UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended December 27, 2003
or
For the transition period from to
Commission File Number: 0-18281
Hologic, Inc.
(Exact name of registrant as specified in its charter)
(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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12 b-2).
As of February 5, 2004, 20,185,336 shares of the registrant’s Common Stock, $.01 par value, were outstanding.
HOLOGIC, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets December 27, 2003 and September 27, 2003 (unaudited)
Consolidated Statements of Operations Three Months Ended December 27, 2003 and December 28, 2002 (unaudited)
Consolidated Statements of Cash Flows Three Months Ended December 27, 2003 and December 28, 2002 (unaudited)
Notes to Consolidated Financial Statements
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
SIGNATURES
EXHIBITS
2
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share data)
CURRENT ASSETS:
Cash and cash equivalents
Accounts receivable, less reserves of $3,224 and $3,477, respectively
Inventories
Prepaid expenses and other current assets
Total current assets
PROPERTY AND EQUIPMENT, at cost:
Land
Buildings and improvements
Equipment
Furniture and fixtures
Leasehold improvements
Less: Accumulated depreciation and amortization
INTANGIBLE ASSETS:
Patented technology, net of accumulated amortization of $5,975 and $5,732, respectively
Developed technology and know-how, net of accumulated amortization of $3,633 and $3,405, respectively
Goodwill
Other assets, net
Total assets
CURRENT LIABILITIES:
Current portion of note payable
Accounts payable
Accrued expenses
Deferred revenue
Total current liabilities
Note payable, net of current portion
Commitments and Contingencies (Note 9)
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value-
Authorized – 1,623 shares
Issued – 0 shares
Common stock, $.01 par value-
Authorized – 30,000 shares
Issued – 20,110 and 19,966 shares, respectively
Capital in excess of par value
Retained earnings
Cumulative translation adjustment
Treasury stock, at cost - 45 shares
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes.
3
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenues:
Product sales
Service and other revenue
Costs and expenses:
Cost of product sales
Cost of service and other revenue
Research and development
Selling and marketing
General and administrative
Income (loss) from operations
Interest income
Interest/other expense
Income (loss) before provision for income taxes and cumulative effect of change in accounting principle
Provision for income taxes
Income (loss) before cumulative effect of change in accounting principle
Cumulative effect of change in accounting principle
Net income (loss)
Basic income (loss) per common and common equivalent share:
Diluted income (loss) per common and common equivalent share:
Weighted average number of common shares outstanding:
Basic
Diluted
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities-
Depreciation
Amortization
Noncash interest expense
Changes in assets and liabilities-
Accounts receivable
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment
(Increase) decrease in other assets
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note payable
Net proceeds from sale of common stock
Net cash provided by financing activities
EFFECT OF EXCHANGE RATE CHANGES ON CASH
NET DECREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of period
CASH AND CASH EQUIVALENTS, end of period
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes
Cash paid during the period for interest
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 27, 2003, included in the Company’s Form 10-K as filed with the Securities and Exchange Commission on December 23, 2003.
The consolidated balance sheet as of December 27, 2003, the consolidated statements of operations and cash flows for the three months ended December 27, 2003 and December 28, 2002, 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 27, 2003 are not necessarily indicative of the results to be expected for the entire fiscal year ending September 25, 2004. Certain prior-period amounts have been reclassified to conform with the current-period presentation.
Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following:
December 27,
2003
September 27,
Raw materials and work-in-process
Finished goods
Work-in-process and finished goods inventories consist of material, labor and manufacturing overhead.
A reconciliation of basic and dilutive share amounts are as follows:
Basic weighted average common shares outstanding
Weighted average common equivalent shares
Diluted weighted average common shares outstanding
Diluted net loss per share for the first three months of fiscal 2003 is computed in the same way as basic, as all common equivalent shares are considered antidilutive due to the Company’s net loss position. Diluted weighted average shares outstanding do not include options outstanding to purchase 323 and 3,606 common-equivalent shares as of December 27, 2003 and December 28, 2002, respectively, as their effect would have been antidilutive.
