-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MsKuE6DQ4M4UxX+XAaMon8BE8Ac9HiPVwUghn82xy54q9yKq/kM9PA7NX6bcmU3j zMsdQW5U2dV6ITJaVBBJhA== 0000927016-98-004351.txt : 19981228 0000927016-98-004351.hdr.sgml : 19981228 ACCESSION NUMBER: 0000927016-98-004351 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980926 FILED AS OF DATE: 19981223 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: SEC FILE NUMBER: 000-18281 FILM NUMBER: 98775042 BUSINESS ADDRESS: STREET 1: 590 LINCOLN ST CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 7818902300 MAIL ADDRESS: STREET 1: 590 LINCOLN STREET CITY: WALTHAM STATE: MA ZIP: 02154 10-K 1 FORM 10K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: SEPTEMBER 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.) 590 LINCOLN STREET, WALTHAM, MASSACHUSETTS 02154 -------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (781) 890-2300 -------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE RIGHTS TO PURCHASE COMMON STOCK Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this 10-K. [X] --- The aggregate market value of the registrant's Common Stock held by non- affiliates of the registrant as of November 30, 1998 was $174,914,399 based on the price of the last reported sale on the Nasdaq National Market System. As of November 30, 1998 there were 13,390,576 shares of the registrant's Common Stock, $.01 par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE (1) Proxy Statement for Registrant's Annual Meeting of Stockholders to be held on February 23, 1999 (Part III: Items 10,11,12 and 13). INTRODUCTORY STATEMENT When used in this Report, the words "expects," "anticipates," "estimates," "should," "will," "could," "would," "may," and similar expressions are intended to identify forward-looking statements. Such statements, which include statements relating to the timing and availability of products under development, the ability of the Company to market such products, once developed, successfully, the anticipated growth or expansion of the markets for the Company's products, and other matters are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. These forward-looking statements speak only as of the date of this Report. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in the Company's expectation with regard thereto or any change in events, conditions or circumstances on which any such statement is based. PART I ITEM 1. BUSINESS Hologic, Inc. ("Hologic" or the "Company") is a leading international developer, manufacturer and marketer of X-ray bone densitometers which precisely measure bone density for use in the diagnosis and monitoring of metabolic bone diseases such as osteoporosis. Hologic pioneered the use of dual-energy X-ray absorptiometry ("DXA") to measure bone density, introducing the first DXA bone densitometer in 1987. Since this introduction, DXA systems have become the standard for measuring bone density. In 1995, Hologic introduced its fourth generation of DXA bone densitometers, its clinically oriented QDR(R) 4500 ACCLAIM(R) product line. To address the growing clinical market for the early diagnosis and monitoring of osteoporosis, Hologic has developed and is developing additional products that it believes will complement its DXA product line. In December 1994, Hologic acquired the ultrasound bone analyzer business of Walker Sonix, Inc. ("Walker Sonix"). In July 1996, Hologic began international shipments of its internally-developed, dry ultrasound system, the Sahara(R) Clinical Bone Sonometer ("Sahara"). On March 13, 1998, the Food and Drug Administration ("FDA") approved the Company's pre-market application ("PMA") for Sahara. Hologic believes that ultrasound systems represent a relatively low cost, compact, easy-to-use, non-ionizing, measurement technique to assist in the initial diagnosis of osteoporosis. The Company also believes that Sahara will improve patient accessibility to bone density testing. In September 1994, Hologic began a joint development effort with Serex, Inc. ("Serex") to develop a diagnostic strip test to detect biochemical markers that indicate the rate of a patient's bone loss. In January 1997, Hologic expanded its joint development agreement to include Ostex International, Inc. Under this agreement, Ostex's Osteomark assay is being combined with Serex's strip test technology to provide a physician with a real-time means of measuring a patient's biochemical response to osteoporosis therapies and compliance with those therapies, as a complement to periodic bone density measurements. On August 29, 1996, Hologic's wholly-owned subsidiary merged with FluoroScan Imaging Systems, Inc. ("FluoroScan") in an all stock transaction accounted for as a pooling-of-interests. FluoroScan manufactures and distributes the FluoroScan Imaging System (the "FluoroScan System"), a low intensity, real- time mini c-arm X-ray imaging device which provides high resolution images at radiation levels and at a cost well below those of conventional X-ray and fluoroscopic equipment. These mini c-arm systems are used primarily by orthopedic surgeons to perform minimally invasive surgical procedures on a patient's extremities (i.e., hand, wrist, knee, foot, ankle etc.). As used herein the term "Company" includes Hologic and all of its subsidiaries, including FluoroScan. The Hologic logo is a service mark of the Company. QDR, QDR-1000, ACCLAIM and Sahara are registered trademarks of the Company. QDR-1000W, QDR 1000plus, QDR- 2000, QDR 2000plus, QDR 4500, QDR 4500A, QDR 2 4500SL, QDR 4500W, QDR 4500C, FluoroScan, FluoroScan I, FluoroScan II, FluoroScan III, Premier, Officemate, FluoroScan Imaging Systems and UBA 575+ are trademarks of the Company. The trademarks Scanora and WalkerSonix are licensed by the Company. BONE ASSESSMENT PRODUCT BACKGROUND OSTEOPOROSIS. Osteoporosis is a condition characterized by reduced bone density that leads to an increased risk of fractures. Bone is a dynamic organ that is maintained through a process referred to as remodeling in which old bone is removed (resorption) and new bone is formed. In early adulthood, the levels of bone resorption and bone formation are generally balanced, with the quantity and distribution of bone throughout the body varying over time depending on muscle mass, strength and use. When remodeling does not function properly, and resorption exceeds formation, the result is a net loss of bone mass and density, often causing diminished structural integrity of the skeleton (particularly of the trabecular "spongy" bone) and an increased risk of fracture. According to the National Osteoporosis Foundation (the "NOF"), 28 million Americans, 80% of whom are women, and approximately 250 million people worldwide, suffer from osteoporosis. Osteoporosis typically develops silently over a period of years, eventually progressing to a point where a fracture can easily occur, causing pain and disability. The post-menopausal female population has the highest incidence of osteoporosis and the highest rate of morbidity (loss of quality of life) and mortality due to osteoporosis. The NOF estimates that in the United States osteoporosis contributes to more than 1.5 million fractures annually, and the costs to the U.S. healthcare system to treat these osteoporosis-related fractures exceed $14 billion annually. Furthermore, it is estimated that women can lose up to 20% of their bone mass in the 5-7 years following menopause. Hip fractures lead to the most serious consequences. According to the NOF, as many as one in every five hip fracture patients dies from complications within a year after fracture, one in every four requires long-term care and an even higher percentage of hip fracture patients never return to an active and independent lifestyle. According to the World Health Organization, the "aging of America" could increase the incidence of hip fracture by as much as 280% by the year 2040. Until recently, osteoporosis was thought to be an inevitable and untreatable consequence of aging. The Company believes that the recent development and 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. THERAPIES. The Company believes that over 45 clinical studies are currently in progress to assess the safety and effectiveness of new therapies to treat osteoporosis. However, prior to 1995, there were only two approved drug treatments for osteoporosis in the United States, hormone replacement therapy, using estrogen and related hormones ("HRT"), and calcitonin, with the most widely prescribed treatment being HRT. Patient concerns regarding complications related to prolonged use of HRT have contributed to a low compliance rate. Until recently, calcitonin was available only in an injectable form, a delivery method that has contributed to low patient compliance. Although HRT and calcitonin have generally been shown in clinical trials to slow or stop the loss of bone mass, these therapies have not been proven to restore bone mass. Bisphosphonates are compounds that inhibit bone deterioration and slow bone loss. Bisphosphonates have been shown to increase bone density and decrease the risk of fractures at the hip and spine. In September 1995, the FDA approved Merck and Company's ("Merck") drug Fosamax/(R)/ for the treatment of established osteoporosis in post-menopausal women. Fosamax is a bisphosphonate that acts by coating the bone surface and inhibiting bone resorption. In clinical trials of Fosamax conducted in over 16 countries, Merck reported that on average, the post-menopausal patients with established osteoporosis who were treated with Fosamax experienced an increase in bone density of the hip and spine over a three-year period. The clinical data also indicated that Fosamax reduced the number of new vertebral fractures in these patients by approximately 48% when compared with patients in placebo. In April 1997, the FDA approved an expansion of the permitted use for Fosamax to include the prevention of osteoporosis. 3 Selective Estrogen Receptor Modulators ("SERMS") are a new class of compounds being studied for their selective ability to act like estrogen in some tissues but not in others. Like estrogens, SERMS produce changes in blood lipids that may protect against heart disease. Unlike estrogens, SERMS do not appear to stimulate breast and uterine tissue which could cause breast and uterine cancers. On December 10, 1997, Eli Lilly and Company ("Eli Lilly") received marketing clearance from the FDA for its new osteoporosis drug, Evista/(R)/. Evista is among the first in this new class of drugs. Eli Lilly reported that in clinical studies of Evista conducted in 28 countries, the drug was shown to prevent bone loss in the total body, lower spine and hip and to significantly increase bone mineral density in those regions when compared with the calcium- supplement placebo group. Other therapies cleared by the FDA to treat osteoporosis are a one-tablet hormone replacement therapy, which combines estrogen and progestin, developed by Wyeth-Ayerst Laboratories, and an intra-nasal formulation of calcitonin developed by Sandoz. In addition, the FDA approved slow-release sodium fluoride for the treatment of post-menopausal osteoporosis. Additional therapies undergoing clinical trials for the prevention or treatment of osteoporosis include bisphosphonates being developed by Proctor & Gamble (Rasidronate), Boehringer-Mannheim (Ibandronate) and Sanofi (Tiludronate), and estrogen analogues being developed by Pfizer (Draloxifene). In several European countries, Japan and other international markets, there has been an earlier availability and greater acceptance of osteoporosis therapies. Some of these therapies include estrogens, bisphosphonates, calcitonins, vitamin D compounds and ipriflavone. The timing of when and where new drugs will become commercially available, if ever, is uncertain. However, the Company believes that there will be broadened and new approvals of osteoporosis therapies for both treatment and prevention which should positively impact the bone assessment market worldwide. DIAGNOSIS AND MONITORING OF OSTEOPOROSIS. There are a number of different technologies that are available that can be used to assess bone mineral status. Since the introduction of the first DXA bone densitometer by the Company in 1987, dual-energy X-ray absorptiometry has become the primary means of measuring bone density. Prior to that introduction, the most widely used bone density measuring technique for the hip and spine was dual photon absorptiometry ("DPA"). DPA systems were not very precise and required relatively long scanning times and the use of an expensive radioactive source that required periodic replacement. In contrast, DXA systems have much higher precision, require significantly shorter scanning times and do not require a radioactive source. DXA systems require a low patient radiation exposure. The most advanced DXA systems can be used to measure the bone density of the whole body, or any site, including the most important fracture sites of the hip or spine. As a result of their precision and versatility, DXA systems have become the predominant means of evaluating low bone density before fractures occur and monitoring changes in a patient's bone density in response to therapies. Other bone assessment technologies include single photon absorptiometry ("SPA"), radiographic absorptiometry ("RA"), quantitative computed tomography ("QCT"), quantitative ultrasound and biochemical markers. Single photon absorptiometry was introduced in the 1960s and represents an effective method of measuring bone density at a peripheral site of the skeleton (forearm or heel), although it cannot be used to measure the most important fracture sites of the spine or hip. SPA systems also have the added inconvenience of requiring the patient to place the site being scanned in water or other tissue-equivalent medium to achieve precision. SPA, however, does represent a relatively inexpensive and valuable tool in the diagnosis of osteoporosis with reasonable precision and low radiation exposure. Quantitative computed tomography was introduced in the mid 1970s and can measure bone density by using a CT scanner to determine both the patient's bone density and bone distribution in three dimensions. QCT, however, has remained limited in clinical use because of its relatively high radiation dose and the high cost of CT scanner equipment. 4 Radiographic absorptiometry, also introduced in the 1970s, measures bone density from two X-ray images (radiographs) of the hand placed alongside a calibration device using a conventional X-ray machine. The radiographs are sent to a central processing laboratory where a computer measures the density of the bone. The precision of this technique is comparable to SPA measurements. An advantage of this system is that it does not require any additional capital investment, as traditional X-ray equipment can be used to obtain the radiographs. The technique, however, cannot be used to measure and monitor the hip or spine. Also, because the radiograph must be sent to a laboratory for testing, it does not provide a real-time assessment of bone density, and, if the test is positive, a follow-up consultation is required. The Company believes that RA will be useful in rural areas where there may not be a sufficient concentration of patients to justify a capital investment in DXA bone density measuring equipment. Ultrasound has long been used in medical testing. However, the use of ultrasound for the detection of osteoporosis was not commercially introduced until recently, and then only in certain foreign countries. Ultrasound measurement has concentrated mainly on the calcaneous (the heel), which is comprised primarily of trabecular bone, as a measuring site. Initial clinical trials of ultrasound systems have indicated a significant association of low ultrasonic bone measurements of the calcaneous and the risk of fracture. The latest developments in hardware and software, resulting in enhanced precision and ease of use, are currently making ultrasound techniques an option for the diagnosis of osteoporosis. Major advantages of ultrasound examination are the complete absence of radiation and the small size and low cost of the equipment. Ultrasound devices do not use X-rays in making their measurements and therefore do not require X-ray licensing or registered operators. However, because ultrasound bone measurements currently are not as precise as DXA and other measurements, they are less reliable for continued monitoring of small changes in bone density or for assessing the response to therapies. In addition, they are generally limited to measurements at peripheral sites, not the more important spine or hip fracture sites. Accordingly, the Company believes that the most likely use for ultrasound devices such as Sahara, and others, will be for initial identification of osteoporosis and not for continued monitoring of changes in bone density or the response to therapies. Biochemical markers are substances that are produced within the body that correlate directly or indirectly to disease or bodily function. A number of biochemical markers have been discovered that can be used to measure the rate of bone resorption or formation. These measurements, while not measuring bone density, can provide a means to assess quickly (within approximately three months) the effectiveness of treatment and patient compliance with therapies for osteoporosis. A baseline and subsequent bone density tests (as frequently as annually) must be used in conjunction with biochemical marker measurements to assess fully the bone status of the patient. Because biochemical markers cannot be used independently to diagnose osteoporosis or risk of fracture, or to monitor a patient's changes in bone density as a result of therapy or otherwise, the Company believes that biochemical marker tests, including those being developed by the Company, will complement and not replace densitometry. BONE ASSESSMENT MARKET The Company believes that the clinical and primary care markets for osteoporosis diagnostic and monitoring products are expanding due to the recent development and introduction of new drug therapies to treat osteoporosis, the more widespread and increased reimbursement for bone density examinations, the aging of the population, and an increased focus on women's health issues and preventive medical practices. All of these factors have led to an increased awareness by women and primary care providers, such as gynecologists and family physicians, that osteoporosis is a treatable disease and that measurement of bone density is an integral component of diagnosis and monitoring of this disease. Upon obtaining FDA approval for Fosamax in September 1995, Merck launched an extensive educational campaign to increase patient and physician awareness that osteoporosis is a treatable disease. In connection with this effort, Merck is promoting the use of DXA and other techniques to diagnose and monitor osteoporosis and the effects of drug therapies. The Company believes that this ongoing comprehensive Merck program has significantly contributed to the growth of the bone densitometer and related markets. Fosamax is approved for use by patients for both the prevention and treatment of osteoporosis. In addition, Eli Lilly's Evista was recently approved for the prevention of osteoporosis. The 5 approval of therapies for both the prevention and treatment of osteoporosis should increase the need for patient testing and monitoring at an earlier age, before a patient is afflicted with osteoporosis. In the United States, the Health Care Finance Administration ("HCFA"), which establishes guidelines for the reimbursement of health care providers treating Medicare and Medicaid patients, provided validation for DXA bone densitometry examinations as a clinically useful procedure by recommending the reimbursement for DXA bone examinations in April 1994. In October 1997, HCFA published new guidelines for bone density measurements. Effective January 1, 1998, HCFA recommended reimbursement for central (hip and spine) DXA examinations, the important fracture sites, of approximately $131 per patient examination, an increase from the previous recommended rate of $121. Reimbursement for DXA densitometry done at peripheral sites was reduced to approximately $40 from $67 in early 1998. In June 1998, HCFA established an interim reimbursement code specifically for ultrasound bone mineral density studies in accordance with the Medicare Bone Mass Measurement Coverage Standardization Act. In October 1998, the American Medical Association established a permanent Certified Procedural Terminology ("CPT") code for ultrasound bone density examinations. CPT codes facilitate automated Medicare billing and the adoption of coverage by private carriers. CPT code 76977 covers ultrasound bone density measurement and interpretation at peripheral sites. HCFA recently published guidelines for CPT code 76977 to be reimbursed at a national average of $42, effective January 1, 1999. The differential in reimbursement between central and peripheral exams recognizes the important benefit of DXA measurements of the critical fracture sites, the hip and spine, in assisting in the detection and monitoring of bone disease. In part, as a result of the reimbursement policy recommendations implemented by HCFA, DXA bone density examinations are paid for by many private third party insurers in the United States. With the established reimbursement levels in the United States, and the FDA approval of additional osteoporosis drug therapies, the Company believes that the United States market for bone densitometers and other methods of bone mineral assessment has expanded from the hospitals, large clinics, research institutions and imaging and women's centers, to the larger potential market of primary care providers, including gynecologists and family physicians. In several European countries, Japan and other international markets, there has been a greater availability or acceptance of osteoporosis therapies and an earlier adoption of reimbursement for bone densitometry exams. Countries in which reimbursement for the use of X-ray bone densitometers has been approved include Belgium, Brazil, Canada, Germany, Greece, Japan, South Korea, Spain and Switzerland. In addition, the Japanese government has been actively supporting an educational program to promote public awareness of osteoporosis as a treatable disease. In Latin American countries such as Argentina, Brazil and Chile, and in Pacific Rim countries, such as Australia, The Peoples Republic of China, South Korea and Taiwan, there has been a growing use of osteoporosis therapies and an increased use of osteoporosis diagnostic and monitoring equipment. Recent economic uncertainties in certain foreign countries, including those in Asia and Latin America, may adversely affect the future growth of these markets. BONE ASSESSMENT PRODUCTS The Company's bone assessment products include a family of DXA bone densitometers which are used for the precise measurement of bone density to assist physicians in the diagnosis and monitoring of metabolic bone diseases such as osteoporosis. Since commercially introducing the first DXA bone densitometer in 1987, the Company introduced its first bone densitometer capable of assessing the bone density of the entire body in 1989, introduced the first bone densitometer capable of taking lateral measurements of the spine in 1991, and, in 1995, introduced its new QDR 4500 ACCLAIM fourth generation series of bone densitometers, which integrates the Company's most advanced X-ray technology into a compact package that facilitates installation in a standard examination room. The Company believes that a significant market exists for relatively low-cost products that assess bone mineral status, employ technologies that do not use ionizing radiation and may be used in a doctor's office. In order to address this market, the Company has introduced the Sahara Clinical Bone Sonometer, a dry ultrasound device that measures bone density of the heel. The Company is also working on the joint development of a biochemical marker strip test to assist in the assessment of bone mineral status. 