premises or any interest in Landlord to
any Affiliate of W.P. Carey & Co. LLC, Carey Institutional Properties
Incorporated, Corporate Property Associates 12 Incorporated, Corporate Property
Associates 14 Incorporated or Corporate Property Associates 15 Incorporated
("CPA 15"), (vi) a transfer to any person or entity to whom CPA 15 sells all or
substantially all of its assets or (vii) any transfer of the Premises to any of
the successors or assigns of any of the persons or entities referred to in the
foregoing clauses (i)
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through (iv), provided, however, that all of the terms of this Section 12
(including the exceptions in this Section 12(e)) shall remain in full force and
effect with respect to any proposed sale of the Premises by any of the Persons
described in this Section 12(e).
(f) Any transfer of the Premises to Tenant or its Affiliate pursuant
to this Section 12 shall be held on a date mutually acceptable to Landlord and
Tenant that is no later than thirty (30) days following acceptance of the Offer
or the date specified in the Third Party Contract, if applicable and shall
otherwise be in accordance with Section 20 of this Lease.
13. INTENTIONALLY DELETED.
14. LIMITED RIGHT OF FIRST REFUSAL
(a) Except as otherwise provided in Section 14(g), and provided an
Event of Default does not then exist, if Landlord shall enter into a contract
(the "Sale Contract") for the sale of the Premises (Landlord acknowledging
Landlord's Non-Bifurcation Obligation) to a Competitor (and which may include
other property owned by Landlord so long as a specific purchase price is
reasonably allocated to the Premises), such Sale Contract shall be conditioned
upon Tenant's failure to exercise its right under this Section 14. Promptly
following the execution thereof, Landlord shall give written notice to Tenant,
together with a copy of the executed Sale Contract.
(b) For a period of thirty (30) days following receipt of such
notice, Tenant shall have the right, exercisable by written notice to Landlord
given within said thirty (30) day period, to elect to purchase the Premises at
the purchase price set forth in the Sale Contract or allocated as set forth
above and upon all the terms and conditions set forth in the Sale Contract
except that no contingency period contained in such Sale Contract as to real
estate due diligence matters such as environmental, engineering, inspection of
the Premises, surveys, zoning, state of the title to the Premises (except that
Landlord shall be obligated to convey such title as was conveyed to it by
Tenant, excepting any title matters consented to by Tenant or created by or
through Tenant after such conveyance, and Landlord shall remove any liens,
restrictions and encumbrances created by or through Landlord after such
conveyance by Tenant), shall apply to Tenant's obligation to purchase the
Premises under this Section 14, and Tenant shall be obligated to purchase the
Premises "as is, where is" as to such matters.
(c) If at the expiration of the aforesaid thirty (30) day period
Tenant shall have failed to exercise the aforesaid right by written notice to
Landlord, Landlord may sell the Premises to such Competitor upon the terms set
forth in the Sale Contract, subject to the terms of this Lease, including the
provisions of this Section 14.
(d) Except as otherwise specifically provided herein, the closing
date for any purchase of the Premises by Tenant pursuant to this Section 14
shall be the later to occur of (i) thirty (30) days after the date of Tenant's
notice to Landlord of its intention to purchase the
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Premises upon the terms of the Sale Contract with a Third Party Purchaser or
(ii) the closing date provided in such Sale Contract. At such closing Landlord
shall convey the Premises to Tenant or to any Affiliate of Tenant as designated
in writing by Tenant in accordance with, and Tenant shall pay to Landlord the
purchase price (or the allocated purchase price as set forth above) and other
consideration set forth in, the applicable Sale Contract, subject in all events
to the limitations set forth in Section 14(b).
(e) Tenant shall have the right during the Term to exercise the
foregoing right of first refusal upon each proposed sale of the Premises. IF THE
TERM OF THIS LEASE SHALL TERMINATE OR EXPIRE, SUCH RIGHTS OF FIRST REFUSAL
GRANTED PURSUANT TO THIS SECTION 14 SHALL TERMINATE AND BE NULL AND VOID AND OF
NO FURTHER FORCE AND EFFECT. IN SUCH EVENT TENANT SHALL EXECUTE SUCH DOCUMENTS
AS LANDLORD SHALL REASONABLY REQUEST EVIDENCING THE TERMINATION OF ITS RIGHT OF
FIRST REFUSAL.
(f) If Tenant does not exercise its right of first refusal to
purchase the Premises and the Premises are transferred to a Competitor, Tenant
will attorn to any Competitor as Landlord so long as such Competitor and
Landlord notify Tenant in writing of such transfer and such Competitor assumes
all of the obligations of Landlord hereunder, actual or contingent, by a written
instrument delivered to Tenant. At the request of Landlord, Tenant will execute
such documents confirming the agreement referred to above and such other
agreements as Landlord may reasonably request, provided that such agreements do
not increase the liabilities and obligations or reduce the rights of Tenant
hereunder.
(g) Notwithstanding anything to the contrary contained herein, the
provisions of this Paragraph 14 shall not apply to or prohibit (i) any
mortgaging, subjection to deed of trust or other hypothecation of Landlord's
interest in the Premises, (ii) any sale of the Premises pursuant to a private
power of sale under or judicial foreclosure of any Mortgage or other security
instrument or device to which Landlord's interest in the Premises is now or
hereafter subject, (iii) any transfer of Landlord's interest in the Premises to
a Lender, beneficiary under deed of trust or other hold of a security interest
therein or their designees by deed in lieu of foreclosure, (iv) any transfer of
the Premises to any governmental or quasi-governmental agency with power of
condemnation, (v) any transfer of the Premises or any interest in Landlord to
any Affiliate of W.P. Carey & Co. LLC, Carey Institutional Properties
Incorporated, Corporate Property Associates 12 Incorporated, Corporate Property
Associates 14 Incorporated or CPA 15, (vi) a transfer to any person or entity to
whom CPA 15 sells all or substantially all of its assets or (vii) any transfer
of the Premises to any of the successors or assigns of any of the persons or
entities referred to in the foregoing clauses (i) through (iv); provided,
however, that all of the terms of this Paragraph 14 (including the exceptions in
Section 14(g)) shall remain in full force and effect with respect to any
proposed sale of the Premises by any of the Persons described in this Section
14(g) to a Competitor.