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The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for its stock-based compensation plans. Accordingly, no compensation expense has been recognized for stock-based compensation plans other than for restricted stock. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of Financial Accounting Standards Board (FASB) Statement No. 123, therefore, no compensation expense was recognized for the Company’s stock option plans. Had compensation expense for the Company’s stock option plans been determined based on the fair value at the grant date for awards under these plans, consistent with the methodology prescribed under SFAS No. 148, the Company’s net income (loss) and earnings (loss) per share would have approximated the pro forma amounts indicated below:
Net income (loss), as reported
Deduct: Total stock-based employee compensation expense determined under fair value - based method for all awards, net of related tax effects
Pro forma net income (loss)
Net income (loss) per share:
Basic – as reported
Basic – pro forma
Diluted – as reported
Diluted – pro forma
The weighted average fair value of each stock option included in the preceding pro forma amounts was estimated using the Black-Scholes option-pricing model and is amortized over the vesting period of the underlying options. The assumptions used to calculate the SFAS No. 148 pro forma disclosure and the weighted average information are as follows:
Risk – free interest rate
Expected dividend yield
Expected lives
Expected volatility
7
The Company historically utilized a distributor in the United States for certain product lines. In the first quarter of fiscal 2003, this distributor sold one of its wholly owned subsidiaries to another company creating a new distributor for the Company’s mammography systems. On January 1, 2003, the Company terminated its relationship with this new distributor and commenced a direct sales effort in the U.S. for the product lines carried by this distributor. The Company had accounts receivable from the new distributor of approximately $439 and $937 as of December 27, 2003 and September 27, 2003, respectively and accounts receivable from the historical distributor of approximately $3,016 and $3,118 as of December 27, 2003 and September 27, 2003, respectively. The new distributor accounted for 1% and 22% of revenues for the quarter ended December 27, 2003 and December 28, 2002, respectively. The historical distributor accounted for 8% and 4% of product revenues for the first three months of fiscal 2004 and 2003, respectively. There were no other customers with balances greater than 10% of accounts receivable as of December 27, 2003 or September 27, 2003 or customers with greater than 10% of the Company’s revenues for the first quarter of fiscal 2004 or fiscal 2003.
SFAS No. 130, Reporting Comprehensive Income, 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 (loss) relates to foreign currency translation adjustments, and is presented separately on the balance sheet as required.
A reconciliation of comprehensive income (loss) is as follows:
Net income (loss) as reported
Foreign currency translation adjustment
Comprehensive income (loss)
As a result of our decision to phase out our digital general radiography systems and to focus on supplying our digital detectors to other original equipment manufacturers, as well as the current trends in the markets in which we compete, we have revised our segment reporting. Our businesses will now be reported as four segments: osteoporosis assessment; mammography; digital detectors and other. Prior periods have been restated to conform to this presentation. Intersegment sales and transfers are not significant. Segment information for the three months ended December 27, 2003 and December 28, 2002 is as follows:
Total revenues–
Osteoporosis Assessment
Mammography
Digital Detectors
Other
Operating income (loss)–
Depreciation and amortization–
Capital expenditures–
8
Identifiable assets–
Corporate
Export sales from the United States to unaffiliated customers primarily in Europe, Asia and Latin America during the three months ended December 27, 2003 totaled approximately $14,214, and for the three months ended December 28, 2002 totaled approximately $8,882.
Transfers between the Company and its European subsidiaries are generally recorded at amounts similar to the prices paid by unaffiliated foreign dealers. All intercompany profit is eliminated in consolidation.
Export product sales as a percentage of total product sales are as follows:
Europe
Asia
All others
In the ordinary course of business, the Company is party to various types of litigation. In the Company’s opinion, all litigation currently pending or threatened are not reasonably likely to have a material effect on the Company’s financial position or results of operations.