6 QDR X-Ray Bone Densitometers. Since its first commercial shipment of a DXA system in October 1987, the Company has sold more than 6,000 DXA systems. The Company believes that its systems' performance advantages and their early adoption by leading clinical investigators have led to their market acceptance. The Company's DXA systems have been purchased for multiple-site studies sponsored by the pharmaceutical companies and by the United States government for evaluation of the incidence and treatment of osteoporosis. In addition, pharmaceutical companies have promoted the purchase of the systems for use by physicians to assist in the diagnosis and treatment of osteoporosis. Advantages of the Company's DXA systems include high precision (consistency from test to test), low patient radiation exposure equivalent to 1/10th of a conventional chest X-ray, a relatively fast scanning time, low operating cost, no radioactive source and the ability to measure bone density of the most important fracture sites, the spine and hip. Studies conducted by the Company and independent investigators have demonstrated that the systems can detect a change in spine bone density with a precision error of less than 1%. All the Company's DXA systems employ its 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. Each of the Company's DXA systems contains an X-ray source mounted beneath the patient. The X-ray source generates alternating high and low energy pulses in a thin beam that passes through the Company's patented Automatic Internal Reference System and then through the patient to an X-ray detector mounted above the patient. When the X-ray beam is detected, it contains information about the X-ray absorbing characteristics of both the patient and the calibration materials in the Automatic Internal Reference System at each of the two levels of radiation. The system converts this information into a digital format which is processed and analyzed by a computer and displayed on a high-resolution color monitor, both of which are incorporated into the system. The Company has invested substantial resources in developing operating and applications software for its systems. The software includes calibration software, automated scan and analysis programs for each scan site, a patient data base manager that archives all raw data for later retrieval and analysis and allows the operator to review the current image with an earlier image of the same patient. Initial DXA systems developed by the Company employed a single narrow pencil beam detected by one receptor. In 1991, the Company introduced the first bone densitometer employing a high density fan shaped X-ray beam that is detected by an array of receptors. This configuration enables the system to obtain better quality images with improved spatial resolution, significantly faster scanning time and higher patient throughput compared to single-beam systems. Moreover, for standard spine and hip scans, fan beam technology can reduce scan time by a factor of more than 25 compared to older single-beam scanning systems. The Company developed this fan beam technology to perform lateral (side-to- side) scans of the lower spine, in addition to the posterior-anterior (back-to- front) measurements performed by the Company's pencil beam systems. The earliest and most dramatic loss of bone density in the spine occurs primarily in the spine's soft (trabecular) bone, which is positioned directly behind the hard (cortical) bone when taking back-to-front measurements. This results in bone density measurements that average the density of the soft and hard bone and tends to mask changes in the soft bone. A lateral scan permits the imaging and measurement of the spine's soft bone with only limited interference from hard bone. In addition, a lateral scan reduces the interference caused by abnormal accumulation of bone and calcium deposits in and around the spine. In November 1994, the Company introduced the QDR 4500A ACCLAIM at the annual meeting of the Radiological Society of North America and in January 1995 obtained FDA clearance to sell the system in the United States. 7 The Company's QDR 4500 ACCLAIM series of bone densitometers offers rapid scanning and high resolution imaging using the latest available fan beam and high density, solid-state multi-detector array technology. In addition, the QDR 4500 ACCLAIM series is built in modular configurations that allow customers to add new features and capabilities, while protecting their investment in the equipment and patient data. The ACCLAIM series is comprised of four modular systems: the high-end QDR 4500A, the QDR 4500SL, the QDR 4500W and the QDR 4500C clinical bone densitometer. An important feature of the QDR 4500A and QDR 4500SL is their ability to perform lateral (side-to-side) scans of the lower spine, without turning the patient on her side, in addition to the posterior-anterior (back-to-front) measurements. The QDR 4500A and QDR 4500SL ACCLAIM are capable of producing high quality images of the spine, lateral spine, hip and other skeletal sites. The ACCLAIM's scan arm allows for multiple scan views without patient repositioning. The images produced can be combined with capabilities that enable vertebral dimensions to be determined with a radiation dose approximately ten to 100 times lower than that of conventional chest X-rays. Using the QDR 4500A or the QDR 4500SL, high-quality lateral images of the entire spine can now be obtained in as little as ten seconds. The ACCLAIM systems are designed to require less floor space than any other bone densitometer capable of taking hip and spine measurements. The special tabletop design and motorized scanner C-arm allow the QDR 4500C and QDR 4500SL to be installed in a standard 8ft x 8ft examination room (the QDR 4500W and QDR 4500A require an 8ft x 10ft room). Installation requirements for any of the ACCLAIM bone densitometers are minimal and normally do not require special electrical, structural or lead-shielding preparation. In addition to their small size, the QDR 4500 series offers virtually silent operation. The ACCLAIM series has replaced the Company's QDR 1500, QDR 2000 and QDR 2000plus products. In fiscal 1998, the ACCLAIM series accounted for approximately 69% of DXA sales. In November 1997, the Company introduced the QDR 4000 at the annual meeting of the Radiological Society of North America. The QDR 4000 pencil beam bone densitometer combines the reliability and economy of Hologic's 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 replaced Hologic's 1000plus pencil beam system in May 1998, and is targeted at the price sensitive segment of the market. Ultrasound. In December 1994, the Company acquired the ultrasound bone analyzer business of Walker Sonix. Walker Sonix had developed an ultrasound product line to assess bone mineral status of the heel. The location of the heel facilitates easy coupling of the ultrasound transducers at a site with a relatively low amount of overlying soft tissue. The heel is also made up of predominantly trabecular bone which tends to be more metabolically active. The Walker Sonix ultrasound devices measure two parameters, Broadbased Ultrasound Attenuation ("BUA") and Speed of Sound ("SOS") through a water medium to characterize bone mineral status. The use of water as a medium, which is a characteristic of other ultrasound bone analyzers, requires the patient to place her foot in water. The use of water requires cumbersome plumbing and cleaning mechanisms to be incorporated in the system. The Company developed internally an enhanced dry ultrasound bone analyzer, called "Sahara" that does not require the use of water. The Company believes that this "dry" technology offers further operator convenience by the elimination of the water handling required between each patient. On March 13, 1998, the FDA approved the Company's PMA for Sahara. Hologic believes that ultrasound systems represent a relatively low cost, compact, easy-to-use, non- ionizing, measurement technique to assist in the initial diagnosis of osteoporosis. The Company also believes that Sahara will improve patient accessibility to bone density testing, although the timing of which is uncertain. Recent studies have suggested that ultrasound provides good separation of fracture populations from reference groups and suggests that this method is a promising screening tool for evaluating a patient's fracture risk. However, ultrasound does not allow for direct assessment of important hip and spine fracture sites, has undocumented ability to follow the effects of therapy and has less precision (reproducibility of results) compared to DXA measurements. Accordingly, the Company believes that ultrasound systems will be used predominantly as a low cost initial screening or diagnostic tool and not as a patient monitoring tool. 8 Biochemical Markers. In September 1994, the Company entered into a joint development agreement with Serex to develop a simple strip test for use by physicians to monitor the levels of a patient's biochemical markers that indicate the rate of bone resorption. Serex has developed a proprietary and patented technology that enables complex immuno-chemistry assays to be performed in a strip test format that the Company believes is well-suited for testing directly in the physician's office to provide a real-time assessment of bone resorption. In January 1997, the Company expanded this joint development agreement to include Ostex International, Inc.'s Osteomark(R) assay. Osteomark is a simple, inexpensive immunoassay used to assess the level of bone resorption. Under the joint agreement, the Company, Serex and Ostex are engaged in the development of a point-of-care Osteomark test, utilizing Serex's strip- test technology. Although biochemical markers cannot measure bone density, the Company believes that biochemical markers may be useful as a tool to determine if therapy is effective. This is accomplished by comparing the baseline level of the marker with the value obtained from a serial measurement performed only two or three months following the start of therapy. This same technique may be useful to evaluate patient compliance with a prescribed therapy. There can be no assurance that the Company, Serex and Ostex will be able to develop effective strip tests, either for physician or over-the-counter use, on a timely basis, if at all, that once developed, any strip test will be approved or cleared for sale in the United States or other jurisdictions, or that once cleared or approved for sale any strip test will be commercially successful. Traditionally, biochemical markers of bone were performed using high pressure liquid chromatography ("HPLC") methods conducted in a research laboratory. HPLC procedures are complex and labor intensive requiring a highly trained technician, relatively slow, subject to high variability and expensive. For these reasons, biochemical markers of bone using HPLC methods have not been used for routine clinical testing. Recently, several immunodiagnostic tests that are antibody-based have been developed as biochemical markers of bone remodeling. Immunodiagnostic tests may be performed in a variety of technical formats. The format that has been introduced by several companies is the microtitre plate system, which is used for many different types of in-vitro diagnostic tests and is normally performed in a reference laboratory. The Company believes that other applications for biochemical markers of bone as well as new markers are likely to be developed in the future, and under its agreement with Serex, the Company retains the first right of negotiation to develop and license such tests. MINI C-ARM IMAGING PRODUCTS BACKGROUND AND MARKET OVERVIEW On August 29, 1996, Hologic's wholly-owned subsidiary merged with FluoroScan in a pooling-of-interests transaction. FluoroScan manufactures and distributes the FluoroScan Imaging System, a low intensity, real-time mini c-arm X-ray imaging device which provides high resolution images at radiation levels and at a cost well below those of conventional X-ray and fluoroscopic equipment. These mini c-arm systems are used primarily by orthopedic surgeons to perform minimally invasive surgical procedures on a patient's extremities (i.e., hand, wrist, knee, foot, ankle, etc.). The Company believes that certain trends in the healthcare industry could broaden the use of mini c-arms from the hospitals and surgery centers to private orthopedic and podiatric physician groups. Some of these trends include: the emergence of technology that enables minimally invasive procedures and therapies, the increase in the number of office-based procedures and examinations as a result of efforts to contain healthcare costs, and the development of new treatments and pharmaceuticals such as synthetic bone materials that are facilitated by the use of a mini c-arm to perform these procedures. FLUOROSCAN PRODUCTS FluoroScan pioneered the mini c-arm market with the introduction of FluoroScan I in June 1984. The basis of the FluoroScan System technology used in the OfficeMate and FluoroScan III products is a second generation micro channel 9 plate image intensifier commonly referred to as a "night vision" intensifier. This technology permits the FluoroScan System to produce high resolution readily viewable images by using a small amount of radiation, converting it to visible light and amplifying it approximately 50,000 times. The same night vision intensifier, as used by the military, allows clear views of a battlefield at night by amplifying small amounts of ambient light. The FluoroScan System technology offers several advantages over existing real-time conventional X-ray imaging devices (also known as C-arms, image intensifiers or fluoroscopy equipment). These advantages include; a substantial reduction of radiation to the patient and of scatter radiation to the surgeon and other operating room personnel, a cost of approximately one-third of the cost of a conventional C-arm, and mobility. Building upon the expertise developed using "night vision" technology coupled with Hologic's dual-energy x-ray expertise, the Company introduced a new x-ray image intensifier (cesium iodide) in its new Premier line. The cesium iodide intensifier, coupled with the smallest focal spot x-ray tube on the market, provides improved image quality in a six inch field-of-view mini c-arm. Premier. The Premier mini c-arm system was introduced in August 1998. The Premier's .085 mm focal spot x-ray tube (the smallest in the mini c-arm industry) provides clear resolution and detailed images. The Premier's balanced iso-centered mini C-arm rotates 360 degrees with easy maneuverability. Also unique to the Premier is its readily accessible surgeon centered controls on the c-arm which make both assisted and unassisted operation much easier. The Premier's compact ergonomic design fits into tight spaces with ease. The combination of advanced technical features and ease-of-use should make the Premier attractive to hospital, surgery centers, orthopedic group practices and private physician offices. OfficeMate. The OfficeMate imaging system was introduced in fiscal 1997. This system was designed specifically to meet the needs of the physician office. This system has replaced the FluoroScan II system which was targeted at physician office and veterinary markets. The OfficeMate features efficient, user-friendly operation, high resolution real-time and freeze frame images, full 360-degree arm rotation and the choice of three or four inch field-of-view. Due to its compact size and portability, the Company believes the OfficeMate is well suited for the in-office extremity imaging requirements of hand and orthopedic surgeons. The OfficeMate system is 51 inches high, 29 inches wide and 30 inches deep. The Company believes the primary market for this system is the office based physician. However, with minor modifications, the OfficeMate can also be configured to address the needs of the veterinary market. FluoroScan III. The FluoroScan III imaging system was introduced in the first quarter of 1996. The FluoroScan III typically has a four or five inch field-of-view and is targeted primarily at orthopedic surgeons, operating rooms, emergency rooms and ambulatory surgery centers. The new system replaced FluoroScan I (the first generation model FluoroScan System) and has a number of technical enhancements. FluoroScan III has dual video channels that allow a surgeon to display different views of the anatomy for side-by-side comparison. The unit also features four image buffer memories for instant recall of previous images. The unit also provides for permanent storage of up to 4,000 full resolution digital images. The unit stands approximately four feet high, weighs about 240 pounds and can be plugged into any standard outlet. It rests on a portable, wheeled base cabinet, and all vital functions are computer controlled. Images can be viewed on the monitor or, through the addition of options, printed on thermal paper or stored on video tape or computer diskette. FLUOROSCAN CORPORATE COLLABORATION Certain companies are developing material to assist in the healing of bone fractures. For example, Norian Corporation ("Norian") is in clinical trials in the U.S. and Europe for its Skeletal Repair System/(TM)/ ("SRS"). SRS is a material that is injected into a fracture and has been shown to hold the bones in position while providing the raw materials to help the body repair itself more rapidly. Since SRS requires extensive imaging from the initial injection through the healing process, the Company believes that FDA approval and market acceptance of SRS could provide long-term benefits for the Company. On June 12, 1995, the Company entered into an agreement with Norian that provides for the Company to provide imaging equipment for seminars introducing Norian's Skeletal Repair System to orthopedic 10 surgeons. The Company can offer no assurance that SRS will receive FDA approval, or if approved will gain wide market acceptance or enhance sales of the Company's FluoroScan System. OTHER PRODUCTS; SCANORA, CRANEX AND SMARTLIGHT In order to take advantage of its European sales force and associated distribution capability, the Company distributes Scanora and Cranex, specialized systems for taking X-ray images of the maxillo-facial anatomy (teeth, jaw and other facial structures) manufactured by Soredex, S.A. ("Soredex"), a division of Orion Corporation of Helsinki, Finland. The Company is also distributing SmartLight/(R)/ Plus ("SmartLight"), a state-of-the-art lightbox used by radiologists for the reading and interpretation of X-ray film. SmartLight is manufactured by SmartLight, LTD of Israel. The Scanora system differs from Cranex in that it supports more than 1,000 different image modes, including pre-surgical planning of dental implants, reconstructive surgery and temporal mandibular joint repair. This system provides significantly improved images of the maxillo-facial anatomy compared to other techniques available in the market, such as panoramic X-rays or computed tomography. Dental implant procedures have experienced significant growth in Europe over the past five years. The Company is the exclusive distributor of Scanora and Cranex systems in Western Europe, the Middle East and Africa, excluding South Africa and Namibia. In addition, the Company has non-exclusive distribution rights in several Eastern European countries. The Company is distributing Scanora and Cranex under a distribution agreement which is renewable annually. SmartLight utilizes optronic technologies to improve film reading. By fully reducing glare and controlling light intensity and ambient light, the SmartLight systems can provide the diagnostician with more clinically valuable information. Proprietary adaptive technology reduces glare by automatically masking the areas that are not clinically significant. The system also controls the light intensity emanating from clinically important parts of the film, regardless of film density. Ambient light is automatically adjusted to increase visual acuity. The Company is distributing SmartLight in France, Spain and Portugal under a distributuion agreement with an initial expiration date of October 1999. CUSTOMERS The Company's DXA customers include many pharmaceutical companies active in the field of bone mineral metabolism, such as Eli Lilly, Merck, Pfizer, Proctor & Gamble, Rhone-Poulenc/Rorer, Sanofi Research and SmithKline. The Company believes that because of their technological features, its DXA systems have been and continue to be the most widely used bone densitometers for clinical studies involving the emerging drug therapies for osteoporosis. The Company has a group of 13 employees who provide data collection and quality assurance services to such customers. Initial clinical evaluation sites for the Company's DXA systems included leading medical and research institutions, such as the Mayo Clinic, the Massachusetts General Hospital and the University of California at San Francisco in the United States; the University of Lyon and Guy's Hospital in Europe; and Kobe University in Japan. These institutions, along with many other leading medical institutions, continue to be users of the Company's DXA systems. The clinical demand for the Company's DXA bone densitometers has grown as a result of the increased worldwide focus on women's health problems and the availability of new osteoporosis therapies entering the market. There has been a shift in the market for bone densitometers to primary care physicians, including gynecologists and family physicians, in response to the development of new drug therapies for osteoporosis and the growing awareness of osteoporosis as a treatable disease. 11 MARKETING AND SALES Domestic Market. In the United States, the Company sells its DXA systems primarily through its direct sales force and its FluoroScan Systems through a national network of independent sales representatives and sales representative organizations. As of November 30, 1998, the Company had approximately 27 employees engaged in DXA sales in the United States. In order to penetrate the DXA market more effectively, the Company has expanded its direct marketing activities, including additions to its sales force, and has implemented various leasing programs, including a program with a third party leasing company to make its QDR 4000 (the replacement for the QDR 1000plus) and QDR 4500C ACCLAIM system available to physicians on a fee-per-scan basis. To meet the growing demand for its products, the Company plans to enhance further its distribution capabilities in the United States through a combination of an expansion of its sales force and strategic alliances with companies with established distribution channels in the various market segments for the Company's products. In the second quarter of fiscal 1997, the Company entered into a distribution agreement with Physician Sales and Service, Inc. ("PSS") of Jacksonville, Florida. PSS is a leading distributor of medical products with over 850 sales representatives focused on private physician practices in the United States. Under the terms of the agreement, PSS has an exclusive right to distribute Hologic's QDR 4000 and QDR 4500C X-ray bone densitometers in certain markets throughout the United States. PSS is also the exclusive U.S. distributor of the Sahara ultrasound bone densitometer to the primary care market. The Company's distributuion agreements with PSS have initial terms through March 2000 and May 2000, respectively, and each may be terminated earlier upon written notice under certain criteria. In fiscal 1998, PSS accounted for approximately 35% of Hologic's bone densitometry sales. Strategic Alliance Program. The Company markets certain of its products in the United States, in part, through its strategic alliance program with Sanwa Business Credit Corporation ("Sanwa"). Under the program, the Company enters into a fee-per-scan lease arrangement with its customers and then sells the lease and the underlying equipment to Sanwa. Under the fee-per-scan arrangement the customer is required to make an initial down payment. Thereafter, payments to Sanwa are based upon the customer's monthly use of the equipment on a fee- per-scan basis. No minimum fees are required. However, if the customer's use of the equipment is insufficient to cover the cost of the equipment, Sanwa has the option of repossessing the equipment. In addition, customers have the option, after an initial six month trial period, to terminate the arrangement and return the equipment. Customers that use the equipment frequently, also have the option to fix their cost by purchasing the equipment or entering into a fixed lease for the equipment. If equipment sold by the Company to Sanwa under this program is repossessed or returned to Sanwa, the Company has the obligation to use its best efforts to remarket the product. The Company has also guaranteed to reimburse Sanwa for certain losses that Sanwa may incur as a result of this arrangement. Generally, the Company's total potential liability for reimbursement of Sanwa and remarketing costs is limited to 10% of the total fee-per-scan contracts funded under the program. See "Management's Discussion and Analysis of Financial Position and Results of Operations." In fiscal 1998 and 1997, the Company's revenues under its strategic alliance program accounted for 33% and 17% of the Company's product revenues, respectively. See "Risk Factors -- Customer Concentration; Sales Channel Risks." International Markets. The Company sells its products in international markets through independent distributors, as well as a direct sales force in France, the Benelux countries, Spain and Portugal. As of November 30, 1998, the Company had 13 employees engaged in sales in Europe. The Company distributes its DXA and ultrasound products in Japan through Toyo Medic, which has been the Company's exclusive distributor in Japan since April 1988. The agreement requires Toyo Medic to purchase certain minimum quantities and to provide technical and warranty support to its customers. In certain other territories outside the United States, the Company sells its systems through independent distributors, all of whom offer technical support. The Company has increased its efforts to expand its market penetration for its DXA systems into Latin America, including Argentina, Brazil and Chile, and into Pacific Rim countries other than Japan, 12 including 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. The Company believes that with time, Eastern Europe may present a significant opportunity for growth and also is seeking to expand its presence in the area. Recent economic uncertainties in certain foreign territories, including much of Asia, may adversely impact the growth of these markets. In fiscal 1998 and in fiscal 1997, foreign sales accounted for approximately 28% and 39% of the Company's product sales, respectively. The Company's foreign sales are subject to risks generally associated with foreign sales, including United States and foreign regulatory approval requirements, policy changes and foreign economic changes. In fiscal 1998, sales to Asia and Latin America decreased 57% and 39%, respectively. The Company believes this decline was primarily attributable to economic uncertainties in these regions. The relative strength of the United States dollar in relation to foreign currencies may also adversely affect the Company's sales to foreign countries. The Company also believes that its sales to Europe may be seasonal, with reduced orders in the summer months reflecting summer vacation schedules. International sales will also be affected