15. INSURANCE.
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(a) Tenant shall maintain the following insurance on or in connection
with the Premises:
(i) Insurance against risk of physical loss or damage to the
Improvements and Equipment as provided under "Special Form" coverage, and
including customarily excluded perils of hail, windstorm, flood coverage (only
for the Premises that is in a flood zone), earthquake, and, to the extent
required by Lender, terrorism and mold insurance, in amounts no less than the
actual replacement cost of the Improvements and Equipment exclusive of
foundations and excavations; provided that, (A) if Tenant's insurance company is
unable or unwilling to include any of all of such excluded perils, Tenant shall
have the option of purchasing coverage against such perils from another insurer
on a "Difference in Conditions" form or through a stand-alone policy and (B)
terrorism insurance shall be in amounts as are customary for properties of
sizes, types, locations and uses as the Premises. Such policies shall contain
Replacement Cost and Agreed Amount Endorsements and shall contain deductibles
not more than $50,000 per occurrence (such amount to be increased on each
anniversary of the Commencement Date by the CPI Ratio).
(ii) Commercial General Liability Insurance and Business
Automobile Liability Insurance (including Non-Owned and Hired Automobile
Liability) against claims for personal and bodily injury, death or property
damage occurring on, in or as a result of the use of the Premises, in an amount
not less than $2,000,000 per occurrence/annual aggregate and Ten Million Dollars
($10,000,000) umbrella liability and all other coverage extensions that are
usual and customary for properties of size, type, location and use as the
Premises provided, however, that the Landlord shall have the right not more
often than every three (3) years to require such higher limits as may be
reasonable and customary for properties of this size and type.
(iii) Workers' compensation insurance covering all persons
employed by Tenant in connection with any work done on or about any of the
Premises for which claims for death, disease or bodily injury may be asserted
against Landlord, Tenant or any of the Premises or, in lieu of such Workers'
Compensation Insurance, a program of self-insurance complying with the rules,
regulations and requirements of the appropriate agency of the state in which the
respective Premises is located.
(iv) Comprehensive Boiler and Machinery Insurance on any of
the Equipment or any other equipment on or in the Premises, in an amount not
less than $2,000,000 per accident for damage to property. Either such Boiler and
Machinery policy or the Special Form policy required in (i) above shall include
at least $1,000,000 per incidence for Off-Premises Service Interruption,
Expediting Expenses, Ammonia Contamination, and Hazardous Materials Clean-Up
Expense and may contain a deductible not to exceed $50,000 (such amount to be
increased on each anniversary of the Commencement Date by the CPI Ratio).
(v) Business Interruption Insurance at limits sufficient to
cover 100% of the Rent for not less than twelve (12) months from time of loss.
Such insurance shall name
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Landlord as loss payee solely with respect to Rent payable to or for the benefit
of Landlord as its interest appears under this Lease.
(vi) During any period in which structural or substantial
non-structural Alterations in excess of $250,000 at the Premises are being
undertaken, builder's risk insurance covering the total completed value
including "soft costs" for additional interest expenses, legal and professional
fees and insurance premiums and other customary "soft costs" for properties of
similar size, use and location, with respect to the Improvements being altered
or repaired (on a completed value, non-reporting basis) replacement cost of work
performed and equipment, supplies and materials furnished in connection with
such construction or repair of Improvements or Equipment, together with such
"soft cost" endorsements and such other endorsements as Landlord may reasonably
require and general liability, worker's compensation and automobile liability
insurance with respect to the Improvements being constructed, altered or
repaired.
(vii) Such other insurance (or other terms with respect to any
insurance required pursuant to this Section 15, including without limitation
amounts of coverage, deductibles, form of mortgagee clause) on or in connection
with any of the Premises as Landlord or Lender may reasonably require for
properties of comparable sizes, locations, types and uses as the Premises.
(b) The insurance required by Section 14 shall be written by
companies which have a Best's rating of A:IX or above and a claims paying
ability rating of AA or better by Standard & Poor's Rating Services, a division
of the McGraw Hill Companies, Inc. or equivalent rating agency approved by
Landlord and Lender in their reasonable discretion and are admitted in, and
approved to write insurance policies by, the State insurance department for both
Connecticut and Massachusetts. The insurance policies (i) shall be for such
terms as Landlord may reasonably approve and (ii) shall be in amounts sufficient
at all times to satisfy any coinsurance requirements thereof. The insurance
referred to in Section 15(a)(i), 15(a)(iv) and 15(a)(vi) shall name Landlord as
owner and Landlord or Lender as loss payee and Landlord or Tenant as its
interest may appear. The insurance referred to in Section 15(a)(ii) shall name
Landlord and Lender as additional insureds, and the insurance referred to in
Section 15(a)(v) shall name Landlord as insured and Lender and Landlord as loss
payee. If said insurance or any part thereof shall expire, be withdrawn, become
void, voidable, unreliable or unsafe for any reason, including a breach of any
condition thereof by Tenant or the failure or impairment of the capital of any
insurer, Tenant shall immediately obtain new insurance reasonably satisfactory
to Landlord.
(c) Each insurance policy referred to in clauses (i), (iv), (v) and
(vi) of Section 15(a) shall contain standard non-contributory mortgagee clauses
in favor of and acceptable to Lender. Each policy required by any provision of
Section 15(a), except clause (iii) thereof, shall provide that it may not be
cancelled, substantially modified or allowed to lapse on any renewal date except
after thirty (30) days' prior notice to Landlord and Lender. Each such policy
shall also provide that any loss otherwise payable thereunder shall be payable
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notwithstanding (i) any act or omission of Landlord or Tenant which might,
absent such provision, result in a forfeiture of all or a part of such insurance
payment, (ii) the occupation or use of any of the Premises for purposes more
hazardous than those permitted by the provisions of such policy, (iii) any
foreclosure or other action or proceeding taken by Lender pursuant to any
provision of the Mortgage, Note, Assignment or other document evidencing or
securing the Loan upon the happening of an event of default therein or (iv) any
change in title to or ownership of any of the Premises.