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The Company typically offers a one-year warranty for all of its products. The Company provides for the estimated cost of product warranties at the time product revenue is recognized. Factors that affect the Company’s warranty reserves include the number of units sold, historical and anticipated rates of warranty repairs and the cost per repair. The Company periodically assesses the adequacy of the warranty reserve and adjusts the amount as necessary.
Product warranty activity for the three months ended December 27, 2003 is as follows (in thousands):
Balance at
Balance atDecember 27,
In fiscal 2000 and 2001, the Company loaned an officer an aggregate of $500 which is required to be repaid quarterly 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. In December 2002, the Compensation Committee of the Board of Directors approved a special bonus program to provide the officer with the funds necessary to pay the quarterly installments due under the loan. Under the special bonus program, for so long as the officer remains an officer of the Company and there are amounts remaining to be repaid under the loan, the Company will pay the officer a special quarterly bonus equal to the amount due under the loan, including interest due, plus an additional payment equal to the taxes due as a result of the special bonus and such additional payment, such that the net-after-tax special quarterly bonus to be received by the officer will equal the principal and interest then due under the loan. During the three months ended December 27, 2003 the Company recognized $79 in bonus expense under the special bonus program related to this note.
In the fourth quarter of 2003, we adopted EITF 00-21, Revenue Arrangements with Multiple Deliverables, as a cumulative effect adjustment for a change in accounting principle, accordingly, the revenue representing the fair value of services not performed at the time of product shipment such as installation and training are deferred and recognized as performed. Additionally, revenue related to installation and training activities have been classified as service and other revenue. All prior periods presented have been reclassified to conform with the current-period presentation.
In October 2003 we acquired the mammography distribution rights for Belgium and Luxembourg from our Belgian distributor in exchange for $341,000 in cash and the assumption of certain service liabilities totaling $134,000. We also purchased spare parts and computers for an additional $79,000.
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PART I - FINANCIAL INFORMATION (Continued)
CAUTIONARY STATEMENT
This report contains forward-looking information that involves risks and uncertainties, including statements regarding our plans, objectives, expectations and intentions. Such statements include, without limitation, statements regarding various estimates we have made in preparing our financial statements, statements regarding our expectations relating to increased digital mammography sales and our geographical mix of sales, as well as statements regarding expected future trends relating to our results of operations and the sufficiency of our capital resources. These forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those anticipated. Factors that could cause actual results to materially differ include, without limitation, manufacturing risks that may limit our ability to ramp-up commercial production of the Selenia™ and other of our digital products, including our reliance on a single source of supply for some key components of our products as well as the need to comply with especially high standards for those components and in the manufacture of digital X-ray products in general; uncertainties inherent in the development of new products and the enhancement of existing products, including technical and regulatory risks, cost overruns and delays; the risk that newly introduced products may contain undetected errors or defects or otherwise not perform as anticipated; our ability to predict accurately the demand for our products and to develop strategies to address our markets successfully; the early stage of market development for digital X-ray products; our ability to expand our direct sales and service team for both the near and longer-term to effectively implement our direct sales strategy; risks relating to compliance with financial covenants under our working capital financing and leases; technical innovations that could render products marketed or under development by us obsolete; competition; and reimbursement policies for the use of our products. Other factors that could adversely affect our business and prospects are described in our filings with Securities and Exchange Commission. We caution readers not to place undue reliance upon any such forward-looking statements, which speak 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 such statements to reflect any change in our expectations or any change in events, conditions or circumstances on which any such statement is based.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations are based upon our interim 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. Any differences may have a material impact on our financial condition and results of operations. For a discussion of how these and other factors may affect our business, see the “Cautionary Statement” above and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 27, 2003.
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The critical accounting policies used in the preparation of our financial statements that we believe affect our more significant judgments and estimates used in the preparation of our consolidated financial statements presented in this report are described in our Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended September 27, 2003. There have been no material changes to the critical accounting policies.