by government approval of new drug therapies, changes in local healthcare policies regarding reimbursement and the strength of promotional efforts by its distributors. Moreover, the FluoroScan System technology is governed by the International Traffic in Arms Regulations of the United States Department of State. As a result, the export of FluoroScan Systems to certain countries may be limited or prohibited. See Note 12 of Notes to Consolidated Financial Statements. COMPETITION The bone assessment market is highly competitive and characterized by continual change and improvement in technology, and multiple technologies that have been or are under development. Some of the companies in this industry have significantly greater manufacturing, marketing and financial resources than the Company. See "Background." The Company believes that competition in the field of DXA bone densitometry is based upon price, precision, speed of measurement, patient radiation dose, cost and ease of operation, product versatility, product reliability and quality of service. The Company believes that it competes effectively with respect to these criteria. The Company believes that its DXA systems will also compete with other X-ray based modalities, including a radiographic absorptiometry product developed by CompuMed Inc. which has been licensed to Merck. The Company's DXA systems also compete with specially-equipped CT scanners and may compete with used and refurbished DXA systems. See "Bone Assessment Products - Background" for a discussion of the technical advantages and disadvantages of these other systems. The Company believes that competition in the field of ultrasound systems is based on price, precision, speed of measurement, cost and ease of operation, product versatility, product reliability and quality of service. The Company believes that advantages of its 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. On March 13, 1998, the Company's Sahara system became the first ultrasound bone sonometer to receive FDA approval in the United States. The Sahara system was followed by Lunar Corporation's Achilles ultrasound device which was approved for sale by the FDA in June 1998 and Myriad Ultrasound Systems, LTD's SoundScan/(TM)/ bone sonometer which received FDA approval in September 1998. The Company believes that ultrasound systems will compete with DXA systems in the diagnostic market for initial screening of patients. However, the Company believes that because ultrasound systems can only measure peripheral skeletal sites and do not have the precision of DXA systems, DXA systems will continue to be the predominant means of monitoring bone density for patients being treated for or at high risk of osteoporosis. Three companies, including Ostex, have obtained FDA clearance to market biochemical marker tests that evaluate bone turnover in a microtitre format which require samples to be sent to the lab for evaluation. One or more of these companies may develop point-of-care, over-the-counter or other real-time biochemical marker tests that would compete with the biochemical marker strip tests being developed by the Company, Serex, and Ostex. The Company believes that 13 competition in this market will be based upon price, product reliability, diagnostic sensitivity, precision and ease-of-use. There can be no assurance that the Company, Serex and Ostex will be able to compete effectively in this market. The Company believes that competition for its mini c-arm systems is based largely on price, quality, service and production capabilities. The market for mini c-arm systems has become increasingly more competitive due to the introduction of new mini c-arm devices, particularly in the United States. The Company believes that key advantages of its FluoroScan Systems include low levels of radiation, low costs, mobility, quality and durability. MANUFACTURING The Company's manufacturing operations for its DXA and ultrasound systems consist primarily of assembly, test, burn-in and quality control. The Company purchases a major portion of the parts and peripheral components for its products, and manufactures certain subsystems, such as the high-voltage X-ray power supply, from raw materials. Parts and materials are readily available from several supply sources. The Company is required to purchase all of its requirements for Scanora from Soredex. Failure of Soredex to manufacture those systems on time and in accordance with specifications would have an adverse impact on the Company's sales of those systems. The Company manufactures all the FluoroScan System models and related products at its manufacturing facility in Northbrook, Illinois. Current manufacturing capacity permits the production of approximately 30 units per month. Generally, units for use in the health care field are manufactured without a prior order, while units for use in industrial applications are custom made to the customer's specifications. The Company performs final assembly and test of the FluoroScan System. All of the materials and most of the purchased components used in manufacturing the Company's products are readily available from numerous sources. Several key components require high technology including the X-ray tube, image intensifier, video camera and fiberoptic taper and are manufactured by only one or a small number of suppliers. Failure of any component supplier to provide acceptable quality and timely components at an acceptable price, or an interruption of supplies from a supplier as a result of fire, nature calamity, strike or other significant events could materially and adversely affect the Company's business. Although the Company uses materials in its manufacturing process that may be subject to federal, state and/or local environmental laws, the costs and effects of compliance with these laws have not had a material effect on the Company's financial condition or results of operations during any of the past three years. BACKLOG Backlog for the Company's systems as of November 30, 1998 and November 30, 1997 totaled approximately $10.6 million and $8.7 million, respectively. 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 the Company's net revenues for any future period. RESEARCH AND DEVELOPMENT The Company's research and development efforts are focused on enhancing its existing products and developing new products for the bone assessment and mini C-arm market. The Company's research and development personnel also are involved in establishing protocols, monitoring, interpreting and submitting test data to the FDA and other regulatory agencies to obtain the requisite clearances and approvals for its products. At November 30, 1998, the Company had 61 14 persons engaged in research and development, of whom 17 persons were engaged in software development. The research and development group was responsible for the development of the Company's Sahara bone analyzer, the QDR 4000 and the development of Premier. During fiscal 1998, 1997 and 1996, the Company's research and product development expenses were approximately $9.8 million, $8.5 million and $7.3 million, respectively. PATENTS AND PROPRIETARY RIGHTS The Company relies upon trade secrets and patents to protect its technology. Due to the rapid technological change that characterizes the medical instrumentation industry, the Company believes 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, the Company has obtained patents and will continue to make efforts to obtain patents, when available, in connection with its product development program. The Company has obtained 26 patents, licensed 5 patents and has pending 12 patent applications in the United States relating to its DXA technology, and has obtained 5 patents, licensed 5 patents and has pending 3 patent applications in the United States relating to its ultrasound technology. The Company has obtained or applied for corresponding patents and patent applications for certain of these patents and patent applications in certain foreign countries. There can be no assurance that any of the Company's patent applications will be granted or that any patent or patent application will provide significant protection for the Company's products and technology. Moreover, there can be no assurance that foreign intellectual property laws will protect the Company's intellectual property rights. In the absence of significant patent protection, the Company may be vulnerable to competitors who attempt to copy the Company's products, processes or technology. In September 1994, Serex granted the Company an exclusive license to use Serex's technology to manufacture, market, sell and distribute the biochemical marker strip test being developed under a joint development agreement between Serex and the Company. Serex further granted the Company the right of first negotiation with respect to the development and distribution of new products conceived of by Serex for application in bone metabolism. In order to maintain its exclusive rights once the product is developed, the Company is required to purchase a certain minimum number of tests or pay Serex amounts that would have been paid had the Company purchased the minimum number of tests. If the Company does not meet these minimum requirements, its rights become nonexclusive. In June 1989, the Company granted an exclusive worldwide license of certain of its DXA technology to Vivid Technologies, Inc., an affiliate of S. David Ellenbogen and Jay A. Stein, the Chief Executive Officer and Senior Vice President of the Company, for the sole purpose of developing a baggage inspection and security system. In September 1996, the Company also granted Vivid Technologies, Inc. a nonexclusive license to be used for the development of X-ray based products for process control applications in the food and beverage industry. The Company had been involved in extensive patent litigation with Lunar, with each party claiming that the other was infringing certain patents held by the other. This litigation was settled by agreement dated November 22, 1995. The agreement provides for certain royalties to be paid by each party to the other for future sales of products using certain defined technologies. The Company does not believe that amounts to be paid by either party under this arrangement will be material. The agreement also 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. However, there can be no assurance that Lunar will not use the Company's technology in a manner that would materially and adversely affect the Company's business and results of operations. The Company has a license agreement for technology used in its mini c-arms with the United States government as represented by NASA that is exclusive within the United States. This agreement gives the Company exclusive rights to manufacture and distribute NASA's high voltage isolation transformer and high voltage power supply. This technology allows the Company's mini c-arm products to produce low levels of radiation. This license and underlying patent 15 previously had an expiration date of 2002 but was extended as a result of GATT and now expires in 2003. Pursuant to this license, the Company may be required to grant sublicenses to the extent that NASA believes such sublicenses are necessary for the health and safety needs of the United States and such needs cannot be fulfilled by the Company. There has been substantial litigation regarding patent and other intellectual property rights in the medical device and related industries. The Company has in the past, and may in the future be, notified that it may be infringing intellectual property rights possessed by other third parties. If any such claims are asserted against the Company's intellectual property rights it may seek to enter into a royalty or licensing arrangement. The Company cannot assure, however, that a license will be available on reasonable terms or at all. The Company could decide, in the alternative, to resort to litigation to challenge such claims or to design around the patented technology. Such actions could be costly and would divert the efforts and attention of the Company's 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 materially and adversely affect the Company's business, financial condition and results of operations. THIRD PARTY REIMBURSEMENT In the United States, the Health Care Finance Administration, which establishes guidelines for the reimbursement of health care providers treating Medicare and Medicaid patients, provided validation for DXA bone densitometry examinations as a clinically useful procedure by recommending the reimbursement for DXA bone examinations in April 1994. In October 1997, HCFA published new guidelines for bone density measurements. Effective January 1, 1998, HCFA recommended reimbursement for central (hip and spine) DXA examinations, the important fracture sites, of approximately $131 per patient examination, an increase from the previously recommended rate of $121. Reimbursement for DXA densitometry done at peripheral sites was reduced to approximately $40 from $67 in early 1998. In June 1998, HCFA established an interim reimbursement code specifically for ultrasound bone mineral density studies in accordance with the Medicare Bone Mass Measurement Coverage Standardization Act. In October 1998, the American Medical Association established a permanent CPT code for ultrasound bone density examinations. CPT codes facilitate automated Medicare billing and the adoption of coverage by private carriers. CPT code 76977 covers ultrasound bone density measurement and interpretation at peripheral sites. HCFA recently published guidelines for CPT code 76977 to be reimbursed at a national average of $42, effective January 1, 1999. The differential in reimbursement between central and peripheral exams recognizes the important benefit of DXA measurements of the critical fracture sites, the hip and spine, in assisting in the detection and monitoring of bone disease. In part, as a result of the reimbursement policy recommendations implemented by HCFA, DXA bone density examinations are paid for by many private third party insurers in the United States. In several European countries, Japan and other international markets, there has generally been an earlier adoption of reimbursement for bone densitometry exams. Countries in which reimbursement for the use of X-ray bone densitometers has been approved include Belgium, Brazil, Canada, Germany, Greece, Japan, South Korea, Spain and Switzerland. In addition, in Japan, where there is a general aversion to ionizing devices, the government has initiated a program to subsidize purchases of ultrasound bone densitometers. As a result, there is much greater use of ultrasound bone densitometers in Japan than in any other country. REGULATION The medical devices manufactured and marketed by the Company are subject to regulation by the FDA and, in many instances, by foreign governments. Under the Federal Food, Drug and Cosmetic Act (the "FDA Act"), manufacturers of medical devices must comply with certain regulations governing the testing, manufacturing, packaging and marketing of medical devices. The Company's 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. 16 The FDA generally must approve the commercial sale of new medical devices. Commercial sales of the Company's 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 Company received FDA market clearance under 510(k) for its DXA bone densitometers and expects to be eligible to seek 510(k) clearance for its biochemical marker strip test for use by physicians, once developed. 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. The Company must first obtain an investigational device exemption ("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. On March 13, 1998, the FDA approved the Company's PMA for Sahara. The Company's systems are also subject to approval by certain foreign regulatory and safety agencies. The FluoroScan System technology is governed by the International Traffic in Arms Regulations of the United States Department of State. As a result, the export of FluoroScan Systems to certain countries may be limited or prohibited. No assurance can be given that the FDA or foreign regulatory agencies will give the requisite approvals or clearances for any of the Company's 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 the Company 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 the Company's products. As a manufacturer of medical devices, the Company is subject to certain other FDA regulations and the Company's manufacturing processes and facilities are subject to continuing review by the FDA. Most states and certain 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. The Company cannot predict what impact, if any, such changes might have on its business. EMPLOYEES As of November 30, 1998, the Company had 396 full-time employees, including 102 in manufacturing operations, 61 in research and development, 161 in marketing, sales and support services, 59 in finance and administration and 13 in medical data management. None of the Company's employees are represented by a union. The Company considers its employee relations to be good. ITEM 2. PROPERTIES On July 30, 1998, the Company purchased a 200,000 square foot building located in Bedford, Massachusetts for approximately $20 million in cash. The Company is currently renovating the building at an additional cost of approximately $5 million and plans to relocate its corporate headquarters and manufacturing facility for its bone assessment products to this new site in late January 1999. Currently, the Company leases a 83,500 square foot building located in Waltham, Massachusetts, under a lease which expires in January 1999, for its corporate headquarters and manufacturing facility and rents on a month to month basis additional space for storage of finished product and inventory totaling approximately 15,000 square feet. The Company also utilizes approximately 25,500 square feet of space in Northbrook, Illinois pursuant to a lease that expires in February 2001 for operations of its wholly-owned subsidiary, FluoroScan. The Company believes that its facilities will be adequate for its needs for the foreseeable future. The Company also maintains sales and service offices in France, Belgium and Spain. The Company believes that it has 17 adequate space for its anticipated needs and that suitable additional space will be available at commercially reasonable prices as needed. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 18 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Market Information. The Company's 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 Common Stock, as reported by the Nasdaq National Market. FISCAL YEAR ENDED SEPTEMBER 27, 1997 High Low First Quarter $29 $18 Second Quarter $31 3/4 $23 1/8 Third Quarter $28 3/8 $17 7/8 Fourth Quarter $29 3/4 $18 1/2 - ----------------------------------------------------------------------------- FISCAL YEAR ENDED SEPTEMBER 26, 1998 High Low First Quarter $29 1/8 $20 3/8 Second Quarter $29 5/8 $18 3/4 Third Quarter $29 3/4 $17 3/8 Fourth Quarter $18 15/16 $ 9 7/8 - ------------------------------------------------------------------------------ Number of Holders. As of December 18, 1998, there were approximately 430 holders of record of the Company's Common Stock. Dividend Policy. The Company has never declared or paid cash dividends on its capital stock and does not plan to pay any cash dividends in the foreseeable future. The Company's current policy is to retain all of its earnings to finance future growth. 19 ITEM 6. SELECTED FINANCIAL DATA. The historical selected financial data of the Company has been retroactively restated to reflect the acquisition of FluoroScan in a pooling-of-interests transaction. See Note 3 of the accompanying Notes to the Consolidated Financial Statements.
FISCAL YEARS ENDED September 24, September 30, September 28, September 27, September 26, 1994 1995 1996 1997 1998 - -------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF OPERATIONS DATA (In thousands, except per share data) Revenues: Product sales $46,227 $54,276 $ 88,201 $102,781 $111,498 Other revenue 1,427 2,270 3,390 3,908 4,066 ------- ------- -------- -------- -------- 47,654 56,546 91,591 106,689 115,564 ------- ------- -------- -------- -------- Costs and Expenses: Cost of product sales 24,522 27,549 41,253 47,492 55,891 Research and development 3,668 4,499 7,283 8,527 9,778 Selling and marketing 7,781 11,052 16,504 19,448 28,589 General and administrative 5,795 6,879 9,081 8,827 10,452 Litigation expenses (2) --- 2,533 798 --- --- Acquisition expenses --- --- 1,949 --- --- ------- ------- -------- -------- -------- 41,766 52,512 76,868 84,294 104,710 ------- ------- -------- -------- -------- Income from operations 5,888 4,034 14,723 22,395 10,854 Interest income 437 883 2,583 5,346 5,458 Other income (expense) 70 (56) (249) (172) (124) ------- ------- -------- -------- -------- Income before income taxes 6,395 4,861 17,057 27,569 16,188 Provision for income taxes 1,627 1,513 5,700 9,840 5,800 ------- ------- -------- -------- -------- Net income $ 4,768 $ 3,348 $ 11,357 $ 17,729 $ 10,388 ======= ======= ======== ======== ======== Net income per common and common equivalent share: Basic $ .49 $ .33 $ .97 $ 1.37 $ .78 ======= ======= ======== ======== ======== Diluted $ .51 $ .34 $ .91 $ 1.30 $ .75 ======= ======= ======== ======== ======== Weighted average number of common and common equivalent shares outstanding: Basic 9,649 10,230 11,698 12,986 13,259 ======= ======= ======== ======== ======== Diluted 9,355 9,831 12,524 13,672 13,766 ======= ======= ======== ======== ======== - ----------------------------------------------------------------------------------------------------------------------- Consolidated Balance Sheet Data Working capital $23,967 $27,189 $ 97,199 $112,868 $ 99,633 Total liabilities 9,426 12,551 15,835 17,900 32,215 Total assets 36,670 44,083 123,107 144,667 172,597 Stockholders' equity 27,244 31,532 107,272 126,767 140,382 - -----------------------------------------------------------------------------------------------------------------------
(1) All share and per share data has been restated to reflect the 2-for-1 stock split that occurred on March 25, 1996. (2) The fiscal 1995 litigation expenses of $2.5 million before income taxes ($1.8 million after tax, or $.18 per share) relate primarily to certain patent litigation. A definitive agreement was reached by the Company and the other party to this litigation in November 1995, settling all outstanding disputes. See "Patents and Proprietary Rights". 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with the "Selected Consolidated Financial Data" and the Consolidated Financial Statements included elsewhere in this Report and the information described under the caption "Risk Factors" below. OVERVIEW Since inception, the Company has experienced generally increasing annual sales as interest in bone diseases, such as osteoporosis, has grown, as new drug therapies have become available in the United States and other countries to treat these diseases and as the use of DXA systems to measure bone density has become more widespread. In fiscal 1998, sales of the Company's X-ray bone densitometers reached record levels, especially in the United States as the clinical use of bone densitometers continued to expand. The Company introduced the first dual energy X-ray absorptiometry (DXA) bone densitometer in 1987 and continued with a string of new product advancements including the introduction of the fourth-generation clinically-oriented ACCLAIM series of bone densitometers in fiscal 1995. In July 1996, the Company began international shipments of Sahara, a completely dry ultrasound bone sonometer system that does not require water as a coupling medium like the other competitive devices. In March 1998, Sahara was approved for sale in the United States by the Food and Drug Administration. The Company believes that future growth will be in part conditional upon the success of sales of Sahara, especially in the United States to the primary care market. In fiscal 1996, the Company acquired FluoroScan Imaging Systems, Inc., an industry leader in the field of mini c-arm imaging systems. Sales of mini c- arms has accounted for less than 10% of the Company's total revenues since the acquisition. The availability of reimbursement to healthcare providers for bone density measurements of patients continues as an important factor in the attractiveness of the Company's bone densitometers. Effective January 1, 1998, the Health Care Finance Administration, the agency which administers Medicare, increased the recommended reimbursement rates for central DXA tests to a national average of $131, from $121, and in October 1998, the American Medical Association established a permanent Certified Procedural Terminology ("CPT") code for ultrasound bone density measurement. The newly created CPT code 76977 will become effective January 1, 1999 with a recommended national average reimbursement rate of $42. In addition, the recommended reimbursement rate for central DXA tests will remain at approximately $131 on average. In connection with a fee-per-scan program offered for the Company's DXA bone densitometers, the Company has entered into a remarketing agreement whereby the Company has agreed to perform certain remarketing activities on a best efforts basis and to cover any losses incurred by the leasing company up to 10% of the total fee-per-scan contracts funded. The leasing company purchases all such DXA densitometers covered under these contracts from the Company. The Company has reserved for potential losses under these contracts by deferring revenue of an amount equal to 10% of the contracts funded. 21 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of revenues represented by items as shown in the Company's consolidated statements of operations.
