UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 26, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission File Number: 0-18281 Hologic, Inc. (Exact name of registrant as specified in its charter) Delaware 04-2902449 (State of incorporation) (I.R.S. Employer Identification No.) 35 Crosby Drive, Bedford, Massachusetts 01730 (Address of principal executive offices) (Zip Code) (781) 999-7300 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ As of January 30, 1999 13,411,670 shares of the registrant's Common Stock, $.01 par value, were outstanding. HOLOGIC, INC. AND SUBSIDIARIES INDEX Page PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets December 26, 1998 and September 26, 1998 3 Consolidated Statements of Income Three Months Ended December 26, 1998 and December 27, 1997 4 Consolidated Statements of Cash Flows Three Months Ended December 26, 1998 and December 27, 1997 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosure About Market Risk 13 PART II - OTHER INFORMATION 14 SIGNATURES 15 HOLOGIC, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except per share data) ASSETS <TABLE> <CAPTION> December 26, September 26, 1998 1998 ----------- ------------- <S> <C> <C> CURRENT ASSETS: Cash and cash equivalents............... $48,436 $48,423 Short-term investments.................. 24,637 27,479 Accounts receivable, less reserves of $2,100................ 33,216 29,287 Inventories............................. 20,478 20,438 Prepaid expenses and other current assets.................. 6,160 6,221 ------- ------- Total current assets................. 132,927 131,848 ------- ------- PROPERTY AND EQUIPMENT, at cost: Equipment.............................. 9,080 8,633 Furniture and fixtures................. 1,814 1,910 Leasehold improvements................. 1,667 1,729 Construction in progress............... 22,649 20,066 ------ ------ 35,210 32,338 Less- Accumulated depreciation and amortization..................... 6,621 6,440 ------ ------ 28,589 25,898 ------ ------ Other assets, net....................... 16,047 14,851 ------ ------ $177,563 $172,597 ======== ======== </TABLE> LIABILITIES AND STOCKHOLDERS' EQUITY <TABLE> <CAPTION> December 26, September 26, 1998 1998 ------------ ------------ <S> <C> <C> CURRENT LIABILITIES: Line of credit......................... $ 2,821 $ 3,799 Accounts payable....................... 9,570 5,497 Accrued expenses....................... 10,381 12,453 Deferred revenue....................... 12,204 10,466 -------- --------- Total current liabilities............ 34,976 32,215 -------- -------- STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value- Authorized - 1,623 Issued and outstanding - none ....... -- -- Common stock, $.01 par value- Authorized - 30,000 shares Issued - 13,395 and 13,378 shares, respectively...................... 134 134 Capital in excess of par value....... 95,277 95,100 Retained earnings.................... 48,224 46,187 Cumulative translation adjustment.... (584) (575) Treasury stock, at cost, 45 shares... (464) (464) ------- ------- Total stockholders' equity......... 142,587 140,382 ------- -------- $177,563 $172,597 ======== ======== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. HOLOGIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands, except per share data) <TABLE> <CAPTION> Three Months Ended December 26, December 27, 1998 1997 ---------- ----------- <S> <C> <C> REVENUES: Product sales...................... $23,914 $25,139 Other revenue...................... 718 982 ------- ------- 24,632 26,121 ------- ------- COSTS AND EXPENSES: Cost of product sales............. 1 12,791 12,740 Research and development.......... 2,458 2,339 Selling and marketing............. 5,259 6,749 General and administrative........ 2,169 2,295 ------- ------ 22,677 24,123 ------- ------ Income from operations...... 1,955 1,998 Interest income.................. 1,253 1,304 Other expense.................... (31) (89) ------- ------- Income before provision for income taxes........ 3,177 3,213 PROVISION FOR INCOME TAXES........ 1,140 1,150 ------- ------ Net income................... $2,037 $2,063 ======= ====== NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE: Basic........................ $.15 $.16 ==== ==== Diluted...................... $.15 $.15 ==== ==== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING........ 13,340 13,132 ====== ====== WEIGHTED AVERAGE NUMBER OF COMMON AND DILUTIVE POTENTIAL COMMON SHARES OUTSTANDING........ 13,638 13,790 ====== ====== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. HOLOGIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) <TABLE> <CAPTION> Three Months Ended December 26, December 27, 1998 1997 ----------- ----------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................... $2,037 $2,063 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization........... 357 388 Compensation expense related to issuance of stock option............... 60 60 Changes in assets and liabilities- Accounts receivable................... (3,526) 1,700 Inventories........................... (40) (3,669) Prepaid expenses and other current assets................ 145 580 Accounts payable...................... 4,073 1,338 Accrued expenses...................... (2,070) 194 Deferred revenue...................... 1,737 2,602 ------ ------ Net cash provided by operating activities.............. 2,773 5,256 ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of held-to-maturity investments...... (7,242) (45,553) Sales of held-to-maturity investments......... 