(d) Tenant shall pay as they become due all premiums for the
insurance required by Section 15(a), shall renew or replace each policy and
deliver to Landlord evidence of the payment of the full premium therefor or
installment then due at least thirty (30) days prior to the expiration date of
such policy, and shall promptly deliver to Landlord all original certificates of
insurance or, if required by Lender, certified policies.
(e) Anything in this Section 15 to the contrary notwithstanding, any
insurance which Tenant is required to obtain pursuant to Section 15(a) may be
carried under a "blanket" or umbrella policy or policies covering other
properties or liabilities of Tenant, provided that such "blanket" or umbrella
policy or policies otherwise comply with the provisions of this Section 15 and
provided further that Tenant shall provide to Landlord a so-called "Statement of
Values" which shall be reviewed annually and amended as necessary by Tenant
based on replacement cost valuations. A certificate of insurance or, if required
by Lender, a certified copy of each such "blanket" or umbrella policy shall
promptly be delivered to Landlord.
(f) Tenant shall promptly comply with and conform to (i) all
Insurance Requirements, even if such compliance necessitates Alterations or
results in interference with the use or enjoyment of any of the Premises.
(g) Tenant shall not carry separate insurance concurrent in form or
contributing in the event of a Casualty with that required in this Section 15
unless (i) Landlord and Lender are included therein as named insureds, with loss
payable as provided herein, and (ii) such separate insurance complies with the
other provisions of this Section 15. Tenant shall promptly notify Landlord of
such separate insurance and shall deliver to Landlord certificates of insurance
evidencing such coverage or if required by Lender, certified copies of policies
thereof.
(h) All policies under Section 15(a) shall contain effective waivers
by the carrier against all claims for insurance premiums against Landlord and
shall contain full waivers of subrogation against the Landlord.
(i) All proceeds of any insurance required under Section 15(a) shall
be payable as follows:
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(i) Proceeds payable under clauses (ii), (iii) and (iv) of
Section 15(a) and proceeds attributable to the general liability coverage of
Builder's Risk insurance under clause (vi) of Section 15(a) shall be payable to
the Person entitled to receive such proceeds.
(ii) Proceeds of insurance required under clause (i) of
Section 15(a) and proceeds attributable to Builder's Risk insurance (other than
its general liability coverage provisions) under clause (vi) of Section 15(a)
shall be payable to Landlord or Lender and applied as set forth in Section 17
or, if applicable, Section 18. Tenant shall apply the Net Award to restoration
of the Premises in accordance with the applicable provisions of this Lease
16. INDEMNIFICATION.
(a) Except to the extent attributable to the gross negligence or
willful misconduct of Landlord or its agents, contractors or employees, Tenant
shall pay, protect, indemnify, defend, save and hold harmless Landlord Parties,
Lender and all other Persons described in Section 35 (each an "Indemnitee") from
and against any and all liabilities, losses, damages (subject to Section 36(q)
below), penalties, Costs (including reasonable attorneys' fees and costs),
causes of action, suits, claims, demands or judgments of any nature whatsoever,
howsoever caused, without regard to the form of action and whether based on
strict liability, negligence or any other theory of recovery at law or in equity
arising from (i) any matter pertaining to the use, non-use, occupancy,
operation, condition, design, construction, maintenance, repair or restoration
of the Premises or Adjoining Property, (ii) any casualty to persons or property
in any manner arising from the Premises or Adjoining Property, whether or not
Indemnitee has or should have knowledge or notice of any defect or condition
causing or contributing to said casualty, (iii) any violation by Tenant of any
provision of this Lease, any Legal Requirement applicable to the Premises or
Tenant's use or occupancy thereof or any Permitted Encumbrance or any
encumbrance Tenant consented to or the Mortgage or Assignment or (iv) any
alleged, threatened or actual Environmental Violation, including (A) liability
for response costs and for costs of removal and remedial action incurred by the
United States Government, any state or local governmental unit or any other
Person, or damages from injury to or destruction or loss of natural resources,
including the reasonable costs of assessing such injury, destruction or loss,
incurred pursuant to Section 107 of CERCLA, or any successor section or act or
provision of any similar state or local Law, (B) liability for costs and
expenses of abatement, correction or clean-up, fines, damages, response costs or
penalties which arise from the provisions of any of the other Environmental
Laws, (C) liability for personal injury or property damage arising under any
statutory or common-law tort theory, including damages assessed for the
maintenance of a public or private nuisance or for carrying on of a dangerous
activity, and (D) any diminution in value or loss of rents after the expiration,
termination or rejection of this Lease solely as a result of an Environmental
Violation existing as of the date of such expiration, termination or rejection.
(b) In case any action or proceeding is brought against any
Indemnitee by reason of any such claim, (i) Tenant may, except in the event of a
conflict of interest, retain its
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own counsel and defend such action (it being understood that Landlord may employ
counsel of its choice to monitor the defense of any such action, the reasonable
cost of which shall be paid by Tenant) and (ii) such Indemnitee shall notify
Tenant to resist or defend such action or proceeding by retaining counsel
reasonably satisfactory to such Indemnitee, and such Indemnitee will cooperate
and assist in the defense of such action or proceeding if reasonably requested
so to do by Tenant. In the event of a conflict of interest, Landlord shall have
the right to select counsel, and the reasonable cost of such counsel shall by
paid by Tenant.
(c) The obligations of Tenant under this Section 16 with respect to
matters that existed or occurred prior to the termination, expiration or
rejection in bankruptcy of this Lease shall survive any termination, expiration
or rejection in bankruptcy of this Lease.