FISCAL YEARS ENDED --------------------------------------------------- September 28, September 27, September 26, 1996 1997 1998 ------------- ------------- -------------- - ---------------------------------------------------------------------------------- Revenues: Product Sales 96.3% 96.3% 96.5% Other revenue 3.7 3.7 3.5 - ---------------------------------------------------------------------------------- 100.0 100.0 100.0 - ---------------------------------------------------------------------------------- Cost and expenses: Cost of product sales 45.0 44.5 48.4 Research and development 8.0 8.0 8.5 Selling and marketing 18.0 18.2 24.7 General and administrative 9.9 8.3 9.0 Litigation expenses .9 -- -- Acquisition expenses 2.1 -- -- - ---------------------------------------------------------------------------------- 83.9 79.0 90.6 - ---------------------------------------------------------------------------------- Income from operations 16.1 21.0 9.4 Interest income 2.8 5.0 4.7 Other income (expense) (0.3) (0.2) (0.1) - ---------------------------------------------------------------------------------- Income before income taxes 18.6 25.8 14.0 Provision for income taxes 6.2 9.2 5.0 - ---------------------------------------------------------------------------------- Net income 12.4% 16.6% 9.0%
FISCAL YEAR ENDED SEPTEMBER 26, 1998 VERSUS FISCAL YEAR ENDED SEPTEMBER 27, 1997 REVENUES. Total revenues increased 8% to $115.6 million in fiscal 1998 compared to $106.7 million in fiscal 1997. The increase in revenues was due to an increase in the total number of Sahara (the Company's ultrasound bone sonometer) product sales, especially in the United States, and an increase in the total number of DXA product sales which were partially offset by decreased sales of mini c-arm imaging systems. The increase in the number of DXA bone densitometers sold was primarily attributable to a significant increase in sales to the primary care market in the United States partially offset by a decrease in sales to the domestic hospital and radiology markets and a decrease in the number of DXA's sold internationally, especially in Asia. Additionally, in the United States, the increase in the number of DXA bone densitometers sold was partially offset by lower average selling prices primarily attributed to this shift in sales to the primary care market. The primary care market accounted for 35% of total revenues in fiscal 1998 compared to 5% in fiscal 1997. Total revenues for the fourth quarter of fiscal 1998 decreased 28% from $34.4 million in the immediately preceding quarter and remained relatively unchanged compared to the fourth quarter of fiscal 1997. The sequential quarter decrease was primarily attributable to a shift in the focus of the Company's U.S. distributor for the primary care market to the Sahara bone sonometer from the DXA line of bone densitometers. In the current quarter, compared to the immediately preceding quarter, sales of DXA bone densitometers into the primary care market decreased significantly and were only partially offset by increased Sahara sales. The Company believes that sales of the Sahara were adversely impacted by a lack of a permanent reimbursement code for ultrasound bone density measurement. The Company further believes that the approval by HCFA of a permanent reimbursement code for 22 these measurements, scheduled to take effect in January 1999, should positively impact Sahara sales. However, the Company cannot assure that Sahara sales will increase. The Company's sales may also be somewhat seasonal, with generally lower sales in its fourth quarter, reflecting summer vacation schedules. Other revenues consist primarily of revenue relating to medical data management services provided to pharmaceutical companies to assist in the collection and monitoring of clinical trial data, royalty revenues from the Company's licensing of its technology to a related party and additional revenues generated from the Company's Strategic Alliance Program on a fee-per-scan basis. In fiscal 1998, other revenues increased 4% to $4.1 million from $3.9 million in fiscal 1997 primarily due to additional fee-per-scan revenues. In fiscal 1998, approximately 72% of product sales were generated in the United States, 18% in Europe, 6% in other international markets and 4% in Asia. In fiscal 1997, approximately 61% of product sales were generated in the United States, 20% in Europe, 10% in Asia and 9% 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 50% in fiscal 1998 from 46% in fiscal 1997. This increase was primarily due to (i) a dramatic shift in the product sales mix to the primary care market in the United States, (ii) lower sales to its hospital and radiology markets which tended to purchase the higher gross margin ACCLAIM systems and (iii) lower sales prices for mini c-arm systems. In the first half of the fiscal year, the Company predominantly sold the lower gross margin QDR 1000plus in the primary care market. In the second half of the fiscal year, sales shifted in this market to the Company's QDR 4500C but at an average selling price less than in the prior year. Partially offsetting these factors were increased sales of the higher gross margin Sahara ultrasound sonometers, especially in the United States. Research and development expenses increased 15% to $9.8 million (8% of total revenues) in fiscal 1998 from $8.5 million (8% of total revenues) in fiscal 1997. This increase was 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 increased 47% to $28.6 million (26% of product sales) in fiscal 1998 from $19.4 million (19% of product sales) in fiscal 1997. The increase in selling and marketing expenses in 1998 is primarily due to an increase in sales commissions based on the higher sales volume in the primary care market in the United States. General and administrative expenses increased 18% to $10.5 million (9% of total revenues) in fiscal 1998 from $8.8 million (8% of total revenues) in fiscal 1997. This increase was primarily due to an increase in accounts receivable reserve related to the Company's foreign accounts receivable, especially in Brazil, and an increase in employee benefit related expenses. INTEREST INCOME. Interest income increased to $5.5 million in fiscal 1998 from $5.3 million in fiscal 1997. In fiscal 1998, the Company held a higher investment base than in the prior year. The Company has invested these proceeds in investment grade corporate and government securities. OTHER EXPENSE. In fiscal 1998 and 1997 the Company incurred other expenses of approximately $124,000 and $172,000 respectively. These expenses were primarily attributable to the interest costs on a bank line of credit used by the Company's European subsidiaries to borrow funds in their local currencies to pay for all intercompany sales, thereby reducing the foreign currency exposure on those transactions. To the extent that foreign currency exchange rates fluctuate in the future, the Company may be exposed to continued financial risk. Although the 23 Company has established a borrowing line 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 35.8% in fiscal 1998 and 35.7% in fiscal 1997. The Company's effective tax rate is lower than the statutory tax 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. See Note 5 of Notes to the Consolidated Financial Statements. FISCAL YEAR ENDED SEPTEMBER 27, 1997 VERSUS FISCAL YEAR ENDED SEPTEMBER 28, 1996 REVENUES. Total revenues increased 16% to $106.7 million in fiscal 1997 compared to $91.6 million in fiscal 1996. The increase in revenues was primarily due to an increase in the total number of DXA product shipments in the United States, Europe and Latin America. The increase in DXA product revenues in these markets were partially offset by fewer sales in Asia and, to a lesser extent, by decreased sales of mini c-arm imaging systems. There has also been a shift in product sales mix to the Company's new line of bone densitometers, the ACCLAIM series, which the Company began shipping in January 1995. The new ACCLAIM products have higher average selling prices than the comparable DXA bone densitometers which they replace. In fiscal 1997, other revenues increased 15% to $3.9 million from $3.4 million in fiscal 1996 primarily due to additional fee-per-scan revenues and from an increase in royalty revenues. In fiscal 1997, approximately 61% of product sales were generated in the United States, 20% in Europe, 10% in Asia and 9% in other international markets. In fiscal 1996, approximately 60% of product sales were generated in the United States, 17% in Asia, 17% in Europe and 6% in other international markets. COSTS AND EXPENSES. The cost of product sales decreased as a percentage of product sales to 46% in fiscal 1997 from 47% in fiscal 1996. These costs decreased as a percentage of product sales primarily due to (i) increased shipments of the latest family of DXA bone densitometers, the ACCLAIM series, which earns a better gross margin than the Company's older DXA systems, (ii) a volume increase in the number of DXA systems sold resulting in certain manufacturing efficiencies and (iii) an increase in sales by the Company's direct sales force (primarily in the United States) which resulted in higher average selling prices. Partially offsetting these decreases were increased costs and lower sales relating to mini c-arm systems. Research and development expenses increased 17% to $8.5 million (8% of total revenues) in fiscal 1997 from $7.3 million (8% of total revenues) in fiscal 1996. This increase was primarily due to the addition of engineering personnel working on the development of new products, product enhancements and the funding of Serex to develop a biochemical marker strip test. Selling and marketing expenses increased 18% to $19.4 million (19% of product sales) in fiscal 1997 from $16.5 million (19% of product sales) in fiscal 1996 primarily due to an increase in sales personnel and related expenses, marketing and promotional costs incurred in connection with the ACCLAIM series and increased sales commissions based on the higher sales volume. In addition, the Company incurred additional costs in connection with its strategic alliances for the introduction and planned introduction of new products and the distribution of products through new sales channels. General and administrative expenses decreased slightly to $8.8 million (8% of total revenues) in fiscal 1997 from $9.1 million (10% of total revenues) in fiscal 1996. The 3% decrease in fiscal 1997 when compared to fiscal 1996 was primarily due to certain efficiencies achieved in connection with the integration of FluoroScan. 24 Litigation expenses incurred in fiscal 1996 were in connection with the Company's disputes with Lunar Corporation (Lunar) and B.V. Optische Industrie de Oude Delf ("Oldelft"). Legal expenses in connection with the patent litigation with Lunar began in October 1994 and represent a substantial portion of the total litigation expenses. In November 1995, a definitive agreement that provides for the cross-licensing of certain patent rights and a non-assertion agreement for all patents involving DXA and ultrasound technologies for a period of ten years was reached by the Company and Lunar. The complaint brought by Oldelft against the Company was settled in May 1996. Acquisition expenses incurred in fiscal 1996 were direct transaction costs related to the Company's merger with FluoroScan Imaging Systems, Inc. These costs were expensed in the period incurred in accordance with the pooling-of- interests accounting for business combinations. INTEREST INCOME. Interest income increased to $5.3 million in fiscal 1997 from $2.6 million in fiscal 1996. In fiscal 1997, the Company earned a slightly higher rate of return on a higher investment base than in the prior year. In January 1996, the Company received proceeds of approximately $49.2 million from a public sale of Common Stock which increased the investment base. The Company also received approximately $8.0 million from the exercise of FluoroScan warrants in July 1996. The Company has invested these proceeds in investment grade corporate and government securities. In fiscal 1997, the Company also increased the number of long-term receivables to Latin American customers resulting in additional interest income. OTHER EXPENSE. In fiscal 1997 and 1996 the Company incurred other expenses of approximately $172,000 and $249,000, respectively. These expenses were primarily attributable to the interest costs on a bank line of credit used by the Company's European subsidiaries. PROVISION FOR INCOME TAXES. The Company's effective tax rate was 35.7% in fiscal 1997 and 33.4% in fiscal 1996. The Company's effective tax rate was lower than the statutory tax rates due primarily to the tax benefits associated with the Company's foreign sales corporation and the utilization of net operating losses in foreign jurisdictions and tax credits. The increase in the effective tax rate is primarily due to the significant increase in U.S. income. See Note 5 of Notes to the Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES At September 26, 1998, working capital was $99.6 million and cash, cash equivalents and short-term investments totaled $75.9 million. The cash, cash equivalents and short-term investments balance decreased approximately $8.4 million during fiscal 1998 primarily due to the purchase of a 200,000 square foot building for approximately $20.1 million and an increase in inventories, which were partially offset by other operating activities which included net income of $10.4 million and an increase in deferred revenue. The increase in inventory is primarily related to increased production of Sahara. The Company finances certain sales to Latin America over a two-to three year-time frame. At September 26, 1998, the Company had long-term accounts receivable outstanding of approximately $2.9 million relating to these sales, which were included in other assets. As of September 26, 1998, the Company had 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. As a result, the Company increased its bad debt reserve in the fourth quarter. In fiscal 1998, the Company purchased approximately $2.5 million of property and equipment in addition to the building, primarily computers and other equipment associated with the hiring of additional personnel. As noted above, the Company purchased a 200,000 square foot building in fiscal 1998 for approximately $20.1 million in cash and the Company plans to spend approximately $5 million in renovations prior to occupying the facility early in 1999. The Company does not have any other 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. 25 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 believes that they will be Y2K compliant by the end of January 1999, as the compliant version of software is in beta test. The Company plans to make this software available, at the Company's expense, to its customers by the end of March 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. 26 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. RISK FACTORS This report contains forward looking statements that involve risks and uncertainties, such as statements of the Company's 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. The Company's 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. DEPENDENCE OF PRODUCT SALES ON AVAILABILITY AND ACCEPTANCE OF NEW DRUG THERAPIES. The Company believes that it is important for the continued growth of its sales of bone densitometers and other related products, that the efficacy of new drug therapies to treat osteoporosis and other bone disorders be demonstrated, that broadened regulatory approval of those therapies be granted in the United States and elsewhere, and once approved, that these new drug therapies gain acceptance. Similarly, the Company believes that it is important for the growth of sales of its mini c-arm products that the efficacy of therapies that could broaden the use of minimally invasive orthopedic surgery such as synthetic bone materials be demonstrated, that broadened regulatory approval of those therapies be granted in the United States and elsewhere, and once approved, that these new therapies gain acceptance. The Company cannot assure that any therapies under development or in clinical trials will prove to be effective, obtain FDA approval, or that any FDA approved therapy will gain wide acceptance. The failure of one or more of these therapies to gain wide acceptance, or the failure of new therapies to be approved and gain acceptance, could have a material adverse effect on the Company's business. UNCERTAINTY OF HEALTH CARE REFORM. Health care reform and medical cost containment have received significant attention in the United States and many foreign countries. Certain reform proposals and cost containment measures could limit the use of the Company's products, reduce reimbursement available for such use, or adversely affect the use of new therapies for which the Company's products may be targeted. As a result, such reforms or cost containment measures could materially and adversely affect the Company's sales. Uncertainty in the medical community regarding the nature and effect of proposed health care reforms and cost containment measures may also have a material adverse effect on the Company's business. THIRD PARTY REIMBURSEMENT FOR BONE DENSITY EXAMINATIONS. Reimbursement for the use of bone densitometers has been approved by health care insurance systems in the United States and many foreign countries. In the United States, bone density examinations are paid for by many private third party insurers. In 27 addition, the Health Care Finance Administration which establishes guidelines for the reimbursement of health care providers treating Medicare and Medicaid patients, has approved reimbursement for DXA examinations and, commencing in January 1999, for ultrasound examinations. The actual reimbursement amounts provided for these examinations is determined by the individual state Medicare carriers. There are often delays between the approval of reimbursement by HCFA and by a state Medicare carrier. Moreover, states may choose not to follow the HCFA reimbursement guidelines. The Company believes that it is important for the continued growth of sales of its Sahara bone sonometer in the United States and internationally that reimbursement for bone density examinations be more broadly adopted. A reduction in reimbursement levels for the Company's products could have a material adverse effect on the Company's business. DEVELOPING MARKETS; NEED TO BROADEN MARKET ACCEPTANCE. The continued success of the Company's products that address the clinical market for the early diagnosis and monitoring of osteoporosis, will depend upon the acceptance and adoption of newly introduced and emerging drug therapies to treat osteoporosis by the broad market of primary care providers, such as gynecologists and family physicians, and the Company's ability to broaden sales of its products to these physician groups. In the United States, PSS serves as the Company's exclusive sales representative to this market. Historically, the Company has marketed its mini c-arm products to hospitals and surgery centers for use by orthopedic surgeons in the operating room. The success of these products will be dependent upon its ability to broaden its sales to orthopedic and podiatric physician groups. The Company cannot give assurance that it will be successful in obtaining broader market acceptance for its products. Failure to do so could have a material adverse effect on the Company's business. PRODUCT DEVELOPMENT; UNCERTAINTY OF MARKET ACCEPTANCE. The Company's success will depend upon its ability to enhance its existing products, to develop new products to meet regulatory and customer requirements and to achieve market acceptance. The Company has a continuing program of research and development designed to enhance and improve its products. In addition, the Company is developing, together with Serex, Inc., a diagnostic strip test to detect biochemical markers that indicate the rate of a patient's bone loss. The development of these products will be subject to all of the risks associated with new product development, including unanticipated delays, expenses, technical problems or other difficulties that could result in the abandonment or substantial change in the commercialization of these new products. The Company cannot give assurance that the Company will be successful in introducing products or product enhancements on a timely basis, if at all, or that the Company will be able to market these products and product enhancements once developed. Failure to do so could have a material adverse effect on the Company's business. OBSOLESCENCE AND RAPID TECHNOLOGICAL CHANGE. The markets for the Company's products are highly competitive and subject to rapid technological change and evolving industry requirements and standards. Several companies have developed or are developing bone densitometry systems or other products that measure or assess bone density or bone mineral status, which compete, or will compete, with the Company's products. These other systems include single photon absorptiometry, radiographic absorptiometry, quantitative computed tomography, ultrasound and biochemical markers. In addition, many companies, research institutions and universities may be working in a number of engineering and radiology disciplines similar to those being used and developed by the Company with respect to is mini c-arm products. As a result, the Company's mini c-arm products may become subject to competition from products using technologies other than those developed by the Company, which may render the Company's mini c-arm products obsolete or less attractive to customers if the Company cannot participate in such new technologies. The Company cannot give assurance that continuing improvements in current or new technologies will not make them technically equivalent or superior to the Company's technologies, in addition to providing cost or other advantages. COMPETITION. The Company competes directly with a number of companies with significant financial resources, including Lunar, Norland Medical Systems, Aloha and Hitachi, each of which has developed DXA systems to measure bone density. In ultrasound, the Company competes with Lunar and Myriad and expects additional competitors based upon the greater availability of ultrasound technology. In addition, Lunar, Norland 28 and Schick have peripheral DXA systems which may compete with the Company's DXA and ultrasound products, primarily on price. The Company's FluoroScan subsidiary competes directly with a limited number of companies including Lunar, OEC Medical and XiTec. The Company also competes indirectly with manufacturers of conventional C-Arm image intensifiers including Philips, Siemens, General Electric, OEC Medical, Fischer Imaging and Picker International. Many of these competitors have substantially greater financial and marketing resources than the Company. The Company cannot give assurance that it will be able to compete successfully. CUSTOMER CONCENTRATION; SALES CHANNEL RISKS. In the United States, the Company sells its products to the primary care market through PSS. In fiscal 1997 and 1998 sales in which PSS acted either as a sales representative or distributor for the Company accounted for 5% and 35% of the Company's product revenues, respectively. In fiscal 1998, the majority of these sales to the primary care market were made pursuant to the Company's strategic alliance program with Sanwa. In 1997 and 1998 the Company's sales under this program accounted for 17% and 33% of the Company's product revenues, respectively. The pricing and other features of this program is periodically reviewed by the Company and Sanwa. As a result of recent changes made to the strategic alliance program, the Company believes that the program may be less attractive for PSS and that sales to the primary care market under this program may therefore decrease. In addition, the Company cannot assure that the program will be continued for an extended period on favorable terms, if at all. A material reduction in revenues under the strategic alliance program, a termination or other cutback of this program, a reduction of sales through PSS or the loss of PSS as the Company's sales representative could have a material adverse affect on the Company's business. RISKS RELATING TO REMARKETING OBLIGATIONS. Under its strategic alliance program with Sanwa, the Company is obligated to use best efforts to remarket equipment repossessed by or returned to Sanwa. The Company has engaged PSS to assist it in remarketing the equipment originally placed by PSS. The efforts of the Company and PSS to remarket this equipment could have a material adverse affect on future sales. QUARTERLY FLUCTUATIONS IN OPERATING RESULTS. The Company's 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 health care and cost containment efforts, the development status and demand for drug therapies to treat osteoporosis, 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, the introduction of new products and product enhancements by the Company or its competitors, and pricing and other competitive conditions. The Company also believes that its sales may be somewhat seasonal, with reduced orders in the summer months reflecting summer vacation schedules. Customers may also cancel or reschedule shipments and production difficulties could delay shipments. Any of these factors also could materially adversely effect the Company's annual results of operations. NO ASSURANCE THAT NEW PRODUCTS WILL RECEIVE FDA OR FOREIGN REGULATORY CLEARANCES. 