8,083 57,968 Purchases of property and equipment........... (2,873) (531) Increase (decrease) in other assets........... 234 (37) ------- ------- Net cash (used in) provided by investing activities................ (1,798) 11,847 ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in line of credit................ (978) (83) Issuance of common stock pursuant to options, stock grants and employee stock purchase plans......................... 22 97 Tax benefit from stock options exercised...... 10 -- ------ ------ Net cash (used in) provided by financing activities................. (946) 14 ------- ------ EFFECT OF EXCHANGE RATE CHANGES ON CASH......... (16) (42) ------ ------ NET INCREASE IN CASH AND CASH EQUIVALENTS....... 13 17,075 CASH AND CASH EQUIVALENTS, beginning of period.. 48,423 28,092 ------- ------- CASH AND CASH EQUIVALENTS, end of period........ $48,436 $45,167 ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for income taxes.............................. $ 326 $ 846 ======== ======== Cash paid during the period for interest..... $ 100 -- ======== ======== SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS: Issuance of common stock under 401(k) plan.. $ -- $ 292 ======== ======== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. HOLOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except share and per share data) (1) Basis of Presentation The consolidated financial statements of Hologic, Inc. (the Company) presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended September 26, 1998, included in the Company's Form 10- K as filed with the Securities and Exchange Commission on December 23, 1998. The consolidated balance sheet as of December 26, 1998, the consolidated statements of income for the three months ended December 26, 1998 and December 27, 1997 and the consolidated statements of cash flows for the three months ended December 26, 1998 and December 27, 1997, are unaudited but, in the opinion of management, include all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation of results for these interim periods. The results of operations for the three months ended December 26, 1998 are not necessarily indicative of the results to be expected for the entire fiscal year ending September 25, 1999. (2) Summary of Significant Accounting Policies The accompanying consolidated financial statements reflect the application of certain accounting policies described in this and other notes to the consolidated financial statements. (a) Inventories: Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following: December 26, September 26, 1998 1998 ----------- ------------ Raw materials and work-in-process... $12,472 $13,859 Finished goods...................... 8,006 6,579 ------- ------- $20,478 $20,438 ======= ======= Work-in-process and finished goods inventories consist of material, labor and manufacturing overhead. (b) Earnings Per Share: A reconciliation of basic and dilutive share amounts are as follows: <TABLE> <CAPTION> Three Months Ended December 26, December 27, 1998 1997 ----------- ------------ <S> <C> <C> Weighted average common shares outstanding..... 13,340 13,132 Common stock equivalents outstanding pursuant to the treasury stock method..... 298 658 ------ ------ Weighted average number of common and dilutive potential common shares outstanding..... 13,638 13,790 ====== ====== </TABLE> The Company adopted SFAS No. 128, Earnings Per Share, effective for the quarter ended December 27, 1997, which replaces primary and fully diluted earnings per share with basic and diluted earnings per share. Anti-dilutive shares of 1,014 and 185 for the three months ended December 26, 1998 and December 27, 1997, respectively, have been excluded from the weighted average number of common and dilutive potential common shares outstanding. (3) Line of Credit The Company has an international line of credit with a bank for the equivalent of $3.0 million, which bears interest at PIBOR plus 1.50%. The borrowings under this line are denominated in the local currency of its European subsidiaries and are primarily used by these subsidiaries to settle intercompany sales. (4) Concentration of Credit Risk The Company sells certain of its systems to a leasing company, which in turn leases the systems to third parties. The leasing company accounted for 9% and 30% of product sales in the three months ended December 26, 1998 and December 27, 1997, respectively. The Company finances certain sales to Latin America over a two-to-three year time-frame. At December 26, 1998, the Company had total accounts receivable outstanding of approximately $8.0 million relating to these sales, of which $2.5 million were long-term and included in other assets. As of December 26, 1998, the Company has not experienced any significant change in these receivables, however, the economic and currency related uncertainties in these countries may increase the likelihood of non-payment. (5) Recent Accounting Pronouncements In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. SFAS No. 131 requires certain financial and supplementary information to be disclosed on an annual and interim basis for each reportable segment of an enterprise, as defined. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. Unless impracticable, companies would be required to disclosure similar prior period information upon adoption. The Company will adopt this statement in their fiscal 1999 year-end financial statements. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments investments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The Company does not expect the adoption of this statement to have a material impact on its consolidated financial position or results of operations. (6) Construction in Progress In fiscal 1998, the Company purchased a 200,000 square foot building for approximately $20 million in cash, and has incurred approximately $5 million for renovations, of which $2.5 million has been paid to-date. The Company moved its headquarters and manufacturing into this facility on January 25, 1999. The Company will amortize the cost of the building straight-line over 40 years beginning in the second quarter of fiscal 1999. (7) Comprehensive Income The Company adopted Statement of Financial Accounting Standards No.130 ("SFAS 130"), Reporting Comprehensive Income, effective September 27, 1998. SFAS 130 established standards for reporting and display of comprehensive income and its components in the financial statements. The Company's only item of other comprehensive income relates to foreign currency translation adjustments, and is presented separately on the balance sheet as required. If presented on the statement of operations for the three months ended December 26, 1998 and December 27, 1997, comprehensive income would be approximately $9 and $43 lower than reported net income, respectively, due to foreign currency translation adjustments. PART I - FINANCIAL INFORMATION (Continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations HOLOGIC, INC. AND SUBSIDIARIES Results of Operations The Company's results of operations have and may continue to be subject to significant quarterly variation. The results for a particular quarter may vary due to a number of factors, including the introduction of new products or product enhancements by the Company or its competitors, the timing of FDA approvals or clearances for such introductions, the overall state of health care and cost containment efforts, the development status and demand for drug therapies to treat osteoporosis, the status and amount of reimbursement for approved procedures, the use of mini c-arms in minimally-invasive surgical procedures, the availability of financing alternatives, including fee-per-scan programs, for the Company's products, dependence on Physician Sales and Service, Inc. to broaden the sales of the Company's product to the primary care market, economic conditions in the Company's markets, the timing of orders, the timing of expenditures in anticipation of future sales, the mix of products sold by the Company, and pricing and other competitive conditions. Revenues. Total revenues for the first quarter of fiscal 1999 decreased 6% to $24.6 million from $26.1 million for the first quarter of fiscal 1998. This decrease was primarily due to a decrease in DXA bone densitometers sold to the primary care market in the United States which were partially offset by an increase in the number of mini c-arm and Sahara (the Company's ultrasound bone sonometer) product sales in the current quarter. The increase in sales of mini c-arms were primarily from the Company's recently introduced Premier system. Sahara sales increased in the current quarter due primarily to sales in the United States, where the Company received marketing clearance from the FDA in March 1998. The Company did not have marketing clearance for Sahara in the first quarter of fiscal 1998. Other revenues decreased for the current three month period due to a decrease in royalties from the license of the Company's technology to Vivid Technologies, Inc. and a decrease in revenues received under a development agreement for a biochemical marker strip test. Partially offsetting these decreases was an increase in additional fee-per-scan revenues. Total revenues for the first quarter of fiscal 1999 remained relatively unchanged compared to the immediately preceding quarter. In the current quarter, sales of the Company's mini c-arms and, to a lesser extent, DXA bone densitometers increased which were offset by a decrease in sales of Sahara by the Company's U.S. distributor for the primary care market when compared to the immediately preceding quarter. The Company believes that sales of the Sahara were adversely impacted by a lack of a permanent reimbursement code for the ultrasound bone density measurement. The Company further believes that the approval by HCFA of a permanent reimbursement code for these measurements, which went into effect in January 1999, should positively impact Sahara sales. However, the Company cannot assure that Sahara sales will increase. In the first quarter of fiscal 1999, approximately 62% of product sales were generated in the United States, 23% in Europe and 15% in other international markets. In the first quarter of fiscal 1998, approximately 67% of product sales were generated in the United States, 22% in Europe and 11% in other international markets. The Company expects that foreign sales in the current fiscal year will continue to account for a substantial portion of product sales. Continued economic and currency related uncertainty in a number of foreign countries, especially in Asia and Latin America, could reduce the Company's future sales to these markets. Costs and Expenses. The cost of product sales increased as a percentage of product sales to 53% in the first quarter of fiscal 1999 from 51% in the first quarter of fiscal 1998. In the current quarter, these costs increased as a percentage of product sales primarily