17. CASUALTY; CONDEMNATION.
(a) If any Casualty to the Bedford Premises or the Danbury Premises
occurs the insurance proceeds for which is reasonably estimated by Tenant to be
equal to or in excess of One Hundred Thousand Dollars ($100,000) as increased
annually by the CPI Ratio, Tenant shall give Landlord and Lender prompt notice
thereof. So long as no Event of Default exists Tenant is hereby authorized to
adjust, collect and compromise all claims under any of the insurance policies
required by Section 15(a) (except public liability insurance claims payable to a
Person other than Tenant, Landlord or Lender) and to execute and deliver on
behalf of Landlord all necessary proofs of loss, receipts, vouchers and releases
required by the insurers and Landlord shall have the right to join with Tenant
therein. Any final adjustment, settlement or compromise of any such claim shall
be subject to the prior written approval of Landlord (which approval shall not
be unreasonably withheld, delayed or conditioned), and Landlord shall have the
right to prosecute or contest, or to require Tenant to prosecute or contest, any
such claim, adjustment, settlement or compromise. If an Event of Default exists,
Tenant shall not be entitled to adjust, collect or compromise any such claim or
to participate with Landlord in any adjustment, collection and compromise of the
Net Award payable in connection with a Casualty. Tenant agrees to sign, upon the
request of Landlord, all such proofs of loss, receipts, vouchers and releases.
Each insurer is hereby authorized and directed to make payment under said
policies, including return of unearned premiums, directly to Landlord or, if
required by the Mortgage, to Lender instead of to Landlord. The Net Award shall
be applied as provided in Section 17(c) or, if the Casualty is a Termination
Event, Section 18. The rights of Landlord under this Section 17(a) shall be
extended to Lender if and to the extent that any Mortgage so provides.
(b) Landlord, promptly upon receiving a Condemnation Notice, shall
notify Tenant thereof. Tenant, promptly upon receiving a Condemnation Notice,
shall notify Landlord and Lender thereof. Upon notice to Tenant, Landlord and
Lender are authorized to collect, settle and compromise, in their discretion,
the amount of any Net Award. Provided that no Event of Default has occurred and
is continuing, Tenant shall be entitled to participate with Landlord and Lender
in any Condemnation proceeding or negotiations under threat thereof or
settlement or compromise negotiations related thereto and to contest the
Condemnation or the amount of the
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Net Award therefor. No agreement with any condemnor in settlement or under
threat of any Condemnation shall be made by Tenant without the written consent
of Landlord and Lender, which shall not be unreasonably withheld, conditioned or
delayed. Subject to the provisions of this Section 17(b), Tenant hereby
irrevocably assigns to Landlord any award or payment to which Tenant is or may
be entitled by reason of any Condemnation, whether the same shall be paid or
payable for Tenant's leasehold interest hereunder or otherwise; but nothing in
this Lease shall impair Tenant's right to any award or payment on account of
Tenant's trade fixtures, equipment or other tangible property which is not part
of the Equipment, moving expenses or loss of business, if available, to the
extent that and so long as (i) Tenant shall have the right to make, and does
make, a separate claim therefor against the condemnor and (ii) such claim does
not in any way reduce either the amount of the award otherwise payable to
Landlord for the Condemnation of Landlord's fee interest in the Premises or the
amount of the award (if any) otherwise payable for the Condemnation of Tenant's
leasehold interest hereunder. The rights of Landlord under this Section 17(b)
shall also be extended to Lender if and to the extent that any Mortgage so
provides.
(c) If any Casualty (whether or not insured against) or Condemnation
shall occur, this Lease shall continue, notwithstanding such event, and there
shall be no abatement or reduction of any Monetary Obligations except as
otherwise specifically provided in Paragraph 18. Promptly after such Casualty or
Condemnation for which Tenant does not give a Termination Notice, Tenant shall
commence and diligently continue to restore the affected Premises as nearly as
possible to their value, condition and character immediately prior to such event
(assuming the Premises to have been in the condition required by this Lease) and
as required by Sections 7 and 8 of this Lease. So long as no Event of Default
exists, any Net Award up to and including $500,000 (such amount to be increased
on each anniversary of the Commencement Date by the CPI Ratio) shall be paid by
Landlord to Tenant and Tenant shall restore the Premises in accordance with the
requirements of Sections 8 and 19 of this Lease. Any Net Award in excess of
$500,000 (such amount to be increased on each anniversary of the Commencement
Date by the CPI Ratio) shall be made available by Landlord (or Lender, if
required by the terms of any Mortgage) to Tenant for the restoration of any of
the Premises pursuant to and in accordance with the provisions of Section 19
hereof.
18. TERMINATION EVENTS.
(a) If (i) all or a substantial portion of the Bedford Premises
and/or the Danbury Premises shall be subject to a Condemnation (such that Tenant
certifies to Landlord that it will forever abandon operations at the Bedford
Premises and/or the Danbury Premises) or (ii) all or a substantial portion of
either of the Bedford Premises or Danbury Premises shall be subject to a
Casualty during any exercised Extension Term (any such event, a "Termination
Event"), then Tenant shall be obligated, within thirty (30) days after Tenant
receives a Condemnation Notice and Tenant shall have the right within thirty
(30) days after the occurrence of such Casualty to give to Landlord written
notice in the form described in Section 18(b) (a "Termination Notice") of
Tenant's election to terminate this Lease with respect to the Bedford
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Premises or the Danbury Premises affected by such Condemnation or Casualty (the
"Affected Premises"). If Tenant elects not to give Landlord a Termination
Notice, then this Lease shall remain in full force and effect and all
obligations of Tenant shall continue in full force and effect with respect to
the Bedford Premises and the Danbury Premises. If Tenant delivers to Landlord a
Termination Notice with respect to the Affected Premises, then this Lease shall
remain in full force and effect with respect to the Premises not subject to
Condemnation or Casualty and all obligations of Tenant and Landlord, including
the obligation to pay Rent, shall continue in full force and effect with respect
to such Premises.