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. The Company's products are also subject to approval and regulation by certain foreign regulatory and safety agencies. The process of obtaining clearances and approvals can be costly and time-consuming. Moreover, any approvals or clearances, once obtained, can be withdrawn or modified. The Company's delay or inability to obtain any necessary United States or foreign clearances or approvals for the Company's products could have a material adverse effect on the Company's business. RELIANCE ON SEREX FOR THE DEVELOPMENT OF BIOCHEMICAL MARKER STRIP TEST. The Company has entered into a research and development agreement with Serex to develop biochemical marker strip tests to monitor bone 29 resorption. Serex is a relatively small company with limited resources and limited operating history. Serex has experienced delays and budget overruns in the development of this strip test. Serex could continue to encounter delays and budget overruns in developing this strip test. The Company cannot give assurance that Serex will be successful in developing the strip test, or that once developed, that the strip test will be commercially successful. RELIANCE ON FOREIGN SALES; RESTRICTION ON FLUOROSCAN'S FOREIGN SALES. In years ended September 27, 1997, and September 26, 1998 foreign sales accounted for approximately 39% and 28%, respectively, of the Company's product sales. The Company maintains sales and service offices in Belgium, France and Spain. The expenses and sales of these offices are denominated in local currencies. The Company anticipates that foreign sales and foreign denominated sales will continue to account for a significant portion of the Company's total sales, which will result in a significant portion of the Company's revenues being subject to risks associated with foreign sales, including risks of exchange rate fluctuations, limitations on foreign sales of high technology products and other United States and foreign regulatory requirements and policy changes, political and economic instability, difficulties in accounts receivable collection, difficulties in managing distributors or representatives and seasonality of sales. The Company's mini c-arm technology is governed by the International Traffic in Arms Regulations of the United States Department of State. As a result, the export of those products to certain countries may be limited or prohibited. On January 1, 1999, 11 of the 15 member countries of the European Union are scheduled to establish fixed conversion rates between their existing sovereign currencies and the euro. As of January 1, 2002, the transition to the euro will be complete. The Company has significant operations within the European Union and is currently preparing for the euro conversion. The issues that the Company is addressing include preparing its information systems for the euro, analyzing the benefit of decreased exchange rate risk in cross border transactions involving participating countries and assessing the potential impact of increased price transparency. In addition, the euro may impact general economic conditions such as interest and foreign exchange rates within the participating countries or in other areas where the Company operates. Volatility in the euro exchange rates or other adverse impacts on the general economic conditions in Europe or elsewhere resulting from the European Union's conversion to the euro could have a material adverse effect on the Company's business. The Company's functional currency for accounting purposes is the Belgian franc in Belgium and the French franc in France. The Company anticipates that its European subsidiaries will adopt the euro as their functional currency following the European Union's conversion to the euro. The Company has hedged its foreign currency exposure by borrowing funds in local European currencies to pay the expenses of its foreign offices. The Company cannot assure that these hedging activities will be successful. As a result, the impact of and economic conditions relating to the euro (including fluctuations in foreign exchange rates, particularly with respect to the U.S. dollar) could have a material adverse affect on the Company's business, financial condition and results of operations. UNCERTAINTY OF PATENT AND PROPRIETARY RIGHTS PROTECTION. The Company relies upon trade secrets and patents to protect its technology. As of September 30, 1998, the Company had obtained 31 patents, licensed 10 patents and had pending 15 patent applications in the United States. These patents have expiration dates ranging from 1999 to 2016. One of the Company's licensed U.S. ultrasound patents will expire in 1999, and two licensed patents with ultrasound and X-ray claims will expire in 2001. The Company does not believe that the expiration of these patents will have any material effect on its business. The Company has obtained or applied for corresponding patents and patent applications for certain of these patents and patent applications for certain foreign countries. The Company cannot assure that any of the Company's patent applications will be granted or that any patent or patent application will provide significant protection for the Company's products and technology. Moreover, the Company cannot assure that foreign intellectual property laws will protect the Company's intellectual property rights to the same extent as United States intellectual property laws. In the 30 absence of significant patent protection, the Company may be vulnerable to competitors who attempt to copy the Company's products, processes or technology. The Company had been involved in extensive patent litigation with Lunar, with each party claiming that the other is infringing certain patents held by the other. This litigation was settled by agreement dated November 22, 1995. The agreement provides for certain royalties to be paid by each party to the other for future sales of products using certain defined technologies. The Company does not believe that amounts to be paid by either party under this arrangement will be material. The agreement also provides that neither party will engage the other party in patent litigation relating to these technologies 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. As a result, Lunar could use the Company's technology during this ten-year period in a manner that would materially and adversely affect the Company's business. The Company has a license from NASA to use and develop certain technology that is used in its mini c-arm products and that are the subject of two patents held by NASA. FluoroScan's license is exclusive in the United States. However, under FluoroScan's license agreement with NASA, NASA retains the right to use its technologies in connection with devices that it produces, including devices that may be produced and marketed by NASA in direct competition with the Company. NASA also has the right to circumvent the exclusivity of the license agreement if, in NASA's opinion, such circumvention is required to serve the public good and the national interest of the United States, and the Company cannot serve such functions. Moreover, the Company's license agreement with NASA is exclusive only in the United States and its territories. Accordingly, NASA retains the right to license its technologies to others outside of the United States, where such technologies are patented or can be patented. The technology covered by the NASA patents is not patented in many foreign countries and may therefore not be protectable or may be cumbersome and expensive to enforce in such countries. Therefore, a competitor in one of these countries could reverse engineer FluoroScan's products and manufacture and sell products in direct competition with FluoroScan outside the United States. The patents covered by this license expire in 2003. These patents previously had expiration dates in February 1996 and 2002, but were extended as a result of the passage of the General Agreement on Tariff and Trade ("GATT"). Upon expiration of a patent, all of the technology covered by these patents will be accessible to potential competitors, which could have a material adverse effect on FluoroScan's business. There has been substantial litigation regarding patent and other intellectual property rights in the medical device and related industries. The Company has in the past, and may in the future be, notified that it may be infringing intellectual property rights possessed by other third parties. If any such claims are asserted against the Company's intellectual property rights it may seek to enter into a royalty or licensing arrangement. The Company cannot assure, however, that a license will be available on reasonable terms or at all. The Company could decide, in the alternative, to resort to litigation to challenge such claims or to design around the patented technology. Such actions could be costly and would divert the efforts and attention of the Company's 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 materially and adversely affect the Company's business, financial condition and results of operations. ACQUISITION RISKS. The Company expects that in addition to internal development it will continue to seek to expand its products and technology in part through acquisitions or strategic alliances in complimentary markets, including other diagnostic or imaging markets, or other women's health care markets. There can be no assurance the Company will be successful in identifying, acquiring and developing products and technology. If any potential acquisition opportunities are identified, there can be no assurance that the Company will consummate such acquisitions or successfully integrate the technology or businesses acquired into the Company. Acquisitions involve a number of special risks, including the diversion of management's attention, the assimilation of the operations and personnel of the acquired companies, the incorporation of acquired products into existing product 31 lines, adverse short-term effects on reported operating results, the amortization of acquired intangible assets, the loss of key employees of the acquired company or business and the difficulty of presenting a unified corporate image. No assurance can be given that any acquisition by the Company will or will not occur, that if an acquisition does occur it will not materially and adversely affect the Company or that any such acquisition will be successful in enhancing the Company's business. If the operations of the acquired company do not meet expectations, the Company may be required to restructure the acquired business or write off the value of some or all of the assets of the acquired business. ATTRACTION AND RETENTION OF KEY PERSONNEL. The future success of the Company will depend in large part on the continued services of its executive officers, including the executive officers of FluoroScan, as well as the Company's ability to attract and retain other highly qualified and well-trained managerial and technical personnel. There may be only a limited number of persons with the requisite skills to serve in these positions and it may become increasingly difficult for the Company to hire such personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be able to attract and retain personnel necessary for the development of its business. S. David Ellenbogen and Jay A. Stein, the Chief Executive Officer and Senior Vice President, respectively, of the Company, also serve in similar positions at Vivid Technologies, Inc. ("Vivid"). Under a management agreement between the Company and Vivid, the Company has agreed to provide management services to Vivid, including the part-time assistance of Mr. Ellenbogen and Dr. Stein. Mr. Ellenbogen and Dr. Stein typically devote up to approximately 16 and eight hours per week, respectively, to Vivid. See "Certain Transactions." PRODUCT LIABILITY. The Company's and FluoroScan's businesses involve the risk of product liability claims inherent to the medical device business. The Company currently maintains product liability insurance subject to certain deductibles and exclusions. The Company can not assure that its insurance will be sufficient to protect them from product liability claims, or that product liability insurance will be available to the Company at a reasonable cost, if at all, in the future. An underinsured or uninsured claim could have a material adverse effect on the Company's financial condition. ANTI-TAKEOVER PROVISIONS; MANAGEMENT CONTROL. The Company's Certificate of Incorporation and By-laws include certain provisions that may have the effect of discouraging or preventing a change in control of the Company. In addition, the Company made a rights distribution in December 1992 that could also have the effect of discouraging or preventing a change in control of the Company. These provisions could limit the price that stockholders of the Company might receive in the future for shares of the Company Common Stock. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. 32 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 33 HOLOGIC, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 27, 1997 AND SEPTEMBER 26, 1998 TOGETHER WITH AUDITORS' REPORT 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 27, 1997 and September 26, 1998, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 26, 1998. 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 generally accepted auditing standards. 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 financial statements referred to above present fairly, in all material respects, the financial position of Hologic, Inc. and subsidiaries as of September 27, 1997 and September 26, 1998, and the results of their operations and their cash flows for each of the three years in the period ended September 26, 1998, in conformity with generally accepted accounting principles. Boston, Massachusetts November 6, 1998 F-2 HOLOGIC, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 27, SEPTEMBER 26, 1997 1998 ------------- ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents........................ $ 28,092 $ 48,423 Short-term investments........................... 56,173 27,479 Accounts receivable, less reserves of $1,460 and $2,100, respectively............................ 29,231 29,287 Inventories...................................... 13,205 20,438 Prepaid expenses and other current assets........ 4,068 6,221 -------- -------- Total current assets........................... 130,769 131,848 -------- -------- PROPERTY AND EQUIPMENT, AT COST: Equipment........................................ 6,397 8,633 Furniture and fixtures........................... 1,656 1,910 Leasehold improvements........................... 1,687 1,729 Construction in progress......................... -- 20,066 -------- -------- 9,740 32,338 Less--Accumulated depreciation and amortization.. 5,036 6,440 -------- -------- 4,704 25,898 -------- -------- OTHER ASSETS, NET.................................. 9,194 14,851 -------- -------- Total assets................................... $144,667 $172,597 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit................................... $ 83 $ 3,799 Accounts payable................................. 5,232 5,497 Accrued expenses................................. 9,297 12,453 Deferred revenue................................. 3,288 10,466 -------- -------- Total current liabilities...................... 17,900 32,215 -------- -------- COMMITMENTS (NOTE 9) STOCKHOLDERS' EQUITY: Common stock, $.01 par value Authorized-- 30,000,000 shares Issued--13,111,442 and 13,377,821 shares, respectively.................................... 131 134 Capital in excess of par value................... 91,668 95,100 Retained earnings................................ 35,799 46,187 Cumulative translation adjustment................ (831) (575) Treasury stock, at cost--45,000 shares in 1998... -- (464) -------- -------- Total stockholders' equity..................... 126,767 140,382 -------- -------- Total liabilities and stockholders' equity..... $144,667 $172,597 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 HOLOGIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEARS ENDED ----------------------------------------- SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 26, 1996 1997 1998 ------------- ------------- ------------- REVENUES: Product sales..................... $ 88,201 $ 102,781 $ 111,498 Other revenue..................... 3,390 3,908 4,066 ---------- ---------- ---------- 91,591 106,689 115,564 ---------- ---------- ---------- COSTS AND EXPENSES: Cost of product sales............. 41,253 47,492 55,891 Research and development.......... 7,283 8,527 9,778 Selling and marketing............. 16,504 19,448 28,589 General and administrative........ 9,081 8,827 10,452 Litigation expenses............... 798 -- -- Acquisition expenses.............. 1,949 -- -- ---------- ---------- ---------- 76,868 84,294 104,710 ---------- ---------- ---------- Income from operations.......... 14,723 22,395 10,854 INTEREST INCOME..................... 2,583 5,346 5,458 OTHER EXPENSE....................... (249) (172) (124) ---------- ---------- ---------- Income before provision for income taxes................... 17,057 27,569 16,188 PROVISION FOR INCOME TAXES.......... 5,700 9,840 5,800 ---------- ---------- ---------- Net income...................... $ 11,357 $ 17,729 $ 10,388 ========== ========== ========== NET INCOME PER SHARE: Basic............................. $.97 $1.37 $.78 ========== ========== ========== Diluted........................... $.91 $1.30 $.75 ========== ========== ========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic............................. 11,698,371 12,985,948 13,258,787 ========== ========== ========== Diluted........................... 12,523,983 13,671,894 13,765,809 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-4 HOLOGIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
COMMON STOCK TREASURY STOCK -------------------- CAPITAL IN CUMULATIVE ---------------- TOTAL NUMBER OF $.01 EXCESS OF PAR RETAINED TRANSLATION NUMBER OF STOCKHOLDERS' SHARES PAR VALUE VALUE EARNINGS ADJUSTMENT SHARES AMOUNT EQUITY ---------- --------- ------------- -------- ----------- --------- ------ ------------- BALANCE, SEPTEMBER 30, 1995................... 9,323,077 $ 93 $24,467 $ 7,116 $(145) -- $ -- $ 31,531 Exercise of common stock warrants........ 357,037 4 8,041 -- -- -- -- 8,045 Issuance of common stock, net of issuance costs of $391......... 2,492,000 25 49,169 -- -- -- -- 49,194 Compensation expense related to issuance of stock options......... -- -- 110 -- -- -- -- 110 Adjustment for FluoroScan Imaging Systems, Inc. pooling of interests from year-end change (Note 3).................... -- -- -- (403) -- -- -- (403) Exercise of stock options............... 684,310 7 2,375 -- -- -- -- 2,382 Issuance of common stock under employee stock purchase plan... 14,850 -- 162 -- -- -- -- 162 Tax benefit from stock options exercised..... -- -- 4,930 -- -- -- -- 4,930 Net income............. -- -- -- 11,357 -- -- -- 11,357 Translation adjustments........... -- -- -- -- (34) -- -- (34) ---------- ---- ------- ------- ----- ------ ----- -------- BALANCE, SEPTEMBER 28, 1996................... 12,871,274 129 89,254 18,070 (179) -- -- 107,274 Exercise of stock options............... 212,214 2 1,346 -- -- -- -- 1,348 Stock issued for employee compensation.......... 7,000 -- 137 -- -- -- -- 137 Issuance of common stock under employee stock purchase plan... 10,766 -- 226 -- -- -- -- 226 Issuance of common stock under 401(k) plan.................. 10,188 -- 215 -- -- -- -- 215 Compensation for grants of stock options to nonemployees.......... -- -- 20 -- -- -- -- 20 Tax benefit from stock options exercised..... -- -- 470 -- -- -- -- 470 Net income............. -- -- -- 17,729 -- -- -- 17,729 Translation adjustments........... -- -- -- -- (652) -- -- (652) ---------- ---- ------- ------- ----- ------ ----- -------- BALANCE, SEPTEMBER 27, 1997................... 13,111,442 131 91,668 35,799 (831) -- -- 126,767 Exercise of stock options............... 228,651 2 1,307 -- -- -- -- 1,309 Stock issued for employee compensation.......... 8,839 -- 227 -- -- -- -- 227 Issuance of common stock under employee stock purchase plan... 16,929 -- 278 -- -- -- -- 278 Issuance of common stock under 401(k) plan.................. 11,960 1 291 -- -- -- 292 Purchase of treasury stock................. -- -- -- -- -- 45,000 (464) (464) Compensation for grants of stock options to nonemployees.......... -- -- 133 -- -- -- -- 133 Tax benefit from stock options exercised..... -- -- 1,196 -- -- -- -- 1,196 Net income............. -- -- -- 10,388 -- -- -- 10,388 Translation adjustments........... -- -- -- -- 256 -- -- 256 ---------- ---- ------- ------- ----- ------ ----- -------- BALANCE, SEPTEMBER 26, 1998................... 13,377,821 $134 $95,100 $46,187 $(575) 45,000 $(464) $140,382 ========== ==== ======= ======= ===== ====== ===== ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 HOLOGIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED ----------------------------------------- SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 26, 1996 1997 1998 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income......................... $11,357 $17,729 $10,388 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization.... 891 1,252 1,851 Deferred income taxes............ (1,079) 182 (2,500) Adjustment for FluoroScan Imaging Systems, Inc. pooling of interests from year-end change (Note 3)........................ (403) -- -- Compensation expense related to issuance of common stock and stock options................... 110 271 302 Changes in assets and liabilities-- Accounts receivable............ (8,853) (9,694) 526 Inventories.................... (2,667) (2,082) (7,234) Prepaid expenses and other current assets................ (1,189) 218 405 Accounts payable............... (404) 1,375 265 Accrued expenses............... 2,936 1,782 3,447 Deferred revenue............... 384 1,529 7,179 ------- ------- ------- Net cash provided by operating activities........ 1,083 12,562 14,629 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of held-to-maturity investments....................... (3,831) (10,624) (69,282) Sales of held-to-maturity investments....................... -- 3,120 95,020 Purchases of available-for-sale investments....................... (75,562) (71,832) -- Sales of available-for-sale investments....................... 31,147 69,375 -- Purchase of property and equipment, net............................... (2,383) (2,082) (22,597) Decrease (increase) in other assets............................ 71 (105) (3,714) ------- ------- ------- Net cash used in investing activities.................. (50,558) (12,148) (573) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings (settlements) under line of credit......................... 605 (2,452) 3,716 Net proceeds from exercise of common stock warrants............. 8,044 -- -- Net proceeds from sale of common stock............................. 51,737 1,574 1,587 Purchase of treasury stock......... -- -- (464) Tax benefit from stock options exercised......................... 4,930 470 1,196 ------- ------- ------- Net cash provided by (used in) financing activities.... 65,316 (408) 6,035 ------- ------- ------- EFFECT OF EXCHANGE RATE CHANGES ON CASH................................ 26 (668) 240 ------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................... 15,867 (662) 20,331 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............................. 12,887 28,754 28,092 ------- ------- ------- CASH AND CASH EQUIVALENTS, END OF YEAR................................ $28,754 $28,092 $48,423 ======= ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for income taxes...................... $ 2,959 $ 7,380 $ 5,993 ======= ======= ======= Cash paid during the year for interest.......................... $ 111 $ 128 $ 324 ======= ======= ======= SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES: Issuance of common stock under 401(k) plan....................... $ -- $ 215 $ 292 ======= ======= ======= Stock issued for employee compensation...................... $ 110 $ 137 $ 227 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-6 HOLOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (1) OPERATIONS Hologic, Inc. and subsidiaries (the Company) is engaged in the development, manufacture and distribution of proprietary X-ray and other medical systems. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements reflect the application of certain accounting policies as described in this note and elsewhere in the accompanying consolidated financial statements. (a) Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. (b) Fiscal Year The Company's fiscal year ends on the last Saturday in September. Fiscal 1996, 1997 and 1998 ended on September 28, 1996, September 27, 1997 and September 26, 1998, respectively. (c) Management Estimates and Uncertainties The preparation of financial statements in conformity with generally accepted accounting principles 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 statement, 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 rapid technological changes, competition, customer concentration, government regulations and dependence on key individuals. (d) Cash and Cash Equivalents and Investments The Company considers all highly liquid investments with maturities of three months or less at the time of acquisition to be cash equivalents. Included in cash equivalents at September 27, 1997 and September 26, 1998 are approximately $8,310 and $5,808, respectively, of securities purchased under agreements to resell. The securities purchased under agreements to resell are collateralized by U.S. government securities. Short-term investments have maturities of greater than three months and consist of commercial paper, corporate bonds and securities issued by the U.S. Government and its agencies. Investments with maturities of greater than one year have been classified as long-term. The Company had long-term investments of approximately $4,527 and $7,483, with an average maturity period of 23 months and 26 months, as of September 27, 1997 and September 26, 1998, respectively, which are included in other assets in the accompanying consolidated balance sheets. The Company accounts for investments in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. In accordance with SFAS No. 115, investments that the Company has the positive intent and ability to hold to maturity are reported at amortized cost, which approximates fair market value, and are classified as held-to-maturity. The investments F-7 HOLOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) that the Company has deemed held-to-maturity include cash equivalents and securities issued by U.S. government agencies, which total approximately $85,368 and $81,026 at September 27, 1997 and September 26, 1998, respectively. (e) Concentration of Credit Risk SFAS No. 105, Disclosure of Information about Financial Instruments with Off- Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk, requires disclosure of any significant off-balance-sheet and credit risk concentrations. Financial instruments that subject the Company to credit risk consists primarily of cash, short-term investments, trade accounts receivable and long-term receivables. The Company's credit risk is managed by investing its cash in high-quality money market instruments, securities of the U.S. government and its agencies, and high-quality corporate issuers. The Company has not experienced any material losses related to receivables from individual customers, geographic regions or groups of customers in the X-ray and medical devices industry. Due to these factors, no additional credit risk beyond amounts provided for, is believed by management to be inherent in the Company's accounts receivable. The Company utilizes distributors in certain countries with various credit terms, depending on the individual circumstances. One distributor had amounts due to the Company of approximately $1,668 and $1,169 as of September 27, 1997 and September 26, 1998, respectively. This distributor accounted for 10%, 5% and 2% of product sales for fiscal 1996, 1997 and 1998, respectively. The Company finances certain sales to Latin American customers over 2 to 3 years. At September 27, 1997 and September 26, 1998, the Company had long-term accounts receivable outstanding of approximately $3,486 and $2,904, respectively, relating to these sales, which are included in other assets. As of September 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 nonpayment. As a result, the Company increased its bad debt reserve in the fourth quarter. The Company sells its systems to a leasing company, which in turn leases the systems to third parties. The leasing company accounted for 4%, 13% and 33% of product sales for fiscal 1996, 1997 and 1998, respectively (see Note 11). (f) Disclosure of Fair Value of Financial Instruments The Company's financial instruments consist mainly of cash and cash equivalents, short-term investments, accounts receivable, line of credit and accounts payable. The carrying amounts of the Company's cash and cash equivalents, short-term investments, accounts receivable, line of credit and accounts payable approximate fair value due to the short-term nature of these instruments. (g) Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following:
SEPTEMBER 27, SEPTEMBER 26, 1997 1998 ------------- ------------- Raw materials and work-in-process............. $ 9,968 $13,859 Finished goods................................ 3,237 6,579 ------- ------- $13,205 $20,438 ======= =======
Work-in-process and finished goods inventories consist of materials, labor and manufacturing overhead. F-8 HOLOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (h) Building Purchase The Company acquired real property consisting of land and an office building located in Bedford, Massachusetts in a cash transaction which was consummated on July 30, 1998. The $20,066 purchase price of the property was paid in cash. This 200,000-square-foot building will serve as the Company's new world headquarters and provide expanded manufacturing capacity. The Company anticipates occupying the new facility in the second quarter of fiscal 1999. (i) Depreciation and Amortization The Company provides for depreciation and amortization by charges to operations, using the straight-line and declining-balance methods, which allocate the cost of property and equipment over the following estimated useful lives:
ESTIMATED ASSET CLASSIFICATION USEFUL LIFE -------------------- ------------- Equipment................................................ 5 years Furniture and fixtures................................... 5-7 years Leasehold improvements................................... Life of lease
(j) Long-Lived Assets The Company assesses the realizability of its long-lived assets, including intangible assets, in accordance with SFAS No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of. To date, the Company has not identified any impairments requiring adjustment. (k) Foreign Currency Translation The Company translates the financial statements of its foreign subsidiaries in accordance with SFAS No. 52, Foreign Currency Translation. In translating the accounts of the foreign subsidiaries into U.S. dollars, assets and liabilities are translated at the rate of exchange in effect at year-end, while stockholders' equity is translated at historical rates. Revenue and expense accounts are translated using the weighted average exchange rate in effect during the year. Gains and losses from foreign currency translation are credited or charged to cumulative translation adjustment, included in stockholders' equity, in the accompanying consolidated balance sheets. Transaction gains and losses in fiscal 1996, 1997 and 1998 were not significant. (l) Revenue Recognition The Company recognizes product revenue upon shipment. A provision is made at that time for estimated warranty costs to be incurred. Other revenues are recorded at the time the product is shipped or the service is rendered. In connection with a fee-per-scan offer for certain products, the Company has entered into a remarketing agreement whereby the Company has agreed to perform certain remarketing activities on a best efforts basis to cover any losses incurred by the leasing Company up to 10% of the total fee-per-scan contracts funded. The leasing Company purchases all such products covered under these contracts from the Company. The Company has reserved for potential losses under these contracts by deferring revenue of an amount equal to 10% of the contracts funded. Maintenance revenues are recognized over the term of the contract. F-9 HOLOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (m) Research and Development and Software Development Costs Research and development costs have been charged to operations as incurred. SFAS No. 86, Accounting for the Costs of Computer Software To Be Sold, Leased or Otherwise Marketed, requires the capitalization of certain computer software development costs incurred after technological feasibility is established. The Company believes that once technological feasibility of a software product has been established, the additional development costs incurred to bring the product to a commercially acceptable level are not significant. (n) Net Income Per Share In March 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, Earnings per Share. This statement established standards for computing and presenting earnings per share and applies to entities with publicly traded common stock or potential common stock. Prior years' earnings per share have been restated to reflect the adoption of SFAS No. 128. Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income by the diluted weighted average number of common and common-equivalent shares outstanding during the period. The weighted average number of common-equivalent shares has been determined in accordance with the treasury stock method. Common stock equivalents include common stock options to purchase common stock. The reconciliation of basic and diluted shares outstanding is as follows:
1996 1997 1998 ---------- ---------- ---------- Weighted average common shares outstanding.............................. 11,698,371 12,985,948 13,258,787 Effect of dilutive securities stock options.................................. 825,612 685,946 507,022 ---------- ---------- ---------- Weighted average common shares outstanding, assuming dilution........... 12,523,983 13,671,894 13,765,809 ========== ========== ==========
Dilutive weighted average shares outstanding do not include 15,729, 163,111 and 830,701 common-equivalent shares for the end of fiscal years 1996, 1997 and 1998, respectively, as their effect would have been antidilutive. (o) Derivative Financial Instruments At September 27, 1997 and September 26, 1998, the Company had no instruments requiring disclosure under SFAS No. 119, Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments. (p) Recently Issued Accounting Standards In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 requires disclosure of all components of comprehensive income on an annual and interim basis. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The Company will adopt this statement for their fiscal 1999 financial statements. 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 F-10 HOLOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 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. (3) ACQUISITION OF FLUOROSCAN IMAGING SYSTEMS, INC. On August 29, 1996, the Company acquired all the common stock of FluoroScan Imaging Systems, Inc. (FluoroScan) in exchange for 1,454,901 shares of the Company's common stock. Under the terms of the agreement, FluoroScan shareholders received .31069 of a share of the Company's common stock in exchange for each share of FluoroScan common stock. Additionally, all outstanding options and warrants to acquire FluoroScan common stock were converted to options and warrants to acquire 297,517 shares of the Company's common stock. FluoroScan is a manufacturer and distributor of low-intensity, real-time X-ray imaging devices. The merger qualifies as a tax-free reorganization and was accounted for as a pooling of interests. Accordingly, the Company's financial statements have been restated to include the results of FluoroScan for all periods prior to the acquisition. (4) LINE OF CREDIT The Company maintains a line of credit with a bank for the equivalent of $3,000, which bears interest at the Paris Interbank Offered Rate (3.375% at September 26, 1998) plus 1.50%. The bank allows for temporary advancements greater than $3,000, which the Company has utilized, as $3,799 was outstanding as of September 26, 1998. 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 a 30-day notice. The average outstanding balance during fiscal 1998 was approximately $1,132 and the weighted average interest rate for fiscal 1998 was 4.83%. Interest expense on this line of credit of approximately $154, $66 and $60 has been included in other expenses in the accompanying consolidated statements of income for 1996, 1997 and 1998, respectively. (5) INCOME TAXES The Company provides for income taxes under the liability method in accordance with SFAS No. 109, Accounting for Income Taxes. F-11 HOLOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The provision for income taxes in the accompanying consolidated statements of income consists of the following:
YEARS ENDED ----------------------------------------- SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 26, 1996 1997 1998 ------------- ------------- ------------- Federal-- Current.......................... $5,942 $8,852 $7,327 Deferred......................... (569) 142 (2,207) ------ ------ ------ 5,373 8,994 5,120 State-- Current.......................... 315 795 973 Deferred......................... -- 40 (293) ------ ------ ------ 315 835 680 Foreign-- Current.......................... 12 11 -- ------ ------ ------ $5,700 $9,840 $5,800 ====== ====== ======
A reconciliation of the federal statutory rate to the Company's effective tax rate is as follows:
YEARS ENDED ----------------------------------------- SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 26, 1996 1997 1998 ------------- ------------- ------------- Income tax provision at federal statutory rate.................. 34.0% 35.0% 35.0% Increase (decrease) in tax resulting from-- Net effect of losses (income) of foreign subsidiaries not provided...................... 0.1 (0.6) 0.1 State tax provision, net of federal benefit............... 1.1 2.3 2.7 Research and development tax credit........................ (2.0) (0.9) (0.9) Effect of not providing U.S. taxes on exempt FSC income.... (1.0) (1.4) (1.2) Nondeductible pooling of interest expenses............. 2.9 -- -- Other.......................... (1.7) 1.3 0.1 ----- ---- ---- 33.4% 35.7% 35.8% ===== ==== ====
The components of domestic and foreign income (loss) before the provision for income taxes are as follows:
YEARS ENDED ----------------------------------------- SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 26, 1996 1997 1998 ------------- ------------- ------------- Domestic.......................... $17,482 $27,063 $16,266 Foreign........................... (425) 506 (78) ------- ------- ------- $17,057 $27,569 $16,188 ======= ======= =======
During fiscal 1996, 1997 and 1998, the Company realized tax benefits of approximately $4,930, $470 and $1,196, respectively, relating to the exercise of certain stock options. These benefits are reflected as a component of capital in excess of par value. F-12 HOLOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The components of the net deferred tax asset recognized as other current assets in the accompanying consolidated balance sheets are as follows:
SEPTEMBER 27, SEPTEMBER 26, 1997 1998 ------------- ------------- Deferred tax assets.............................. $2,136 $4,665 Valuation allowance.............................. (539) (568) ------ ------ $1,597 $4,097 ====== ======
The approximate income tax effect of each type of temporary difference and carryforward before allocation of the valuation allowance is approximately as follows:
SEPTEMBER 27, SEPTEMBER 26, 1997 1998 ------------- ------------- Net foreign operating loss carryforwards......... $ 330 $ 360 Nondeductible accruals........................... 283 332 Nondeductible reserves........................... 1,493 1,568 Other temporary differences...................... 30 (182) Deferred Revenue................................. -- 2,587 ------ ------ $2,136 $4,665 ====== ======
The Company has recorded a valuation allowance against a portion of its deferred tax assets. The valuation allowance relates primarily to certain deferred tax assets in foreign jurisdictions, for which realization is uncertain. (6) COMMON STOCK (a) Stock Option Plans The Company's 1986 Combination Stock Option Plan (the 1986 Plan) is administered by the Board of Directors. Under the terms of the 1986 Plan, the Company granted employees either incentive stock options or nonqualified stock options to purchase shares of the Company's common stock at a price not less than fair market value at the date of grant. In addition, the Company may grant nonqualified options to other participants. During fiscal 1996, the 1986 Plan was terminated. Options granted under the 1986 Plan vest over a five-year period and are exercisable at varying dates. 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, are administered by the Board of Directors and the Company has issued options to purchase 289,252 shares of the Company's common stock, as of September 26, 1998. Under the terms of the 1994 Plan and the 1995 Plan, the Company may grant employees either incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock and deferred stock awards at a price not less than the fair market value on the date of grant. 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 1,100,000 options to purchase shares of common stock. Under the terms of the 1995 Combination Plan, the Company may grant employees either F-13 HOLOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 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. As of September 26, 1998, the Company had 147,978 shares available for future grant under this plan. The Company's 1990 Nonemployee Director Stock Option Plan (the Directors' Plan) allows for eligible directors to receive options to purchase 10,000 shares of common stock upon election as a director. The options vest ratably over a five-year period. In addition, eligible directors are entitled to annual option grants to purchase 8,000 shares of common stock, which vest after six months. Option grants under the Directors' Plan are at not less than fair market value on the date of grant. The Company has reserved 200,000 shares of common stock for issuance under the Directors' Plan. As of September 26, 1998, the Company had 32,000 shares available for future grant. The Company's 1994 Directors' Stock Option Plan (the 1994 Directors' Plan), originally adopted by FluoroScan, allows for eligible directors to receive options to purchase an aggregate of 9,321 shares of common stock. Option grants under the 1994 Directors' Plan are at not less than the fair market value on the date of grant. As of September 26, 1998 all options available under the 1994 Directors' Plan had either expired or been exercised. 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 500,000 shares of common stock. Under the terms of the 1997 Plan, the Company may grant employees either nonqualified stock options, stock appreciation rights, performance shares, restricted stock, or stock units. As of September 26, 1998 the Company had 157,661 shares available for future grant under this plan. The following table summarizes all stock option activity under all of the plans for the three years ended September 26, 1998.
NUMBER EXERCISE PRICE WEIGHTED AVERAGE, OF SHARES PER SHARE EXERCISE PRICE --------- --------------- ----------------- Outstanding, September 30, 1995........................ 1,995,859 $ .05-- $32.59 $ 6.45 Granted.................... 312,072 11.50-- 49.00 23.61 Terminated................. (36,374) 1.94-- 30.58 3.54 Exercised.................. (667,372) .05-- 20.72 6.99 --------- --------------- ------ Outstanding, September 28, 1996........................ 1,604,185 .50-- 49.00 11.24 Granted.................... 324,750 19.25-- 29.13 21.60 Terminated................. (224,524) 1.94-- 37.75 21.46 Exercised.................. (212,214) 1.88-- 30.98 10.36 --------- --------------- ------ Outstanding, September 27, 1997........................ 1,492,197 .50-- 49.00 12.08 Granted.................... 399,300 10.25-- 29.50 24.24 Terminated................. (93,428) 2.63-- 45.25 21.97 Exercised.................. (228,651) .50-- 25.38 5.72 --------- --------------- ------ Outstanding, September 26, 1998........................ 1,569,418 $ 1.81-- $49.00 $15.52 ========= =============== ====== Exercisable, September 26, 1998........................ 818,468 $ 1.81-- $49.00 $10.46 ========= =============== ====== Exercisable, September 27, 1997........................ 582,076 $ .50-- $49.00 $ 8.78 ========= =============== ======
F-14 HOLOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The range of exercise prices for options outstanding and options exercisable at September 26, 1998 are as follows:
OPTIONS OPTIONS OUTSTANDING EXERCISABLE ------------------------------------------------------------------------------------- WEIGHTED AVERAGE REMAINING CONTRACTUAL WEIGHTED WEIGHTED RANGE OF EXERCISE OPTIONS LIFE AVERAGE OPTIONS AVERAGE PRICE OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE ----------------- ----------- ----------- -------------- ----------- -------------- $ 1.81--$ 6.90 316,090 5.30 $ 3.40 279,070 $ 3.30 $ 7.00--$ 8.25 365,060 6.72 8.19 317,444 8.19 $ 8.31--$20.68 420,006 8.57 18.64 91,386 17.15 $20.72--$28.13 431,670 8.65 25.97 116,212 25.57 $28.17--$49.00 36,592 7.97 34.28 14,356 34.73 --------- ---- ------ ------- ------ $ 1.81--$49.00 1,569,418 7.49 $15.52 818,468 $10.46 ========= ==== ====== ======= ======
The weighted average grant date fair value under the Black-Scholes option pricing model of options granted during the years ended September 28, 1996, September 27, 1997 and September 26, 1998 under the various plans is $14.82, $14.62 and $14.81 per share, respectively. As of September 28, 1996, September 27, 1997 and September 26, 1998, the weighted average remaining contractual life of outstanding options under these plans is 8.24, 7.69 and 7.49 years, respectively. The Company accounts for its stock-based compensation plans under Accounting Principle Board Opinion No. 25, Accounting for Stock Issued to Employees. 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 and earnings 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 all stock options, stock issuances under the employee stock purchase plan and warrants granted to employees of the Company in fiscal years ending September 27, 1997 and September 26, 1998, 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 ending September 28, 1996, September 27, 1997 and September 26, 1998 are as follows:
1996 1997 1998 ------- ------- ------- Risk-free interest rate.............................. 6.00% 6.00% 5.96% Expected dividend yield.............................. -- -- -- Expected lives 6 years 6 years 6 years Expected volatility.................................. 70% 70% 70%
F-15 HOLOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 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 ending September 28, 1996, September 27, 1997 and September 26, 1998 would be as follows:
1996 1997 1998 ------- ------- ------- Net income as reported.............................. $11,357 $17,729 $10,388 Pro forma net income................................ $10,210 $16,731 $ 8,761 Diluted net income per share, as reported........... $ .91 $ 1.30 $ .75 Pro forma diluted net income per share.............. $ .82 $ 1.22 $ .64
(b) Employee Stock Purchase Plan In December 1994, the Company adopted the 1995 Employee Stock Purchase Plan (the ESP Plan) in compliance with Section 423 of the Internal Revenue Code. Employees who have completed three consecutive months or 1,000 hours, whether or not consecutive, of employment with the Company are eligible to participate in the ESP Plan. The ESP Plan allows participants to purchase common stock of the Company at 85% of the fair market value, as defined. The Company may issue up to 200,000 shares under the ESP Plan. During fiscal 1997 and 1998, the Company issued 10,766 and 16,929 shares, respectively, under the ESP Plan. At September 26, 1998, the Company has 147,895 shares available for purchase under the ESP Plan. (c) Rights Agreement In December 1992, the Company adopted a shareholder rights plan. The plan is intended to protect shareholders from unfair or coercive takeover practices. In accordance with the plan, the Board of Directors declared a dividend distribution of one common stock purchase right for each share of common stock outstanding until the rights become detachable. Each right entitles the registered holder to purchase from the Company one share of common stock for $90, adjusted for certain events. In the event that the Company is acquired in a merger or other business combination transaction or more than 50% of its assets or earning power is sold, each holder shall thereafter have the right to receive, upon exercise of each right, that number of shares of common stock of the acquiring company that, at the time of such transaction, would have a market value of two times the $90 per share exercise price. The rights will not be detachable or exercisable until certain events occur. The Board of Directors may elect to terminate the rights under certain circumstances. (d) Warrants In conjunction with its initial public offering, FluoroScan issued 357,294 warrants to purchase common stock at an exercise price of $22.53 per share. In July 1996, 357,037 warrants to purchase FluoroScan common stock were exercised, resulting in proceeds of approximately $8,000. Of the warrants issued to underwriters, which were not subject to redemption, 257 remained outstanding at September 26, 1998. The underwriters' warrants expire in July 1999. (e) Underwriter's Option In conjunction with its initial public offering, FluoroScan sold to the underwriter an option to purchase up to 31,069 shares of common stock at an exercise price of $33.80. As of September 26, 1998, there were 14,131 options outstanding. The options expire in July 1999. (f) Treasury Stock In 1998, the Board of Directors authorized the purchase of up to one million shares of the Company's common stock. As of September 26, 1998, the Company has purchased 45,000 shares under this authorization. F-16 HOLOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (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 $309, $235 and $360 as a provision for the profit-sharing contribution for fiscal 1996, 1997 and 1998, respectively. (8) RELATED-PARTY TRANSACTIONS (a) Management Services Agreement The Company has an agreement with Vivid Technologies, Inc. (Vivid), an affiliated company, whereby the Company provides management, administrative and support services. In addition, the Company leased a portion of its facilities to Vivid through February 1996 for approximately $15 per month. Vivid paid the Company for all direct costs incurred, as well as a portion of the Company's overhead costs, as defined, representing the pro rata portion of costs attributable to Vivid. The Company charged Vivid approximately $325, $130 and $140 under the agreement during fiscal 1996, 1997 and 1998, respectively, which have been offset against operating expenses of the Company. Of these amounts, approximately $15 and $16 were unpaid as of September 27, 1997 and September 26, 1998, respectively. (b) License and Technology Agreement The Company has an agreement with Vivid whereby Vivid obtained a perpetual, exclusive worldwide license to utilize certain of the Company's technology and patents for the sole purpose of developing baggage and inspection security systems (the Exclusive License). In September 1996, this license was amended to grant Vivid a nonexclusive license to utilize these patents and technology for certain new product development for other applications (the Nonexclusive License). Royalty payments to the Company under the Exclusive License are 5% of product revenue on Vivid's first $50 million in sales; thereafter, payments are 3% of Vivid's sales up to $200 million. Royalty payments under the Nonexclusive License are 3% on sales up to $200 million. No royalty payments will be made on aggregate revenues in excess of $200 million for either the Exclusive License or the Nonexclusive License. The agreement terminates by mutual agreement of the two parties or under certain other circumstances, as defined. The Company recognized approximately $775, $950 and $1,070 of royalty revenue under the Exclusive License for fiscal 1996, 1997 and 1998, respectively. Approximately $710 and $519 were outstanding at September 27, 1997 and September 26, 1998, respectively. The Company has not recognized any royalty revenue under the Nonexclusive License. (9) COMMITMENTS (a) Operating Leases The Company and its subsidiaries lease certain equipment and conduct their operations in leased facilities under operating lease agreements that expire through fiscal 2002. In addition, the facility lease requires the Company to pay a percentage of real estate taxes and certain operating costs of the property. Future minimum lease payments under the operating leases are approximately as follows:
FISCAL YEARS ENDING AMOUNT ------------------- ------ September 25, 1999......................... $1,272 September 24, 2000......................... 1,221 September 30, 2001......................... 1,015 September 29, 2002......................... 301 September 25, 2003......................... -- ------ $3,809 ======
F-17 HOLOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Rental expense, net of subrentals from Vivid, was approximately $796, $1,107 and $1,937 for fiscal 1996, 1997 and 1998, respectively. (b) Patent Acquisition In fiscal 1992, the Company acquired certain patents pertaining to technology incorporated into certain of the Company's products. The Company paid approximately $245 for these patents and related expenses upon entering into the agreement. In May 1993, this agreement was amended such that the Company paid approximately $344 for additional patent rights and related expenses, of which $50 was paid through the issuance of 21,334 shares of common stock. In January 1998, the Company made the final payment of $1,086 with respect to the acquisition of these patent rights. The cost of these patents is being amortized over their expected life of 10 years. (10) COLLABORATION AGREEMENT In June 1995, the Company acquired a 5% minority interest in a collaborating company. To acquire this minority interest, the Company issued 56,042 shares of common stock and paid $76 in cash in return for all of the outstanding convertible preferred stock of the collaborating company. The Company also entered into a development agreement with the collaborating company related to a certain product. As part of the development agreement, the Company will reimburse the collaborating company for expenses incurred in the development of this product. The Company incurred $458, $552 and $344 of expense, net of related royalty revenue, in connection with this agreement in 1996, 1997 and 1998, respectively. In order to maintain its exclusive rights in the collaborating company's technology, the Company must meet required sales volumes, as defined, in the five years commencing 90 days after approval of the product by the Food and Drug Administration. The Company is also required to pay royalties to the collaborating company based on net sales of the product, as defined. No royalties were due under the agreement as of September 26, 1998. (11) FEE PER SCAN PROGRAM The Company has entered into a strategic fee per scan program with a leasing company whereby the Company sells its systems to the leasing company, which, in turn, leases the systems to third parties. Under the terms of the agreement, the Company is contingently liable for a certain amount per system, up to a maximum of 10% of the aggregate value of systems sold under the program. The Company has recorded the amount for which it is contingently liable as deferred revenue. (12) SUBSEQUENT EVENTS In November 1998, the Company received notice from their landlord in Waltham, MA that they would not be liable for the remaining lease payments once they move to their new headquarters and vacated the Waltham, MA location (see Note 2(h)). F-18 HOLOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (13) GEOGRAPHIC INFORMATION Revenues, net income (loss) and identifiable assets for the Company's U.S. and European operations are summarized as follows:
1996 ---------------------------------------------------- EUROPEAN UNITED STATES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------- ------------ ------------ ------------ Revenues from unaffiliated customers.............. $ 79,688 $11,903 $ -- $ 91,591 Transfers between geographic areas....... 6,039 1,187 (7,226) -- -------- ------- -------- -------- Total revenues........ $ 85,727 $13,090 $ (7,226) $ 91,591 ======== ======= ======== ======== Net income (loss)....... $ 11,702 $ (436) $ 91 $ 11,357 ======== ======= ======== ======== Identifiable assets..... $120,749 $ 6,550 $ (4,191) $123,107 ======== ======= ======== ======== 1997 ---------------------------------------------------- Revenues from unaffiliated customers.............. $ 91,635 $15,054 $ -- $106,689 Transfers between geographic areas....... 8,736 1,100 (9,836) -- -------- ------- -------- -------- Total revenues........ $100,371 $16,154 $ (9,836) $106,689 ======== ======= ======== ======== Net income.............. $ 17,346 $ 495 $ (111) $ 17,729 ======== ======= ======== ======== Identifiable assets..... $144,834 $ 4,304 $ (4,471) $144,667 ======== ======= ======== ======== 1998 ---------------------------------------------------- Revenues from unaffiliated customers.............. $108,554 $18,225 $(11,215) 115,564 Transfers between geographic areas....... (10,083) (1,132) 11,215 -- -------- ------- -------- -------- Total revenues........ $ 98,471 $17,093 $ -- $115,564 ======== ======= ======== ======== Net income (loss)....... $ 10,866 $ (152) $ (325) $ 10,388 ======== ======= ======== ======== Identifiable assets..... $166,164 $ 8,506 $ (2,073) $172,597 ======== ======= ======== ========