RESULTS OF OPERATIONS
Total Revenues. Total revenues for the first quarter of fiscal 2004 increased 2% to $49.9 million from $49.0 million for the first quarter of fiscal 2003. This increase was primarily due to an increase in unit sales of our digital detectors, an increase in revenues from our mammography products and, to a lesser extent, bone assessment products. Partially offsetting these increases was a decrease in our mini C-arm product sales. Total revenues for the first quarter of fiscal 2004 declined 5% from $52.4 million for the immediately preceding quarter which ended September 27, 2003. This decrease was primarily due to a $1.7 million decline in osteoporosis assessment revenues from a decrease in unit sales and, to a lesser extent, a $600,000 decrease in mammography service revenue and a $600,000 decrease in sales of digital detectors. These decreases were offset in part by an increase of $400,000 in the all other segment primarily related to an increase in unit sales of our mini C-arm product.
Product Sales. Product sales increased 2% to $38.6 million for the first quarter of fiscal 2004 from $37.8 million for the corresponding period in fiscal 2003.
Mammography product sales increased approximately 3% to $18.2 million in the first quarter of fiscal 2004 from $17.7 million in the first quarter of fiscal 2003. This increase was primarily due to an increase in the number of digital mammography systems sold worldwide and, to a lesser extent, multicare stereotactic tables sold in the United States. Our digital mammography system was introduced in the first quarter of fiscal 2003 and since its introduction sales have steadily increased. These increases were partially offset by fewer analog mammography systems sold primarily in the United States. We expect that analog mammography sales as a percentage of total mammography product sales will continue to decline as sales of the higher priced digital mammography product continues to increase. During the quarter ended December 28, 2002, we terminated our relationship with the distributor who sold our mammography line in the United States. This distributor accounted for 32% of mammography sales in the first quarter of fiscal 2003. The transition to our direct sales force did not have a material impact on sales between the first quarters of 2004 and 2003 but did account for an increase in the average selling prices for the systems sold in the former distributor’s territory.
Osteoporosis assessment product sales increased 2% to $12.4 million in the first quarter of fiscal 2004 from $12.1 million in the first quarter of fiscal 2003. The slight revenue increase was primarily due to higher average selling prices from sales of our new Discovery line of bone densitometers and an increase in the number of systems sold in Asia and Japan partially offset by fewer systems sold in Europe.
Digital detector product sales increased 58% to $1.5 million in the first quarter of fiscal 2004 compared to revenues of $949,000 in the first quarter of fiscal 2003. The increase in revenues was primarily attributable to an increase in the number of digital detectors sold in the United States partially offset by a decrease in the number of detectors sold internationally. The increase in the number of detectors sold was due to slightly greater demand from our OEM customers and the timing of available detectors to ship.
Other product sales includes sales of our mini C-arms and digital general radiography systems. Other product sales decreased 8% to $6.5 million in the first quarter of fiscal 2004 from $7.1 million in the first quarter of fiscal 2003. This decrease was primarily due to lower average selling prices as a result of a shift in sales of our mini C-arm products to our lower priced Encore system and a decrease in the number of mini C-arm systems sold. As a result of our decision to phase out our digital general radiography systems and to focus on supplying our digital detectors to other original equipment manufacturers, we expect our product sales for our digital general radiography systems to be negligible by the end of the fiscal year. In the first quarter, sales of digital general radiography systems accounted for $3.2 million of other product revenues.
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In the first quarter of fiscal 2004, approximately 63% of product sales were generated in the United States, 19% in Europe and 18% in other international markets. In the first quarter of fiscal 2003, approximately 77% of product sales were generated in the United States, 14% in Europe and 9% in other international markets. We believe the slight shift in sales to Europe and other international markets is primarily due to the timing of an increase in demand from those territories and that for the full year our sales generated in the United States should increase to a level approximately that achieved in fiscal 2003.
Service and Other Revenue. Service and other revenue is primarily comprised of revenue generated from our field service organization to provide ongoing service and repair of our products. Service and other revenue increased slightly to $11.3 million in the first quarter of fiscal 2004 compared to $11.2 million in the first quarter of fiscal 2003. The increase in service and other revenue in fiscal 2004 was primarily due to an increase in service contract revenues partially offset by decreases in rental revenue and additional fee-per-scan revenues compared to the first quarter of last year.