(b) A Termination Notice shall contain (i) notice of Tenant's
intention to terminate this Lease with respect to the Affected Premises on the
first Basic Rent Payment Date which occurs at least thirty (30) days after the
date of the Condemnation Notice or thirty (30) days after the date of the
Casualty (the "Termination Date"), and (ii) a binding and irrevocable offer of
Tenant to pay to Landlord the Termination Amount for the Affected Premises.
(c) If Landlord shall reject such offer by Tenant to pay to Landlord
the Termination Amount for the Affected Premises pursuant to Section 18(b) above
by written notice to Tenant (a "Rejection") then this Lease shall terminate with
respect to the Affected Premises on the Termination Date; provided that, if
Tenant has not paid all Rent then due and owing (collectively, "Remaining
Obligations") on the Termination Date, then Landlord may, at its option, extend
the date on which this Lease may terminate to a date which is no later than the
first Basic Rent Payment Date after the Termination Date on which Tenant has
satisfied all Remaining Obligations. Upon such termination (i) on the
Termination Date all obligations of Tenant hereunder for the Affected Premises
shall terminate except for any Surviving Obligations, (ii) Tenant shall on or
before the Termination Date vacate and shall have no further right, title or
interest in or to any of the Affected Premises and (iii) the Net Award shall be
retained by Landlord.
(d) Unless Tenant shall have received a Rejection not later than the
thirtieth (30th) day following the date of the Termination Notice, Landlord
shall be conclusively presumed to have accepted such offer from Tenant to pay
the Termination Amount for the Affected Premises. If such offer from Tenant to
pay the Termination Amount for the Affected Premises is accepted by Landlord
then, on the later of (i) the Termination Date or (ii) the date on which Tenant
has available funds to pay the Termination Amount (but in no event later than
forty-five (45) days after the Termination Date), Tenant shall pay to Landlord
the Termination Amount and Rent then due and owing, this Lease shall terminate
with respect to the Affected Premises except for any Surviving Obligations and,
if requested by Tenant, Landlord shall (i) convey to Tenant the Affected
Premises or the remaining portion thereof, if any, and (ii) pay to or assign to
Tenant Landlord's entire interest in and to the Net Award, all in accordance
with Section 20.
19. RESTORATION.
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(a) If any Net Award is in excess of $500,000 (such amount to be
increased on each anniversary of the Commencement Date by the CPI Ratio),
Landlord (or Lender if required by any Mortgage) shall hold the entire Net Award
in a fund (the "Restoration Fund") and disburse amounts from the Restoration
Fund only in accordance with the following conditions:
(i) prior to commencement of restoration, (A) the architects,
contracts, contractors, plans and specifications and a budget for the
restoration shall have been reasonably approved by Landlord and (B) Landlord and
Lender shall be provided with acceptable performance and payment bonds which
insure satisfactory completion of and payment for the restoration, are in an
amount and form and have a surety reasonably acceptable to Landlord in an amount
not to exceed the cost of restoration, and name Landlord and Lender as
additional dual obligees;
(ii) at the time of any disbursement, no Event of Default
shall exist and no mechanics' or materialmen's liens shall have been filed
against the Premises affected by such Casualty or Condemnation and remain
undischarged or not bonded against or affirmatively insured against by the title
company;
(iii) disbursements shall be made from time to time in an
amount not exceeding the cost of the work completed since the last disbursement,
upon receipt of (A) reasonably satisfactory evidence, including architects'
certificates, of the stage of completion, the estimated total cost of completion
and performance of the work to date in a good and workmanlike manner in
accordance with the contracts, plans and specifications, (B) waivers of liens,
(C) contractors' and subcontractors' sworn statements as to completed work and
the cost thereof for which payment is requested, (D) a satisfactory bringdown of
title insurance and (E) other reasonably requested evidence of cost and payment
so that Landlord can verify that the amounts disbursed from time to time are
represented by work that is completed, in place and free and clear of mechanics'
and materialmen's lien claims;
(iv) each request for disbursement shall be accompanied by a
certificate of Tenant, signed by the president or a vice president of Tenant,
describing the work for which payment is requested, stating the cost incurred in
connection therewith, stating that Tenant has not previously received payment
for such work and, upon completion of the work, also stating that the work has
been fully completed and complies with the applicable requirements of this
Lease;
(v) Landlord may retain the same percentage of the
restoration fund as and to the extent as may be retained by Tenant under its
construction contract with its general contractor (which shall not be less than
10% until 50% completion) until the restoration is fully completed;
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(vi) if the Restoration Fund is held by Landlord, the
Restoration Fund shall not be commingled with Landlord's other funds and shall
bear interest at a rate agreed to by Landlord and Tenant; and
(vii) such other reasonable conditions as Landlord may impose.
(b) Prior to commencement of restoration and at any time during
restoration, if the estimated cost of completing the restoration work free and
clear of all liens, as determined by Landlord, exceeds the amount of the Net
Award available for such restoration, the amount of such excess shall, upon
demand by Landlord, be paid by Tenant to Landlord to be added to the Restoration
Fund. Any sum so added by Tenant which remains in the Restoration Fund upon
completion of restoration shall be refunded to Tenant. For purposes of
determining the source of funds with respect to the disposition of funds
remaining after the completion of restoration, the Net Award shall be deemed to
be disbursed prior to any amount added by Tenant.
(c) If any sum remains in the Restoration Fund after completion of
the restoration and any refund to Tenant pursuant to Section 19(b), such sum
shall be retained by Landlord or, if required by a Note or Mortgage, paid by
Landlord to a Lender.
20. PROCEDURES UPON PURCHASE.
(a) If the Premises or any portion thereof are purchased by Tenant
pursuant to Section 12, Section 14 or Section 18 of this Lease, Landlord shall
convey the same title thereto than as was conveyed to Landlord by Tenant, and
Tenant shall accept such title, subject, however, to the Permitted Encumbrances
and to all other liens, exceptions and restrictions on, against or relating to
the portion of the Premises being purchased (the "Purchased Property") and to
all applicable Laws, but free of the lien of and security interest created by
any Mortgage or Assignment and liens, exceptions and restrictions on, against or
relating to the Purchased Property which have been created by or suffered or
resulted by or from acts of Landlord after the date of this Lease, unless the
same are Permitted Encumbrances or were created by or with the concurrence of
Tenant or as a result of a default by Tenant under this Lease.