due to a decrease in the DXA selling prices which was partially offset by an increase in the selling prices and volume related manufacturing efficiencies of the increased mini c- arm sales this quarter. Research and development expenses increased 5% to $2.5 million (10% of total revenues) in the current quarter from $2.4 million (9% of total revenues) in the first quarter of fiscal 1998 primarily due to the addition of engineering personnel and outside consultants working on the development of new products and product enhancements. Selling and marketing expenses decreased 22% to $5.3 million (22% of product sales) in the current quarter from $6.7 million (27% of product sales) in the first quarter of fiscal 1998 primarily due to a decrease in sales commissions paid to PSS based on the lower sales volume in the primary care market in the United States. General and administrative expenses are relatively unchanged at $2.2 million (9% of total revenues) in the first quarter of fiscal 1999 compared to $2.3 million (9% of total revenues) in the first quarter of fiscal 1998. Interest Income. Interest income was approximately $1.3 million in the current quarter and in the first quarter of fiscal 1998. Other Expense. In the first quarters of fiscal 1999 and 1998, the Company incurred other expenses of approximately $31,000 and $89,000 respectively. In the current quarter, these expenses were primarily attributable to foreign currency transaction losses. In the first quarter of fiscal 1998, these expenses were primarily attributable to interest costs on the line of credit established for use by the Company's European subsidiaries to borrow funds in their local currencies to pay for intercompany sales, thereby reducing the foreign currency exposure on those transactions and, to a lesser extent, to foreign currency transaction losses. To the extent that foreign currency exchange rates fluctuate in the future, the Company may be exposed to continued financial risk. Although the Company has established a borrowing line of credit denominated in the two foreign currencies (the French Franc and the Belgian Franc) in which the subsidiaries currently conduct business to minimize this risk, there can be no assurance that the Company will be successful or can fully hedge its outstanding exposure. Provision for Income Taxes. The Company's effective tax rate was 36% in the first quarters of fiscal 1999 and 1998. The effective tax rate is less than the combined Federal and state statutory rates due primarily to the favorable Federal and state tax treatment afforded the Company's foreign sales corporation and the favorable state tax treatment of certain of the Company's interest income. Liquidity and Capital Resources At December 26, 1998, working capital was approximately $98 million, and cash, cash equivalents and short-term investments totaled $73 million. The cash, cash equivalents and short-term investments balance decreased approximately $2.8 million from September 26, 1998 primarily due to payments for facility renovations and an increase in accounts receivable, which were partially offset by other operating activities which included net income of $2.0 million and an increase in accounts payable. The Company finances certain sales to Latin America over a two-to- three year time-frame. At December 26, 1998, the Company had total accounts receivable outstanding of approximately $8.0 million relating to these sales, of which $2.5 million were long- term and included in other assets. As of December 26, 1998, the Company has not experienced any significant change in these receivables, however, the economic and currency related uncertainties in these countries may increase the likelihood of non-payment. In the first quarter of 1999, the Company purchased approximately $300,000 of property and equipment, which consisted primarily of computers. In fiscal 1998, the Company purchased a 200,000 square foot building for approximately $20 million in cash, and has incurred approximately $5 million for renovations of which $2.5 million has been paid to-date. The Company moved its headquarters into this facility on January 25, 1999. The Company does not currently have any significant capital commitments and believes that existing sources of liquidity and funds expected to be generated from operations will provide adequate cash to fund the Company's anticipated working capital and other cash needs for the foreseeable future. Year 2000 Readiness Disclosure The year 2000 (Y2K) issue is the potential for system and processing failure of date-related data and the result of computer-controlled systems using two digits rather than four to define the applicable year. For example, computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. Systems that do not properly recognize date-sensitive information when the year changes to 2000 could generate system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar ordinary business activities. The Company has defined Y2K compliance as the ability for the Company, its products and suppliers to continue normal business activities in the year 2000 and beyond. The Company is evaluating the Y2K issue with respect to its financial and management information systems, its products and its suppliers. At this point in its assessment, the Company is not currently aware of any Y2K problems that are reasonably likely to have a material effect on the Company's business, results of operations or financial condition, without taking into account the Company's