Costs of Product Sales. The cost of product sales decreased as a percentage of product sales to 52% in the first quarter of fiscal 2004 from 55% in the first quarter of fiscal 2003. These costs decreased as a percentage of product sales primarily due to improved gross margins recognized on the shift in mammography product sales to Selenia, our full field digital mammography system which has significantly higher selling prices more than offsetting the higher costs of the product when compared to the analog mammography product and, to a lesser extent, the increased efficiencies and related gross margin attributable to our increased digital detector sales as the increase in volumes has led to better manufacturing efficiency. DRC continues to have significant fixed manufacturing costs and is operating significantly below manufacturing capacity. Until DRC achieves higher revenue levels, they will continue to report lower margins due to under-absorbed manufacturing overhead costs.
Costs of Service and Other Revenue. Cost of service and other revenue decreased as a percentage of service and other revenue to 93% in the first three months of fiscal 2004 from 95% in the first quarter of fiscal 2003. These costs, in absolute dollars, were unchanged at $10.6 million for the first three months of fiscal 2004 and 2003. We expect our costs of service and other revenue to remain relatively high as a percentage of service and other revenue, reflecting our need to employ the required personnel for warranty, non-warranty and installation service to support our growing installed base of products. We expect an increase in customers entering into service agreements in connection with our transition to digital mammography and direct service coverage.
Research and Development Expenses. Research and development expenses decreased 15% to $4.0 million, 8% of total revenues, in the first quarter of fiscal 2004 from $4.8 million, 10% of total revenues, in the first quarter of fiscal 2003. This decrease was primarily due to a decrease in research and development spending and personnel primarily related to reduced spending on digital detectors at DRC and our phase-out of the digital general radiography systems product line announced in the fourth quarter of fiscal 2003.
Selling and Marketing Expenses. Selling and marketing expenses increased slightly to $9.0 million, 18% of total revenues, in the first quarter of fiscal 2004 from $8.9 million, 18% of total revenues, in the first quarter of fiscal 2003 primarily due to higher international distributor commissions and higher trade show expenses which were offset by lower distributor commissions in the United States as a result of our transition to direct sales of mammography products in the United States. First quarter expenses in fiscal 2004 and 2003 reflected the expenses associated with our exhibit at the Radiological Society of North America (“RSNA”) medical imaging trade show held in December of each year. Our expenses for this show were approximately $1.6 million in the first quarter of fiscal 2004 and $1.5 million in the corresponding period last year.
General and Administrative. General and administrative expenses increased slightly to $5.3 million, 11% of total revenues, in the first quarter of fiscal 2004 compared to $5.2 million, 11% of total revenues, in the first quarter of fiscal 2003. This increase was primarily due to increased employee benefit expenses.
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Interest Income. Interest income decreased to $108,000 in the current quarter from $176,000 in the first quarter of fiscal 2003. This decrease was primarily due to a decrease in the interest rate earned in the first quarter of fiscal 2004 compared to the same period last year.
Interest / Other Expense. In the first quarters of fiscal 2004 and 2003, we incurred other expenses of approximately $91,000 and $25,000, respectively. These expenses were primarily due to the interest costs on the Wells Fargo Foothill, Inc. note payable which were partially offset by foreign currency transaction gains. 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 for 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. We have provided for certain minimum taxes where net operating losses cannot be used during the first three months of fiscal 2004 and 2003.
Cumulative Effect of Change in Accounting Principle. We recognize product revenue upon the completion of installation for shipments that require more than perfunctory obligations at the time of shipment, specifically our digital imaging systems. During the fourth quarter of fiscal 2003, we adopted EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, as a cumulative effect of a change in accounting principle in accordance with APB 20, Accounting Changes, in fiscal 2003. In accordance with EITF 00-21 certain services including installation and training are deemed to be separate units of accounting requiring such services to be accounted for separately from product revenue. We have reviewed the terms and conditions of our revenue arrangements and determined that these services can be accounted for separately from the product element as our products have value to our customers on a standalone basis and we have objective and reliable evidence of the fair value of the services. In accordance with EITF 00-21, revenues for the product portion of multiple element sales arrangements will continue to be recorded upon shipment based on the relative fair value of the product on a standalone basis. In connection with the adoption of EITF 00-21, we recorded a cumulative effect adjustment of $207,000 and reclassified $1.1 million of product revenue to service revenue for the three months ended December 28, 2002.