(b) Upon the date fixed for any such purchase of the Purchased
Property pursuant to any provision of this Lease (any such date the "Purchase
Date"), Tenant shall pay to Landlord, or to any Person to whom Landlord directs
payment, the Relevant Amount therefor, in Federal Funds, less any credit of the
Net Award received and retained by Landlord or a Lender allowed against the
Relevant Amount, and Landlord shall deliver to Tenant or to its Affiliate (i) a
quitclaim or similar form deed which describes the Purchased Property and
conveys title thereto (but no better title than conveyed to Landlord by Tenant)
as provided in Section 20(a), together with Landlord's right, title and interest
in and to the Improvements, the Equipment and the Appurtenances relating to the
Purchased Property, (ii) a bill of sale for the Equipment, (iii) an assignment
of all of the guaranties and warranties, if any, from contractors, construction
manager, suppliers and subcontractors, to the extent assignable, (iv) such other
instruments as
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shall be necessary or reasonably requested by Tenant or the title company to
transfer to Tenant or its Affiliate the Purchased Property (or rights to any Net
Award not yet received by Landlord or a Lender), and (v) with respect to a
purchase under Section 18, any Net Award received by Landlord, not credited to
Tenant against the Termination Amount and required to be delivered by Landlord
to Tenant pursuant to this Lease; provided, that if any Monetary Obligations
remain outstanding on such date, then Landlord may deduct from the Net Award the
amount of such Monetary Obligations. If on the Purchase Date any Monetary
Obligations remain outstanding and no Net Award is payable to Tenant by Landlord
or the amount of such Net Award is less than the amount of the Monetary
Obligations, then Tenant shall pay to Landlord on the Purchase Date the amount
of such Monetary Obligations. Upon the completion of such purchase, this Lease
and all obligations and liabilities of Tenant with regard to the Purchased
Property hereunder shall terminate, except any Surviving Obligations.
(c) Landlord shall be obligated to use reasonable efforts to convey
the Purchased Property in conformity with the title standard set forth in
Section 20(a) of this Lease. If the completion of such purchase shall be
delayed, unless such delay is a result of Landlord's refusal to convey the
Purchased Property as required herein, after the Termination Date, in the event
of a purchase pursuant to Section 18 of this Lease then Rent shall continue to
be due and payable until completion of such purchase. If the Landlord is unable
(as opposed to refuses), for a period in excess of ninety (90) days from the
scheduled closing date, to convey title as and when required herein, after using
reasonable efforts to do so, Tenant shall have the right to continue this Lease
in effect and not proceed to closing, accept title as it then exists (with a
credit against the Purchase Price with respect to such title defect, as
reasonably agreed to by Landlord and Tenant) or bring an action for specific
performance.
(d) Any prepaid Monetary Obligations paid to Landlord shall be
prorated as of the Purchase Date, and the prorated unapplied balance shall be
deducted from the Relevant Amount due to Landlord; provided, that no
apportionment of any Impositions shall be made upon any such purchase.
21. ACCESS TO THE PREMISES.
(a) Tenant and Tenant's officers, directors, employees, contractors,
servants, agents, customers, invitees, licensees and subtenants shall have
access to the Premises twenty-four (24) hours a day, seven (7) days a week,
subject to the terms of this Lease.
(b) Subject to the terms hereof, Landlord shall, upon as much advance
notice as is practical under the circumstances and no less than forty-eight (48)
hours' notice in non-emergency situations, and when accompanied by a
representative of Tenant, have the right to access and enter upon the Premises
for the purposes of inspection and exercising any right reserved to Landlord by
this Lease; and (z) upon no less than forty-eight (48) hours' notice, permit any
of the Landlord Parties, at reasonable times, to show the Premises during
ordinary business hours to any prospective mortgagee or purchaser of the
Premises or of the interest of
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Landlord therein, and, if Tenant has not exercised its rights pursuant to
Section 13 above, during the last twelve (12) months of the Term, prospective
tenants; provided such access does not unreasonably interfere with the operation
of Tenant's business and/or Tenant's use, occupancy and enjoyment of, and access
to, any of the Premises.
22. ENVIRONMENTAL MATTERS.
(a) Tenant shall not at any time (i) cause, permit or suffer to occur
any Environmental Violation or (ii) permit any sublessee, assignee or other
Person occupying the Premises under or through Tenant to cause, permit or suffer
to occur any Environmental Violation and, at the request of Landlord or Lender,
Tenant shall promptly remediate or undertake any other appropriate response
action to correct any existing Environmental Violation. Any and all reports
prepared for or by Landlord with respect to the Premises shall be for the sole
benefit of Landlord and Lender and no other Person shall have the right to rely
on any such reports; provided, however, that upon Tenant's request, Landlord
shall cooperate with Tenant, at no cost to Landlord, in Tenant's efforts to
obtain a so-called "reliance letter" from the preparer of any such report.
(b) Upon at least three (3) business days' prior written notice from
Landlord, Tenant shall permit such persons as Landlord may designate ("Site
Reviewers") to visit any of the Premises and perform, environmental site
investigations and assessments ("Site Assessments") on any of the Premises (i)
in connection with any sale, financing or refinancing of such portion of the
Premises, (ii) within the six (6) month period prior to the expiration of the
Term if Tenant has not exercised its rights pursuant to Section 13 hereof, (iii)
if required by Lender or the terms of any credit facility to which Landlord is
bound, (iv) if an Event of Default exists, or (v) at any other time that, in the
reasonable opinion of Landlord or Lender, a reasonable basis exists to believe
that an Environmental Violation or any condition that could reasonably be
expected to result in any Environmental Violation exists. No more than one (1)
Site Assessment for each of the Bedford Premises and the Danbury Premises shall
be performed per Lease Year unless as a result of subsection (v) above. Such
Site Assessments may include both above and below the ground testing for
Environmental Violations and such other tests as may be necessary, in the
opinion of the Site Reviewers, to conduct the Site Assessments. Tenant shall
supply to the Site Reviewers such historical and operational information
regarding the Premises as may be reasonably requested by the Site Reviewers to
facilitate the Site Assessments, and shall make available for meetings with the
Site Reviewers appropriate personnel having knowledge of such matters. If an
Environmental Violation is found to exist, the cost of performing and reporting
the Site Assessment shall be paid by Tenant. In all other cases the cost shall
be paid by Landlord.