Export sales from the United States to unaffiliated customers primarily in Europe, Asia and Latin America during fiscal 1996, 1997 and 1998 totaled approximately $21,468, $24,751 and $14,496 respectively. Transfers between the Company and its European subsidiaries are generally recorded at amounts similar to the prices paid by unaffiliated foreign dealers. All intercompany profit is eliminated in consolidation. Export product sales as a percentage of total product sales are as follows:
YEARS ENDED ----------------------------------------- SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 26, 1996 1997 1998 ------------- ------------- ------------- Europe............................ 17% 20% 18% Asia.............................. 17 10 4 All others........................ 6 9 6 --- --- --- 40% 39% 28% === === ===
F-19 HOLOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (14) ACCRUED EXPENSES Accrued expenses consist of the following:
SEPTEMBER 27, SEPTEMBER 26, 1997 1998 ------------- ------------- Accrued payroll and employee benefits............ $1,997 $ 2,233 Accrued commissions.............................. 3,821 3,769 Accrued legal.................................... 430 317 Accrued income taxes............................. 1,504 3,748 Other accrued expenses........................... 1,545 2,386 ------ ------- $9,297 $12,453 ====== =======
(15) LITIGATION In the ordinary course of business, the Company is party to various types of litigation. The Company believes it has meritorious defenses to all claims, and, in its opinion, all litigation currently pending or threatened will not have a material effect on the Company's financial position or results of operations. (16) QUARTERLY INCOME STATEMENT INFORMATION (UNAUDITED) The following table presents a summary of quarterly results of operations for 1997 and 1998:
1997 ------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Total revenue.............................. $27,110 $28,000 $26,948 $24,632 Net income................................. 4,408 4,651 4,746 3,924 Diluted net income per common and common equivalent share.......................... .32 .34 .35 .29 1998 ------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Total revenue.............................. $26,121 $30,197 $34,426 $24,822 Net income................................. 2,063 2,720 4,289 1,316 Diluted net income per common and common equivalent share.......................... .15 .20 .31 .09
F-20 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 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 the Registrant's Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is incorporated by reference to the sections entitled "Executive Compensation" in the Registrant's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item is incorporated by reference to the section entitled "Share Ownership of Directors, Officers and Certain Beneficial Owners" in the Registrant's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is incorporated by reference to the section entitled "Certain Transactions" in the Registrant's Proxy Statement. 34 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: (1) Financial Statements Report of Independent Public Accountants Consolidated Balance Sheets as of September 27, 1997 and September 26, 1998 Consolidated Statements of Operations for the years ended September 28, 1996, September 27, 1997 and September 26, 1998 Consolidated Statements of Stockholders' Equity for the years ended September 28, 1996, September 27, 1997 and September 26, 1998 Consolidated Statements of Cash Flows for the years ended September 28, 1996, September 27, 1997 and September 26, 1998 Notes to Consolidated Financial Statements (2) Financial Statement Schedules The following financial statement schedules are filed as part of this report and should be read in conjunction with the consolidated financial statements: SCHEDULE -------- Report of Independent Public Accountants on Schedule II Valuation and Qualifying Accounts All other schedules have been omitted because they are not required or because the required information is given in the Consolidated Financial Statements or Notes thereto. (3) Listing of Exhibits Exhibit Number Reference - ------- --------- 2.01 Merger Agreement between the Company and its Massachusetts predecessor............................. A 2.02 Agreement and Plan of Merger between the Company, Fenway Acquisition Corp., and FluoroScan Imaging Systems, Inc.............................................. I-2.01 3.01 Certificate of Incorporation of the Company............... A 3.02 By-laws of the Company.................................... A 4.01 Specimen certificate for shares of the Company's Common Stock.................................... A 4.02 Description of capital stock (contained in the Certificate of Incorporation of the Company filed, as Exhibit 3.01)... A 35 4.03 Rights Agreement dated December 22, 1992.................. C 4.04 Amendment No. 1 to Rights Agreement....................... G 10.07 1986 Combination Stock Option Plan, as amended............ F* 10.08 Amended and Restated 1990 Non-Employee Director Stock Option Plan................................ H 10.09 Employee Stock Purchase Plan of the Company............... F 10.10 1995 Combination Stock Option Plan........................ H* 10.12 Form of Indemnification Agreement for directors and certain officers of the Company........................... A* 10.17 Management Agreement between the Company and Vivid Technologies, Inc................................... A* 10.18 License Agreement between the Company and Vivid Technologies, Inc.,................................. A 10.19 Distribution Agreement between the Company, Toyo Medic Company Limited and Yokogawa Medical Systems, Ltd......... B* 10.20 Facility lease between the Company and Lincoln Street Trust...................................... B 10.21 Orion Corporation Soredex Distribution Agreement for Scanora........................ D** 10.22 Employment Agreement with an officer of the Company............................................ E 10.23 Form of Selling Stockholders Agreement.................... G 10.25 Amendment No.1 to the License Agreement between the Company and Vivid Technologies, Inc................... K 10.26 Facility Lease between the Company and Mangen Management Company................................. K 10.32 First Amendment to the facility lease between the Company and Lincoln Street Trust.................................. I 10.33 Building Purchase and Sale Agreement...................... L Filed 10.34 Master Product Financing Agreement........................ herewith** Filed 10.35 Distribution Agreement between Company and PSS for DXA ... herewith** 10.36 Distribution Agreement between Company and PSS for Filed Sahara................................................... herewith** Filed 21.01 Subsidiaries of the Company............................... herewith Filed 23.01 Consent of Arthur Andersen LLP............................ herewith _______________________ * Management compensation plan or arrangement ** Confidentiality requested as to certain provisions A. The above exhibits were previously filed as an exhibit of the same number to the Company's Registration Statement on Form S-1 (Registration No. 33-33128) filed on January 24, 1990 and are incorporated herein by reference. B. The above exhibits were previously filed as an exhibit of the same number to the Company's 1990 Annual Report on Form 10-K and are incorporated herein by reference. C. The above exhibit was previously filed as an exhibit of the same number to the Company's 1992 Annual Report on Form 10-K and is incorporated herein by reference. 36 D. The above exhibit was previously filed as an exhibit of the same number to the Company's 1993 Third Quarter Report on Form 10-Q and is incorporated herein by reference. E. The above exhibit was previously filed as an exhibit of the same number to the Company's 1993 Annual Report on Form 10-K and is incorporated herein by reference. F. The above exhibits were previously filed as an exhibit of the same number to the Company's 1994 Annual Report on Form 10-K and is incorporated herein by reference. G. The above exhibit was previously filed as an exhibit of the above referenced number of the Company's Registration Statement on Form S-3 (Registration No. 33-65019) filed on December 14, 1995 and is incorporated herein by reference. H. The above exhibits were previously filed as an exhibit of the same number to the Company's 1995 Annual Report on Form 10-K and is incorporated herein by reference. I. The above exhibit was previously filed as an exhibit of the above referenced number of the Company's Proxy Statement and Prospectus on Form S-4 filed (Registration No. 333-08977) on August 6, 1996 and is incorporated herein by reference. J. The above exhibit was previously filed as an exhibit of the same number of the Company's Registration Statement on Form S-8 (Registration No. 333-11853) filed on September 12, 1996 and is incorporated herein by reference. K. The above exhibits were previously filed as an exhibit of the same number to the Company's 1996 Annual Report on Form 10-K and is incorporated herein by reference. L. The above exhibit was previously filed as an exhibit of the same number to the Company's 1998 Third Quarter Report on Form 10-Q and is incorporated herein by reference. (d) Financial Statement Schedules: The financial statement schedules required are included as part of Item (2) above. 37 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/ S. David Ellenbogen ------------------------------ S. DAVID ELLENBOGEN Chief Executive Officer Dated: December 23, 1998 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. SIGNATURE TITLE DATE - ----------------------------- --------------------------- ----------------- Director /s/ S. David Ellenbogen and Chief Executive Officer December 23, 1998 - ----------------------------- S. DAVID ELLENBOGEN Director, President /s/ Steve L. Nakashige and Chief Operating Officer December 23, 1998 - ----------------------------- STEVE L. NAKASHIGE Vice President, Finance and Principal Financial and /s/ Glenn P. Muir Accounting Officer December 23, 1998 - ----------------------------- GLENN P. MUIR Director and /s/ Jay A. Stein Senior Vice President December 23, 1998 - ----------------------------- JAY A. STEIN /s/ Irwin Jacobs Director December 23, 1998 - ----------------------------- IRWIN JACOBS /s/ William A. Peck Director December 23, 1998 - ----------------------------- WILLIAM A. PECK /s/ Gerald Segel Director December 23, 1998 - ----------------------------- GERALD SEGEL /s/ Elaine Ullian Director December 23, 1998 - ----------------------------- ELAINE ULLIAN 38 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To Hologic, Inc. We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Hologic, Inc. and subsidiaries included in this Form 10-K and have issued our report thereon dated November 6, 1998. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14 is the responsibility of the Company's management and is presented for the purposes of complying with the Securities Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Boston, Massachusetts November 6, 1998 39 SCHEDULE II HOLOGIC, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
Balance at Charged to Balance Beginning Costs and at End of of Period Expenses Period ---------- ---------- --------- Allowance for Uncollectible Amounts Year Ended: September 28, 1996 $ 850 $510 $1,360 September 27, 1997 $1,360 $100 $1,460 September 26, 1998 $1,460 $640 $2,100
40 EX-10.34 2 MASTER PRODUCT FINANCING AGREEMENT Exhibit 10.34 MASTER PRODUCT FINANCING AGREEMENT This Master Product Financing Agreement (this "Agreement") dated as of September 25, 1996, is entered into between Hologic Inc., whose address is 590 Lincoln Street, Waltham, Massachusetts 02154 ("Hologic") and Sanwa Business Credit Corporation whose address is One South Wacker Drive, Suite 3900, Chicago, Illinois 60606 ("SBCC"). Whereas, Hologic is engaged in the business of manufacturing and financing bone densitometry and calibration equipment; and Whereas, SBCC is engaged in the business of leasing capital equipment and acquiring chattel paper arising out of the sale, lease or financing of capital equipment; and Whereas, Hologic from time to time leases or finances certain of its products to its customers pursuant to lease agreements, installment sale agreements or other financing agreements; and Whereas, Hologic desires to sell and assign and SBCC desires to purchase from Hologic pursuant to the terms of this Agreement and any applicable Program Supplement(s), the leases, installment sale agreements or finance agreements generated out of the financing of such products, the payments relating thereto, and the products which are subject to such leases and agreements; Now therefore, in consideration of the premises and for other good and valuable consideration received, SBCC and Hologic hereby agree as follows: 1. Master Agreement; Program Supplements. The terms and conditions of ------------------------------------- this Agreement are master terms and conditions which may be supplemented and/or clarified by one or more "Program Supplements" from time to time entered into by ------------------- Hologic and SBCC. Each Program Supplement will constitute a separate set of terms and conditions incorporated in full under and made a part of this Agreement, which will be applicable to the particular financing program provided under the Program Supplement. No Program Supplement will, unless specifically provided for in its terms, apply to, modify, or limit the provisions of any other Program Supplement entered into under this Agreement. This Agreement, together with all Program Supplements, will constitute a single agreement. Inconsistencies between a Program Supplement and this Agreement, will be controlled, but only with respect to the applicable Program, by the terms of the Program Supplement. 2. Definitions. The following terms will have the meanings given to ----------- them in this Section: "As-Placed Investment" means as of any date, for each item of Equipment purchased under a Program Supplement, the amount specified as "As-Placed Investment" in the Program Supplement or schedule thereto. The As-Placed Investment will reflect the amount attributed to SBCC's unrecovered investment in Equipment through the end of the projected term (but not after the projected term) of the related Contract. "Attributed Rent" means, for each item of Equipment purchased under a Program Supplement, the amount determined as Attributed Rent using the methodology specified in the Program Supplement. "Contract" means a lease, installment financing, or other agreement arising out of the provision, sale or financing of Equipment. "Eligible Contract" means a Contract purchased by SBCC which meets all of the requirements set forth in Section 5 and any additional eligibility requirements under the Program Supplement applicable to such Contract; provided, -------- however, that notwithstanding that a Contract is otherwise an Eligible Contract, - ------- upon (i) a breach of the covenant set forth in Section 6(e), (ii) a breach of any of Hologic's other covenants or agreements under Sections 6(c), 6(f), 6(h), 8(c), or 9(b) of this Agreement, (iii) a breach of any remarketing reporting provision set forth in any Program Supplement, (iv) or a breach of any of Hologic's obligations to pay any amount to SBCC under this Agreement or any other agreement, which breach (other than under Section 6(e)) remains unremedied thirty (30) days after notice from SBCC, the Contract and all other Contracts shall cease to be Eligible Contracts. "Equipment" means bone densitometers and related calibration equipment manufactured by Hologic or offered under Hologic's brand, and third-party brand equipment used in conjunction with Hologic-brand equipment which is approved for purchase pursuant hereto by SBCC. "Fair Market Value Purchase Price" for each unit of Equipment purchased hereunder shall be determined according to the Program Supplement therefor. "Investment Balance" means, with respect to any Contract or item of Equipment as of any date, the sum of (i) the "As-Placed Investment" as of such date, plus (ii) the Residual Investment as of such date, plus (iii) the sum of any unpaid taxes or other costs and expenses accrued or incurred by SBCC with respect to the Equipment or the Contract, plus (iv) interest on any amount specified in clause (iii) which has not been paid within thirty (30) days from the projected payment date or due date thereof (such interest to accrue at the rate of twelve percent (12%) per annum)SBCC. "Loss" means, with respect to any Section 11(b) indemnification, the amount by which the indemnity payment with respect to an item of Equipment exceeds the amount distributed to Hologic under Section 11(e)(iii) on account of such Equipment. The amount of Loss shall be reduced by the amount of any payments received by Hologic from or on behalf of the Obligor after Hologic's indemnity payment. For purposes of calculating "Loss", the amount attributed to remarketing events will be determined as follows: -2- (i) if the remarketing was an arm's length, good faith cash or installment sale or a full pay-out lease in accordance with Hologic's standard practices, the gross proceeds of such sale or lease (discounted to present value provided in the last sentence of this definition) minus such of Hologic's actual related out-of-pocket expenses as are approved by SBCC; (ii) if the remarketing was an arm's length "true" or "operating" lease in accordance with Hologic's standard practices, the greater of (x) the fair market value of the Equipment, as determined by SBCC in good faith or (y) the gross rentals owing under such lease (discounted to present value as provided in the last sentence of this definition) plus the estimated fair market value of the Equipment at the end of the lease term, as determined by SBCC in good faith (discounted to present value as provided in the last sentence of this definition); and (iii) if the remarketing was other than as described above, an amount determined by SBCC in good faith. The discount rate to be used in the calculations described clauses (i) - (iii) shall be the discount rate then used by SBCC for contracts which are the most similar to the contract resulting from the remarketing. "Obligor" means any party obligated in respect of a Contract other than the lessor or vendor of the Equipment covered thereby. "Obligor Guaranty" means any guaranty given to Hologic (or under which Hologic has rights) by any person or entity guaranteeing the payment and/or performance of a Contract purchased by SBCC. "Obligor Default" means: (i) failure of an Obligor under any Contract to make a Payment within ninety (90) days of the due date of that Payment; (ii) failure of any Obligor to perform any of its material obligations under any Contract and the continuation of such failure for thirty (30) days after notice thereof; (iii) insolvency of any Obligor, inability of any Obligor to pay its debts as they mature, any Obligor's assignment for the benefit of creditors, or the institution of any proceeding alleging that the Obligor is insolvent or unable to pay its debts as they mature which proceeding is not withdrawn or dismissed within sixty (60) days after institution; or (iv) falsity in any material respect as of the date made in any Obligor's statement, representation or warranty made in connection with any Contract. -3- "Payment" means any payment, whether or not earned by performance, receivable by the vendor or lessor under a Contract purchased by SBCC or by the owner of Equipment covered by such a Contract. "Residual Investment" means as of any date, for each item of Equipment purchased under a Program Supplement, the amount specified as "Residual Investment" in the Program Supplement or schedule thereto. The Residual Investment will reflect the amount attributed to SBCC's unrecovered investment in Equipment at the end of the projected term of the related Contract. 2. Purchases. --------- (a) Facility. Hologic may offer to SBCC the right to purchase any -------- Contract which it enters into, together (if the applicable Program Supplement provides for the purchase of Equipment) with the Equipment which is the subject of any such Contracts. SBCC, in its discretion and subject to the terms and conditions of this Agreement and any applicable Program Supplement, may purchase any or all such Contracts and Equipment. If SBCC for any reason refuses to buy any such Contract or Equipment within ten (10) days after the offer has been made, then Hologic may offer the Equipment to any other purchaser. (b) Closing. On the date of each purchase, SBCC shall pay to Hologic the ------- aggregate Fair Market Value Purchase Price for all Contracts and the related Equipment being purchased on such date, and Hologic shall sell, assign and transfer to SBCC all right, title and interest in and to (i) the Contracts being purchased, (ii) all Payments receivable with respect to such Contracts, (iii) all rights of Hologic under such Contracts, (iv) all Obligor Guaranties; and (v) if SBCC is purchasing the Equipment covered by the Contract, all of the property and Equipment referred to in and covered by the Contracts and all accessions, accessories, parts, additions and attachments attached thereto or used in connection therewith and all replacements and substitutions thereof. SBCC may first apply the proceeds representing the Fair Market Value Purchase Price to be paid at closing as a set off against any payments Hologic is then required to make to SBCC under this Agreement or any Program Supplement. (c) No Delegation. SBCC shall not be deemed by reason of any purchase ------------- hereunder to have assumed any of Hologic's obligations under any Contract or with respect to any Equipment. (d) Security Interest. If SBCC does not purchase the Equipment covered ----------------- under a Contract purchased under this Agreement, Hologic, in connection with SBCC's purchase of the Contract, grants to SBCC, or assign to SBCC Hologic's security interest in the property and Equipment covered by the Contract and all accessions, accessories, parts, additions and attachments attached thereto or used in connection therewith and all replacements for or substitutions of any thereof and all proceeds, products, rents, issues, profits, and returns thereof and therefrom. Additionally, in the event it is determined that any purchase made under this Agreement constitutes a loan or loans; then as collateral security for the payment of all sums and amounts due hereunder, Hologic hereby grants to SBCC a security interest in and to all Contracts -4- covered by the "loan(s)", all Payments, rights, Obligor Guaranties, and property and Equipment related to any such Contracts and all accessions, accessories, parts, additions and attachments attached thereto or used in connection therewith and all replacements for or substitutions of any thereof; and proceeds, products, rents, issues, profits, and returns thereof and therefrom. Lastly, SBCC shall have a security interest, to secure each obligation of Hologic to SBCC under or in connection with this Agreement or any Program Supplement, in any retained interest of Hologic in any and all Contracts purchased by SBCC and in any Payments, rights, Obligor Guaranties, and property and Equipment related to such Contracts. 