Segment Results of Operations
As a result of our decision to phase out our digital general radiography systems and to focus on supplying our digital detectors to other original equipment manufacturers, as well as the current trends in the markets in which we compete, we have revised our segment reporting. Our businesses will now be reported as four segments: osteoporosis assessment; mammography; digital detectors and other. Prior periods have been restated to conform to this presentation. The accounting policies of the segments are the same as those described in the footnotes to the accompanying consolidated financial statements included in our 2003 Annual Report on Form 10-K. 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 revenues and the primary changes in operating income or loss by segment.
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Osteoporosis Assessment. Osteoporosis assessment revenues decreased slightly for the first quarter of fiscal 2004, compared to the same period in fiscal 2003, rounding to $16.6 million for both periods due to an increase in the number of unit sales offset by a decrease in service revenue. Operating income for osteoporosis assessment was $1.6 million for the first quarter of fiscal 2004 compared to $1.7 million in the first quarter of fiscal 2003. The slight decrease in operating income for this business segment was primarily due to increased marketing expenses associated with the RSNA trade show and an increased allocation of operating expenses previously absorbed by the digital general radiography systems business, which is being phased out, partially offset by reduced research and development spending.
Mammography. Mammography revenues increased 3% to $22,487,000 for the first quarter of fiscal 2004 from $21,798,000 for the same period in fiscal 2003 primarily due to an increase in the number of digital mammography systems sold worldwide and to a lesser extent, multicare stereotactic tables sold in the United States. These increases were partially offset by fewer analog mammography systems sold primarily in the United States. Operating income for this business segment in the first quarter of fiscal 2004 decreased to $397,000 from $769,000 in the corresponding quarter of fiscal 2003. The decrease in operating income in the current quarter was primarily due to additional international distributor commissions related to a multiple unit Selenia sale and higher selling expenses from our continued expansion of our direct sales initiative. In addition, operating expenses increased as a result of reallocating resources and costs in order to focus on the more profitable and faster growing digital mammography systems and de-emphasize the digital general radiography systems. Partially offsetting these increases was additional gross margin from the shift in product revenues to our more profitable Selenia full field digital mammography systems from our analog mammography systems.
Digital Detectors. Digital detector revenues increased 47% to $1,718,000 for the first quarter of fiscal 2004 from $1,169,000 for the same period in fiscal 2003, primarily attributable to the increased number of digital detectors sold in the United States partially offset by a decrease of digital detectors sold internationally. The digital detector business operating loss decreased 22% to $1.6 million in the first quarter of fiscal 2004 from $2.0 million in the first quarter of fiscal 2003. This decrease was due primarily to a decrease in research and development spending related to our digital detector development for Selenia.
Other. Other revenues decreased 3% to $9,122,000 for the first quarter of fiscal 2004 from $9,396,000 for the same period in fiscal 2003. This decrease was primarily attributable to a decrease in the number of mini C-arms sold offset in part by an increase in sales of mini C-arm spare parts. Operating income for this business segment, which includes the mini C-arm business, the digital general radiography business and the conventional general radiography service business, was $655,000 in the first quarter of fiscal 2004 compared to an operating loss of $1.5 million in the first quarter of fiscal 2003. The improvement in operating income is primarily due to lower operating expenses as a result of our decision to de-emphasize the digital general radiography systems business, which is being phased out and reallocate resources and costs in order to focus on the more profitable and faster growing digital mammography systems.