(c) If an Environmental Violation occurs or is found to exist and, in
Landlord's reasonable judgment, the cost of remediation of, or other response
action with respect to, the same is likely to exceed $250,000 (such amount to be
increased on each anniversary of the Commencement Date by the CPI Ratio), Tenant
shall provide to Landlord, within ten (10) days after Landlord's request
therefor, adequate financial assurances that Tenant will effect such
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remediation in accordance with applicable Environmental Laws. Such financial
assurances shall be a bond or letter of credit reasonably satisfactory to
Landlord in form and substance and in an amount equal to Landlord's reasonable
estimate, based upon a Site Assessment performed pursuant to Section 21(b), of
the anticipated cost of such remedial action.
(d) If Tenant fails, after the expiration of all applicable notice
and cure periods, to correct any Environmental Violation which occurs or is
found to exist, Landlord shall have the right (but no obligation) to take any
and all reasonable actions as Landlord shall deem necessary or advisable in
order to cure such Environmental Violation.
(e) Tenant shall notify Landlord immediately after becoming aware of
any Environmental Violation (or alleged Environmental Violation) or
noncompliance with any of the covenants contained in this Section 22 and shall
forward to Landlord immediately upon receipt thereof copies of all orders,
reports, notices, permits, applications or other communications relating to any
such violation or noncompliance.
(f) All future subleases or occupancy agreements relating to any of
the Premises entered into by Tenant shall contain covenants of the other party
not to at any time (i) cause any Environmental Violation to occur or (ii) permit
any Person occupying the Premises through said subtenant or concessionaire to
cause any Environmental Violation to occur.
(g) Tenant shall perform or caused to be performed those obligations
listed in Exhibit K hereto within the time period specified in Exhibit K.
23. SUBDIVISION OF BEDFORD PREMISES & POST-CLOSING OBLIGATIONS.
(a) Landlord and Tenant acknowledge that prior to the sale of the
Bedford Premises by Tenant to Landlord: (i) Tenant owned a parcel designated as
Lot 5 on the Land Court Plan No. 34759C on file with the Middlesex South
Registry District of the Land Court (the "Original Parcel") comprised of (1) the
Bedford Premises and (2) the 3-acre Parcel; (ii) Tenant subdivided on or about
August 13, 2002 in compliance with all applicable subdivision laws, Legal
Requirements and Easement Agreements, the Original Parcel into the Bedford
Premises and the 3-acre Parcel; (iii) Tenant sold on August 26, 2002, the 3-acre
Parcel to N.W. Building 22 Trust (the "Adjoining Property Owner"); and (iv)
Tenant and Adjoining Property Owner executed that certain Tax Apportionment
Agreement dated August 26, 2002, to account for Tenant's and Adjoining Property
Owner's proportionate share of taxes in connection with the Original Parcel
until such time that the Bedford Premises and the 3-acre Parcel is separately
assessed by the Town of Bedford, Massachusetts.
(b) Tenant shall use reasonable efforts to: (i) cause the separate
tax assessment of both the Bedford Premises and the 3-acre Parcel commencing
with the July 1, 2003 - June 30, 2004 fiscal year; and (ii) cause the
termination and release, within thirty (30) days after the date
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hereof, of the Reserved Easements as such term is defined in that certain Deed
from BASF Corporation to 35 Crosby Drive LLC, dated April 24, 1997 and filed as
Document No. 1029886 at the South Registry of Middlesex County.
24. EVENTS OF DEFAULT.
The occurrence of any one or more of the following shall, at the sole option of
Landlord, constitute an "Event of Default" under this Lease:
(a) a failure by Tenant to make any payment of Basic Rent on or prior
to its due date, if such failure continues for three (3) business days after
written notice with respect to the first late payment in any Lease Year and
three (3) business days without notice for any subsequent failure in such Lease
Year regardless of the reason for such failure;
(b) a failure by Tenant to make any payment of any other Monetary
Obligation on or prior to its due date, if such failure continues for ten (10)
days after written notice thereof regardless of the reason for such failure;
(c) a failure by Tenant duly to perform and observe, or a violation
or breach of, any other provision hereof not otherwise specifically mentioned in
this Paragraph 24, and such failure continues for thirty (30) days (or such
additional time, not to exceed ninety (90) days in the aggregate or such longer
period as afforded to Landlord under the Mortgage, reasonably necessary to
complete the cure of such default if within such thirty (30) day period Tenant
shall commence to correct the same and thereafter diligently pursue the
completion of such cure) after receipt of a reasonably detailed written notice
from Landlord of such failure;
(d) any representation or warranty made by Tenant herein or in any
certificate, demand or request made pursuant hereto proves to be incorrect, now
or hereafter, in any material respect which has an adverse impact on Landlord
based on Landlord's reliance thereon, and the facts are not conformed to such
representation or warranty within thirty (30) days after written notice to
Tenant from Landlord of such inaccuracy such that Landlord suffers no loss or
detriment;
(e) if Tenant fails to pay at maturity or if any lender of Tenant
exercises its right to accelerate all payments due under loan documents relating
to borrowed money having an original principal balance of $10,000,000 or more in
the aggregate;
(f) a final, non-appealable judgment or judgments for the payment of
money in excess of $5,000,000 (as such amount is increased on each anniversary
of the Commencement Date by the CPI Ratio) in the aggregate shall be rendered
against Tenant which is not covered by insurance, and the same shall remain
undischarged for a period of sixty (60) consecutive days or such later date as
is required by the judgment;
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(g) The breach of any Covenant shall occur, unless Tenant shall be in
compliance with Section 34;
(h) Tenant shall (A) voluntarily be adjudicated a bankrupt or
insolvent, (B) seek or consent to the appointment of a receiver or trustee for