efforts to avoid such problems. The Company is completing its review of its management and information systems for Y2K compliance and has identified other application software and hardware which must be upgraded to become Y2K compliant. The Company believes that its accounting and information systems are currently compliant as a result of installing an upgrade version of the software made available through the annual maintenance contract. However, the Company uses other application hardware and software which may not be Y2K complaint. Most upgrades for these programs are also available as part of an annual maintenance program. The Company believes that it already has and installed most of the necessary upgrades for these programs or that the upgrades for the programs are otherwise available without material expenditure by the Company. The Company anticipates that it will be able to complete, test and implement all upgrades of this software that may be material to its business on a timely basis. There is a risk that, notwithstanding its internal review, if the Company has not properly identified all year 2000 compliance issues with respect to its management and information systems, the Company may not be able to implement all necessary changes to these systems on a timely basis and within budget. Such a failure could result in a material disruption to the Company's business, including the inability to track and fill orders on a timely basis, which could have a material adverse effect on its business, results of operations and financial condition. The Company has evaluated its DXA products currently in production and they are Y2K compliant as of the end of January 1999. The Company plans to make this software available, at the Company's expense, to its existing customers by the end of April 1999. These costs are not expected to be material. The Company has also identified certain older models of its DXA products that will need computer hardware upgrades to become Y2K compliant. The Company plans to offer users of these products a computer upgrade at the customers' expense. The Company believes that its Sahara ultrasound bone sonometer is currently Y2K compliant. The Company is also exposed to the risk that it could experience material shipment delays from its major component suppliers or material sales delays from its major customers due to year 2000 issues relating either to their management information or production systems. The Company has inquired of these suppliers in an attempt to ascertain their year 2000 readiness. At this time, the Company is unable to estimate the nature or extent of any potential adverse impact resulting from the failure of third parties, such as its suppliers and customers, to achieve year 2000 compliance. Moreover, such third parties, even if year 2000 compliant, could experience difficulties resulting from year 2000 issues that may affect their suppliers, service providers and customers. As a result, although the Company does not currently anticipate that it will experience any material shipment delays from their major product suppliers or any material sales delays from its major customers due to year 2000 issues, these third parties could experience year 2000 problems that could have a material adverse effect on the Company's business, results of operations and financial condition. Apart from its activities described above, the Company does not have and does not plan to develop a contingency plan to address Y2K issues. Should any unanticipated significant Y2K issues arise, the Company's failure to implement such a contingency plan could have a material adverse affect on its business, financial condition and results of operations. To the extent that the Company does not identify any material non-compliant year 2000 issues affecting the Company or third parties, such as the Company's suppliers, service providers and customers, the most reasonably likely worst case year 2000 scenario is a systemic failure beyond the control of the Company, such as a prolonged telecommunications or electrical failure, or a general disruption in United States or global business activities that could result in a significant economic downturn. The Company believes that the primary business risks, in the event of such failure or other disruption, would include but not be limited to, loss of customers or orders, increased operating costs, inability to obtain inventory on a timely basis, disruptions in product shipments, or other business interruptions of a material nature, as well as claims of mismanagement, misrepresentation, or breach of contract, any of which could have a material adverse effect on the Company's business, results of operations and financial condition. Item 3. Quantitative and Qualitative Disclosure About Market Risk. Not applicable. PART II - OTHER INFORMATION HOLOGIC, INC. AND SUBSIDIARIES Item 1. Legal Proceedings. No material litigation. Item 2. Changes in Securities. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits furnished: (27) Financial Data Schedule (b) Reports on Form 8-K: None. HOLOGIC, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Hologic, Inc. (Registrant) February 4, 1999 /s/ S. David Ellenbogen - ---------------- --------------------------- Date S. David Ellenbogen Chairman and Chief Executive Officer February 4, 1999 /s/ Glenn P. Muir - ---------------- ----------------------------- Date Glenn P. Muir Vice President, Finance and Treasurer (Principal Financial and Chief Accounting Officer)