Liquidity and Capital Resources
At December 27, 2003 we had approximately $105.6 million of working capital. At that date our cash and cash equivalents totaled $45.0 million. Our cash and cash equivalents balance decreased approximately $162,000 during the first quarter of fiscal 2004 primarily due to purchases of property and equipment and the effect of exchange rate changes on cash that were partially offset by cash provided by operating and financing activities.
In the first quarter of fiscal 2004 operating activities provided us with $788,000 of cash. Our cash provided by operating activities reflected net income of $1.0 million for the first quarter of fiscal 2004 plus non-cash charges for depreciation and amortization of $2.0 million, partially offset by changes in our current assets and liabilities. Cash used in operations due to changes in our current assets and liabilities included an increase in accounts receivable $3.4 million and a decrease in accrued expenses of $976,000 that were partially offset by an increase in deferred revenue of $1.9 million an increase in accounts payable of $427,000. The increase in accounts receivable was primarily due to increased European sales in the current three month period which have longer payment terms than domestic sales. The changes in accounts payable and accrued expenses were primarily due to the timing of
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payments. The increase in deferred revenue was primarily due to a large customer deposit received and an increase in the number of deferred service contracts.
In the first quarter of fiscal 2004, we used approximately $1.4 million of cash in investing activities. This use of cash was primarily attributable to purchases of property and equipment which consisted primarily of computer hardware, ultrasound mammography demonstration equipment and manufacturing equipment.
In the first quarter of fiscal 2004, financing activities provided us with $902,000 of cash. These cash flows included approximately $1.1 million from the sale of our Common Stock upon exercise of stock options, partially offset by $177,000 of repayments of our notes payable.
As of December 27, 2003 we had short term borrowings of $1.0 million and long term notes payable totaling $827,000. The short term borrowings represent the current portion of our long term note payable to Wells Fargo Foothill, Inc. of $480,000 and the $547,000 balance due on the note to Fleet in connection with the settlement of the Fleet litigation. The Fleet note bears interest at Fleet’s prime rate plus 1% with the full amount of principal to be paid on August 10, 2004. The long term note payable represents the long term portion of our term loan under our credit facility with Wells Fargo Foothill, Inc.
In September 2001 we obtained a secured loan from Wells Fargo Foothill, Inc. This loan agreement 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 and amendments is $20.0 million. The loan agreement and amendments contain 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. In July 2003 we amended this loan agreement primarily to simplify financial covenants and to reduce the fees related to this facility. The term loan accrues interest at prime plus 1.0% for five years. The line of credit advances accrue interest at a prime plus 0.25%. The line of credit expires in September 2005. We were in compliance with all covenants as of December 27, 2003.
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 (2.13% at September 27, 2003) 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 December 27, 2003 and September 27, 2003, there were no outstanding borrowings under this line.
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 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 December 27, 2003:
Contractual Obligations
Long Term Debt
Operating Leases
Total Contractual Cash Obligations
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Except as set forth above, we do not have any other significant capital commitments. We are working on several projects, with an emphasis on digital detectors and digital mammography systems. We believe that we have sufficient funds in order to fund our expected operations over the next twelve months.
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 Wells Fargo Foothill, Inc. (the Foothill Agreement) and a European line of credit. The Foothill Agreement term loan accrues interest at the prime rate plus 1.0% and the European Line of Credit accrues interest at the Europe Interbank Offered Rate plus 1.50%. At December 27, 2003, we had $1.3 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 have a material adverse effect on our business, results of operations or financial condition.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of December 27, 2003, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in enabling us to record, process, summarize and report information required to be included in our periodic SEC filings within the required time period.
There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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No material developments.
None.
Exhibit
Number
Reference
The following Current Report on Form 8-K was furnished by the registrant during the period covered by this report:
Current Report on Form 8-K filed on November 12, 2003 regarding the release of a press release announcing the Company’s financial results for the fourth quarter and fiscal year ended September 27, 2003.
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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.
(Registrant)
John W. Cumming
Chairman and Chief Executive Officer
Glenn P. Muir
Executive Vice President, Finance and Treasurer
(Principal Financial Officer)
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