itself or for the Premises, (C) file a petition seeking relief under the
bankruptcy or other similar laws of the United States, any state or any
jurisdiction, (D) make a general assignment for the benefit of creditors, or (E)
be unable to pay its debts as they mature;
(i) a court shall enter an order, judgment or decree appointing,
without the consent of Tenant, a receiver or trustee for it or for any of the
Premises or approving a petition filed against Tenant which seeks relief under
the bankruptcy or other similar laws of the United States, any state or any
jurisdiction, and such order, judgment or decree shall remain undischarged or
unstayed ninety (90) days after it is entered;
(j) unless Tenant is actively seeking subtenants for the Premises,
any of the Premises shall have been vacated for a period of more than one
hundred twenty (120) consecutive days except during the period of restoration
following a Casualty or Condemnation or shall have been abandoned;
(k) Tenant shall be liquidated or dissolved or shall begin
proceedings towards its liquidation or dissolution;
(l) the estate or interest of Tenant in any of the Premises shall be
levied upon or attached in any proceeding and such estate or interest is about
to be sold or transferred or such process shall not be vacated, discharged or
bonded against within sixty (60) days after it is made;
(m) a failure by Tenant to perform or observe, or a violation or
breach of, or a misrepresentation by Tenant under any provision of any document
between Tenant and Lender or from Tenant to Lender, if such failure, violation,
breach or misrepresentation gives rise to a default beyond any applicable cure
period with respect to any Loan;
(n) Tenant shall fail to deliver the estoppel described in Section 26
within the time period specified therein and such failure continues for ten (10)
days after written notice thereof;
(o) Tenant shall fail to provide any insurance required by Section
15;
(p) Tenant shall enter into a sublease or assignment in violation of
Section 9;
(q) Tenant shall sell or transfer all or substantially all of its
assets a single transaction or a series of related transactions unless the sale
or transfer is to a Pre-Approved Assignee under Section 9(b)(i) or a
Non-Approved Assignee under Section 9(b)(ii) approved by
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Landlord and Lender applying the Review Criteria set forth in Section 9(b)(ii)
who assumes all of Tenant's obligations and liabilities under this Lease; or
(r) Tenant's failure to timely comply with any of Tenant's
post-closing environmental obligations in connection with the Danbury Premises
as more particularly described in Exhibit "K" attached hereto and made a part
hereof and such failure continues for fifteen (15) days after written notice
from Landlord.
25. REMEDIES AND DAMAGES UPON DEFAULT.
(a) If an Event of Default shall have occurred and is continuing,
Landlord shall have the right, at its sole option, then or at any time
thereafter, to exercise its remedies and to collect damages from Tenant in
accordance with this Section 25, subject in all events to applicable Law,
without demand upon or notice to Tenant except as otherwise provided in Section
24 and this Section 25.
(i) Landlord may give Tenant written notice of Landlord's
intention to terminate this Lease on a date specified in such notice. Upon such
date, this Lease, the estate hereby granted and all rights of Tenant hereunder
shall expire and terminate. Upon such termination, Tenant shall immediately
surrender and deliver possession of the Premises to Landlord in accordance with
Section 28. If Tenant does not so surrender and deliver possession of the
Premises, Landlord may re-enter and repossess the Premises, by legal process,
ejectment or any other lawful means or procedure. Upon or at any time after
taking possession of the Premises, Landlord may, by peaceable means or legal
process, remove any Persons or property therefrom. Landlord shall be under no
liability for or by reason of any such entry, repossession or removal except for
its own gross negligence or willful misconduct. Notwithstanding such entry or
repossession, Landlord may collect the damages set forth in Section 25(b)(i) or
25(b)(ii).
(ii) After repossession of the Premises pursuant to clause (i)
above, Landlord shall have the right to relet any of the Premises to such tenant
or tenants, for such term or terms, for such rent, on such conditions and for
such uses as Landlord in its sole discretion may determine, and collect and
receive any rents payable by reason of such reletting. Landlord may make such
Alterations in connection with such reletting as it may deem advisable in its
sole discretion. Notwithstanding any such reletting, Landlord may collect the
damages set forth in Section 25(b)(ii).
(iii) Landlord may declare by notice to Tenant the entire Basic
Rent (in the amount of Basic Rent then in effect) for the remainder of the then
current Term to be immediately due and payable. Tenant shall immediately pay to
Landlord all such Basic Rent discounted to its Present Value, all accrued Rent
then due and unpaid, all other Monetary Obligations which are then due and
unpaid and all Monetary Obligations which arise or become due by reason of such
Event of Default (including any Costs of Landlord). Upon receipt by Landlord of
all such accelerated Basic Rent and Monetary Obligations, this Lease shall
remain in
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full force and effect and Tenant shall have the right to possession of the
Premises from the date of such receipt by Landlord to the end of the Term, and
subject to all the provisions of this Lease, including the obligation to pay all
increases in Basic Rent and all Monetary Obligations that subsequently become
due, except that (A) no Basic Rent which has been prepaid hereunder shall be due
thereafter during the said Term, (B) Tenant shall have no option to extend or
renew the Term and (C) Tenant shall have no further rights under Sections 12, 13
or 14.
(b) The following constitute damages to which Landlord shall be
entitled if Landlord exercises its remedies under Section 25(a)(i) or 25(a)(ii):
(i) If Landlord exercises its remedy under Section 25(a)(i)
but not its remedy under Section 25(a)(ii) (or attempts to exercise such remedy
and is unsuccessful in reletting the Premises) then, upon written demand from
Landlord, Tenant shall pay to Landlord, as liquidated and agreed final damages
for Tenant's defau