4. General Warranties. Hologic hereby represents and warrants (and each ------------------ representation and warranty shall be considered as having been made concurrently with any Program Supplement entered into and the sale of any Equipment or Contract(s) to SBCC as an inducement to SBCC to enter into such Program Supplement or make such purchase) that: (a) Organized and Existing. Hologic is a corporation duly organized, ---------------------- validly existing and in good standing under the laws of Delaware; and Hologic is duly qualified and in good standing as a foreign corporation authorized to do business in each state or jurisdiction where such qualification is necessary. (b) Duly Authorized. Hologic is duly authorized to execute and deliver --------------- this Agreement any Program Supplement thereto, and is and will (until payment in full of all amounts due and owing SBCC pursuant to the Contracts and hereto) continue to be, duly authorized to perform all of its obligations under this Agreement, each Program Supplement, and under each instrument and document delivered pursuant to this Agreement or in connection herewith; (c) Approvals. The execution and delivery of this Agreement and any --------- Program Supplements by Hologic does not, and the performance by it of its obligations hereunder and thereunder will not, conflict with any provision of law or of its charter or by-laws or of any agreement or court or administrative order, judgment or decree binding upon it; (d) Financial Information. Hologic has delivered to SBCC copies of --------------------- (i) Hologic's most recent annual audited financial statements, prepared and certified by an independent firm of certified public accountants, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding fiscal year and presenting fairly its financial condition as at such date, and the results of its operations for the twelve (l2) month period then ended and (ii) Hologic's most recent quarterly financial statements, prepared in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding fiscal quarter and presenting fairly its financial condition as at such date and the results of its operations for the quarter then ended, certified as true and correct by its chief financial officer; and since the date of the above described financial statements there has been no material adverse change in Hologic's financial condition. -5- (e) Litigation and Contingent Liabilities. Hologic has delivered to SBCC a ------------------------------------- schedule of litigation or governmental proceedings pending or threatened against Hologic (including estimates of the dollar amounts involved) which would be deemed material under generally accepted accounting practices consistently applied. Other than any liability disclosed in such schedule, Hologic's only material contingent liabilities are those provided for or disclosed in the financial statements referred to in Section 4(d). (f) Principal Place of Business. Hologic's chief executive office and --------------------------- principal place of business is located at the address set forth on the first page of this Agreement unless another address is specified here: 5. Warranties as to the Payments, the Contracts, and the Equipment. --------------------------------------------------------------- Hologic hereby warrants that all of the following are true and correct with respect to any Contract or Equipment purchased hereunder, and the Payments due with respect to each such Contract: (a) Bona Fide Transaction. The Contract arises from a bona fide lease or --------------------- sale of the Equipment described in the Contract. (b) Accurate Description of Equipment and Payments. The Contract ---------------------------------------------- accurately describes the Equipment covered by and the Payments due under the Contract. (c) No Obligor Default. At the time of SBCC's purchase, no Obligor Default ------------------ or event which with the passage of time or giving of notice or both would become an Obligor Default under the terms of the Contract existed and Hologic had no knowledge of any fact that might impair the Contract's validity. (d) Equipment Compliance and Acceptance. The Equipment covered by the ----------------------------------- Contract was new or warranted-as-new current production equipment when placed in service under the Contract, and such Equipment complies with all of the requirements of the Contract and has been delivered to and accepted under the Contract by the Obligor thereunder. (e) No Fixtures. None of the Equipment covered by the Contract is a ----------- fixture. (f) No Prepayments. At the time of SBCC's purchase, no amounts have been -------------- prepaid on the Contract. (g) Single Original. The single assignable original of the Contract will --------------- be delivered to SBCC at the time of purchase. (h) Other Agreements. At the time of SBCC's purchase, Hologic has informed ---------------- SBCC in writing of all agreements entered into in connection with the Contract and fully executed copies (all original copies if requested by SBCC) of all those agreements, together with a current certificate of insurance evidencing coverage satisfactory to the -6- requirements of Section 5(u), will be delivered to SBCC simultaneously with delivery of the Contract. (i) No Setoffs. No setoffs, counterclaims or defenses exist to any claims ---------- against or obligations of any Obligor under the Contract or any related Obligor Guaranty. (j) Capacity and Authorization. Each party to the Contract or any Obligor -------------------------- Guaranty has all the legal capacity, power and right required, and has received all corporate or governmental authorization required, for it to enter into and to perform its obligations under the Contract, any related Obligor Guaranty and any supplemental agreements. (k) Valid, Binding, Enforceable. The Contract and each related Obligor --------------------------- Guaranty are genuine, fully in effect, valid, binding and enforceable in accordance with their terms, subject to bankruptcy laws and general principles of equity. (l) Complies with Laws. The Contract and the Equipment covered by the ------------------ Contract comply with all applicable laws and regulations in all material respects. (m) Good Title. At the time of SBCC's purchase, Hologic had, and did ---------- convey to SBCC, good title to the Contract, the Payments due under the Contract, each Obligor Guaranty related to the Contract, and, if SBCC purchases the Equipment covered by the Contract, the Equipment, free of all liens, claims or security interests, except only to the interest of the lessee or vendee. (n) No Liens. The Contract, Equipment, the Payments due under the Contract -------- and all proceeds thereof are not, as of the date of SBCC's purchase, subject to any lien, claim or security interest except the interest of the lessee or vendee, and Hologic will not, after the date of purchase, create or incur any other lien, claim or security interest in such property or rights. (o) Perfection. Hologic has taken, at its expense, all steps from time to ---------- time necessary or deemed by SBCC to be desirable to perfect (and continue the perfection of) SBCC's interest in the Contract, any related Obligor Guaranty and the Payments and Equipment covered by the Contract. (p) No Hologic Defaults. Neither Hologic nor any vendor or lessor of the ------------------- Equipment is in default of any of their respective obligations under the Contract or arising by contract or imposed by applicable law, rule or regulation with respect to the Contract or the related Equipment. (q) No Impairment of Rights or Value. Hologic has not done anything that -------------------------------- might impair the value of the Contract, any related Obligor Guaranty, or any of SBCC's rights under the Contract, any Obligor Guaranty, or to the Equipment covered by or Payments due under the Contract. -7- (r) No Amendments. Neither the Contract nor any related Obligor Guaranty ------------- has been, or will be, altered, modified, changed or amended without SBCC's prior written consent. (s) Insurance. At the time of SBCC's purchase, the Equipment covered by --------- the Contract is insured against casualty and theft in an amount not less than the greater of the replacement cost of or Investment Balance of such Equipment, and such policies of insurance will name Hologic and its assignees as loss payee. (t) Taxes. All taxes, assessments, fines, fees and other liabilities ----- accruing prior to the purchase date and relating to the Contract, the Payments due under the Contract, the related Equipment, or any related Obligor Guaranty have or will be been paid when due, and all related filings have been or will be timely made. (u) Contract Provisions. The Contract is in the form required under, and ------------------- satisfies any other eligibility conditions specified in any applicable Program Supplement, and the Contract has not been modified or amended from such form 6. Covenants. Hologic covenants that, until requested in writing by SBCC --------- to the contrary, it will: (a) Financial Information. Furnish to SBCC: --------------------- (i) as soon as available, but not later than sixty (60) days after the end of each quarter (except the last) of each fiscal year, quarterly unaudited financial statements concerning Hologic's business, prepared in accordance with generally accepted accounting principles applied on a basis consistent with that of the preceding fiscal quarter, presenting fairly its financial condition as at the end of that quarter and containing such data as may be requested by SBCC, and certified as true and correct by its chief financial officer; (ii) as soon as available, but not later than one hundred-twenty (l20) days after the end of each fiscal year, a copy of Hologic's annual audit report for that year, prepared in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding fiscal year and presenting fairly its financial condition as at the end of that fiscal year and the results of its operations for the twelve (l2) month period then ended and signed by independent certified public accountants of recognized standing or otherwise satisfactory to SBCC; and (iii) any other information as SBCC may reasonably request from time to time; (b) Notice of Adverse Events. Notify SBCC promptly upon Hologic's learning ------------------------ of: (i) any change in the name of the vendee or lessee under any Contract purchased by SBCC. -8- (ii) the default or violation of any provision of a Contract purchased by SBCC or other related document by the lessee or vendee thereunder or any other Obligor thereof. (iii) any adverse credit information, which Hologic may acquire or have knowledge of, with respect to any lessee or vendee of any Contract purchased by SBCC, or any other Obligor thereof. (iv) any and all litigation or other matters or events concerning Hologic or any Obligor which might reasonably be construed to affect adversely SBCC's interest in a Contract, Payments, or related Equipment or any of SBCC's rights under this Agreement or any Program Supplement. (c) Books and Records. Permit SBCC reasonable access to Hologic's books ----------------- and records as they relate to Contracts purchased by SBCC. (d) Insurance. Maintain general liability insurance with respect to the --------- Equipment for an amount not less than $5,000,000.00. Hologic will provide SBCC with endorsements, in form and substance satisfactory to SBCC, naming SBCC as named insured under such policies of insurance. (e) Continuity of Business. Not, without SBCC's written consent, (i) cease ---------------------- to engage in substantially the same line of business in which Hologic is engaged on the date of this Agreement, (ii) cease to engage in the sale of or provision of maintenance for bone densitometry equipment, or (iii) sell, transfer or convey, in one or more transactions, more than fifty percent (50%) of Hologic's assets or effect or be a party to any merger or consolidation, unless the entity surviving such merger or consolidation is no less creditworthy than was Hologic immediately prior to such merger or consolidation and such surviving entity specifically assumes all of Hologic's obligations under this Agreement, any Program Supplement(s) and with respect to the Contracts. (f) Performance of Obligations Under Contracts. Perform all Hologic's ------------------------------------------ obligations arising by contract or imposed by applicable law, rule or regulation with respect to the Contracts and the related Equipment. (g) Changed Locations. Notify SBCC at least ten (10) days prior to: ----------------- (i) Hologic's changing the location of its principal place of business or chief executive office or (ii) Hologic's opening or closing any places of business in any jurisdictions where such openings or closings might affect the place where a UCC financing statement or similar document would need to be filed in order to perfect or protect SBCC's security interest or other interest in any Contract, Equipment or Payment. -9- (h) Further Assurances. From time to time execute and deliver such further ------------------ documents and take such actions as SBCC may reasonably request in order to fully effect the purposes of this Agreement and any Program Supplement, and to protect SBCC's interest in the Contracts, Equipment and Payments. (i) Services and Parts. Make available to SBCC and Obligors and other ------------------ users of the Equipment, at commercially reasonable rates, service, maintenance, spare parts, and training as is necessary to operate the Equipment. 7. Warranties as to Maintenance. ---------------------------- (a) Modifications and Maintenance Made Available. Hologic shall make, or -------------------------------------------- cause to be made, all modifications to Equipment, related software, and microcode as it makes or causes to be made to all or a substantial part of the same type of equipment owned or financed by Hologic or any third party. The costs of any such modifications to an Obligor shall be no greater than the costs of such modifications made with respect to similar equipment owned or financed by Hologic or any third party. Hologic agrees that, in the event that it ceases to provide maintenance or support for the Equipment and related software, it will provide a copy of the complete source code for all such software to SBCC for use only in connection with the maintenance and support of Equipment purchased under this Agreement. Hologic further agrees to freely license operating and applications software related to the Equipment to all end-users of Equipment, including Obligors, subject only to a reasonable fee to offset the costs of registering the new licensee under the license agreement. (b) Payment for Services. Hologic or its designee shall receive all -------------------- payments for the performance of the services described in subsection (a) above except those charged in connection with SBCC's provision of such services; provided that the amount charged for Hologic's services shall be no greater than the amount charged to other customers of Hologic for such services in similar circumstances. (c) Performance by SBCC. SBCC or its designee may, after any uncured ------------------- default by Hologic of its maintenance or service-related obligations under this Agreement, any Program Supplement or any Contract, undertake to provide for any or all maintenance and/or refurbishment responsibilities provided for hereunder or under such Contract, at any time in SBCC's sole discretion upon 30 days notice to Hologic. In the event of such an assumption SBCC shall retain, as compensation for services rendered and not as Attributed Rents, all maintenance and refurbishment related payments received in connection with the SBCC-serviced Equipment and any related Software. 8. Agreement to Indemnify. ---------------------- (a) No Assumption. SBCC assumes no obligation or liability to the lessee ------------- or vendee under any Contract and no assignment of any Contract shall impose any such obligation or liability on SBCC. -10- (b) Scope of Indemnity. Hologic agrees to indemnify and save SBCC harmless ------------------ of, from and against any losses, damages, penalties, forfeitures, claims, costs, expenses (including court costs and reasonable attorneys' fees) or liabilities, excepting those arising solely out of SBCC's malfeasance, which may at any time be brought, incurred, assessed or adjudged against SBCC, related to or arising from the Contracts and the related Equipment. (c) Indemnity Payment. SBCC and Hologic will each give the other notice of ----------------- any event or condition that requires indemnification by Hologic, or any allegation that such event or condition exists, promptly upon obtaining knowledge thereof. Hologic agrees to pay all indemnity amounts to SBCC promptly on notice thereof from SBCC. (d) Control of Proceedings. If Hologic makes or provides to SBCC's ---------------------- satisfaction for payment under this indemnity provision, and if Hologic is otherwise in compliance with the terms of this Agreement and each Program Supplement, Hologic shall be subrogated to SBCC's rights with respect to such event or condition and shall have the right to control, and determine the settlement of claims upon, related litigation. In the event Hologic so controls litigation proceedings and provides for SBCC's defense of such matters by reputable and experienced counsel, and provided that joint representation is feasible and there is no conflict of interests which would make joint representation undesirable, SBCC will not be entitled to recover any attorneys' fees incurred for separate representation during such period of joint representation. (e) Survival of Indemnity Obligations. All of the indemnities and --------------------------------- agreements contained in this Section shall survive and continue in full force and effect notwithstanding termination of this Agreement, any Program Supplement, or of any Contract. 9. Agreements Regarding Collections. -------------------------------- (a) Private Label. All billings and collections will be conducted by ------------- SBCC according to its standard policies and procedures, as in effect from time to time. Billings and collections will be performed on a non-notification, private label basis, with SBCC using Hologic's name or another name selected by SBCC. Hologic irrevocably authorizes SBCC to use Hologic's name in connection with all aspects of billing, collections and enforcement of Contracts or any related rights. The Obligors under Contracts purchased by SBCC shall be directed to send all Payments to a lockbox or post office box designated by SBCC and under SBCC's control. If, despite such direction, Hologic subsequently receives a Payment on account of a Contract sold to SBCC, Hologic agrees to hold the amount in trust for SBCC and immediately forward the Payment to SBCC in kind. Hologic hereby authorizes SBCC to endorse, in writing or by stamp, in Hologic's name or otherwise any and all checks, drafts, notes, bills of exchange and orders, howsoever received by SBCC, representing any Payment under any Contract or with respect to any Equipment purchased by SBCC. (b) Account Information. Hologic agrees to monitor the usage and number ------------------- of billable scans rendered by each unit of Equipment purchased under this Agreement, and to provide to SBCC a data file specifying such information for each Contract on or before the 12th day of the -11- month following the month of usage. SBCC will provide Hologic with access to account summary and payment history information (if any) relative to the Contracts, as maintained by SBCC on SBCC's proprietary asset tracking system or its equivalent. SBCC MAKES NO WARRANTIES, INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR USE, WITH RESPECT TO SUCH SYSTEM, OR ANY INFORMATION MAINTAINED IN THE SYSTEM. (c) Taxes. SBCC will be responsible for collecting, filing returns with ----- respect to, and the remittance of sales, use and property taxes which accrue with respect to the Contracts and/or Equipment after the date of purchase. Hologic will be responsible for such matters with respect to taxes, assessments, fines, fees and other liabilities accruing prior to the purchase date and relating to the Contract, the Payments due under the Contract, the related Equipment, or any related Obligor Guaranty. (d) Applications. Payments (excepting prepayments) received on account of ------------ the Contracts and Equipment will be applied first, against any Attributed Rent then due with respect to the Equipment, plus any unrecovered taxes, late charges or other amounts then payable by the Obligor under the Contract and second to Hologic. (e) Collections in SBCC's Name. Notwithstanding anything to the contrary -------------------------- contained in this Section, SBCC may, upon twenty (20) days prior written notice to Hologic of SBCC's intention to do so, notify the Obligor(s) under any or all Contracts to make all payments directly to SBCC and SBCC may thereafter proceed to use SBCC's own name in connection with all subsequent billing and collection efforts on each such Contract. (f) Notices to Obligors. Hologic agrees to provide to SBCC an original ------------------- notice in the form of Exhibit _____A hereto, which shall be issued on Hologic's letterhead and executed by Hologic's duly authorized officer, but be blank as to the addressee and Contract information as shown on the Exhibit, together with a sufficient supply of Hologic's letterhead for SBCC's preparation of notification letters to each Obligor under the Contracts. Hologic irrevocably authorizes SBCC, in connection with SBCC's notification of Obligors as provided in this Section 9, to mechanically reproduce the executed letter (with completed information as to the Obligor, etc.) and/or to reproduce such letters and execute them on Hologic's behalf and to deliver the same as an original to each Obligor to whom notice under this Section is to be given. Hologic also agrees to provide to SBCC, upon SBCC's request, written or electronically readable information stating the names and current addresses of, and to the extent known by Hologic the names of the contact persons for, each Obligor under any Contract then owned by SBCC. (g) Discretion. SBCC, to the extent in compliance with SBCC's standard ---------- policies and procedures as in effect from time to time, and in compliance with laws and regulations applicable to SBCC in the State of Illinois, may take or fail to take whatever action with respect to the collection of Payments and receipt of funds as SBCC, in its sole discretion, shall deem proper and SBCC may agree with any Obligor as to any modification, alteration, release, compromise, extension, waiver, consent or other similar or dissimilar indulgence of or with respect to the Contract. -12- 10. Prepayments. Hologic has no right to prepay (in whole or in part) ----------- any Contract or to repurchase any Contract or Equipment purchased under this Agreement. If a Contract purchased by SBCC is prepaid in full by the Obligor for any reason, SBCC shall be entitled to receive, in connection with such payment, an amount equal to the Investment Balance of the Equipment covered by the Contract . Upon SBCC's receipt of such amount, SBCC will reassign to Hologic all of SBCC's right, title and interest in the repurchased Contract, any Payments due thereunder, and the related Equipment, without recourse to, and without representations or warranties by, SBCC of any kind whatsoever. 11. Repurchase of Contracts and Equipment, Indemnity After Obligor -------------------------------------------------------------- Default. (a) Eligibility. In the event any Contract shall not be an Eligible ----------- Contract at the time of purchase or shall thereafter cease to be an Eligible Contract Hologic agrees, upon demand by SBCC, to repurchase the Contract and related Equipment for cash for a price equal to the Investment Balance of the Equipment. Such repurchases will be made on or before the tenth (10th) day of the month following the month in which repurchase is requested. After SBCC receives the Investment Balance for any repurchased Contract and Equipment, SBCC will reassign to Hologic all of its right, title and interest in the repurchased Equipment and Contract, and any Payments due thereunder, without recourse to, and without representations or warranties by, SBCC of any kind whatsoever. (b) Obligor Default. If SBCC gives Hologic notice of an Obligor Default --------------- under any Contract purchased by SBCC and requests in writing that Hologic indemnify SBCC pursuant to this Section 11(b), Hologic will, within ten (10) days after receipt of SBCC's request, pay SBCC an amount equal to the As-Placed Investment of the Equipment. (c) Loss Limitation for Obligor Default Indemnities. The maximum amount of ----------------------------------------------- Loss which Hologic will be required to bear on account of indemnities under Section 11(b) shall be equal to the greater of: (i) ten percent (10%) percent of the aggregate Fair Market Value Purchase Price paid for all Contracts and Equipment purchased under this Agreement, or (ii) the aggregate Fair Market Value Purchase Price paid for the first four contracts (and the Equipment covered thereunder) purchased under this Agreement. (d) Scope of Loss Limitation. The limitation on Losses under Section 11(c) ------------------------ applies only to Losses resulting from Section 11(b) indemnities. Any loss or losses resulting from repurchases other than Section 11(b) repurchases will not be considered in determining whether the amount of Loss Hologic has borne exceeds the applicable maximum amount of Loss computed under Section 11(c). (e) Remarketing. Upon Hologic's payment of a Section 11(b) indemnity, ----------- Hologic agrees to promptly take all reasonable steps to recapture possession of the Equipment covered by -13- such Contract and to use its best efforts to promptly remarket the Equipment before attempting to remarket any similar Equipment covered under Contracts repurchased under Section 11(a). All remarketing proceeds of such Equipment, net of any costs and expenses approved by SBCC, will be applied in the following order: (i) to SBCC, up to the amount of its unrecovered As-Placed Investment (if any) for the Equipment; (ii) to SBCC, up to the amount of its unrecovered Residual Investment for the Equipment; (iii) to Hologic, up to the indemnity amount paid to SBCC under Section 11(b) with respect to the Equipment; and then (iv) one half to SBCC, one half to Hologic. If Hologic is unable to remarket the Equipment and report any Loss attributable to remarketing to SBCC within six months after its indemnity payment, the Loss on that Contract shall be deemed to be zero. (f) Excess Loss; Continuing Obligations. If Hologic's aggregate Loss ----------------------------------- resulting from Section 11(b) indemnities exceeds the maximum amount of Loss which has been computed under Section 11(c), then Hologic may invoice SBCC for the amount of such excess Loss. SBCC will refund the excess Loss within ten (10) days after receipt of Hologic's invoice (provided that the invoice shows the calculations of the excess Loss). Nothing in this Section 11(f) shall relieve Hologic of its obligation to make indemnity payments and remarket Equipment pursuant to Sections 11(b) and 11(e), regardless of whether its aggregate Loss exceeds the maximum amount of Loss which has been computed under Section 11(c). 12. Miscellaneous. ------------- (a) Hologic agrees to pay all reasonable costs and expenses, including reasonable attorneys' and paralegals' fees, expenses and court costs incurred by SBCC in enforcing any of the provisions of this Agreement or any Program Supplement, or in enforcing any obligations of Hologic's contained in any Assignment. (b) Hologic hereby waives notice of any Obligor Default under any Contract purchased by SBCC and Hologic consents that, without affecting any of its liabilities or obligations hereunder or under any Assignment, SBCC may agree with any Obligor as to any modification, alteration, release, compromise, extension, waiver, consent, or other similar or dissimilar indulgence of or with respect to any Contract. (c) SBCC and Hologic each acknowledge that, as of the date of this Agreement, they each intend to treat purchases made pursuant to this Agreement, for all purposes including but -14- not limited to accounting purposes and Federal income tax purposes, as purchases of Equipment subject to Contracts and not as loans. (d) This Agreement has been delivered and each Program Supplement will be delivered for acceptance by SBCC in Chicago, Illinois and shall be governed by and construed in accordance with the internal laws of the State of Illinois. Hologic hereby (i) waives any right to a trial by jury in any action to enforce or defend any matter arising from or related to this Agreement or any Program Supplement; (ii) irrevocably submits to the jurisdiction of any state or federal court located in Cook County, Illinois, over any action or proceeding to enforce or defend any matter arising from or related to this Agreement or any Program Supplement; (iii) irrevocably waives, to the fullest extent Hologic may effectively do so, the defense of an inconvenient forum to the maintenance of any such action or proceeding; (iv) agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in any other jurisdictions by suit on the judgment or in any other manner provided by law and (v) agrees not to institute any legal action or proceeding against SBCC or any of its directors, officers, employees, agents or property, concerning any matter arising out of or relating to this Agreement or any Program Supplement in any court other than one located in Cook County, Illinois. Nothing in this Section shall affect or impair SBCC's right to serve legal process in any manner permitted by law or our right to bring any action or proceeding against Hologic or its property in the courts of any other jurisdiction. (e) This Agreement and each Program Supplement shall be binding on, and inure to the benefit of, SBCC and Hologic and their respective successors and assigns and contains their entire understanding and agreement with respect to the subject matter hereof. It is understood and agreed that from time to time SBCC may (i) assign to any person or entity all of its right, title and interest in any Equipment purchased hereunder and/or in any Contract related to such Equipment, (ii) participate to any person(s) or entity all or any part of its right, title and interest in any Equipment purchased hereunder and/or in any Contract related to such Equipment, or (iii) assign all or part of its rights and benefits under this Agreement and/or any Program Supplement to any person, provided however, that SBCC will remain liable for the breach or failure of any - ---------------- such assignee to perform SBCC's duties under this Agreement. Neither this Agreement nor any Program Supplement is assignable by Hologic without the prior written consent of SBCC. (f) This Agreement and any Program Supplement shall continue in effect until terminated and may be terminated by either party at any time upon thirty (30) days' written notice to the other, provided, however, that all indemnities and all of the rights and obligations of the parties which apply to the Contracts and Equipment purchased prior to such termination shall survive such termination. (g) All of the covenants, agreements, representations and warranties made by Hologic and SBCC in this Agreement and in any Program Supplement shall, notwithstanding any investigation by the other party, be deemed to be material to and to have been relied upon by such party with respect to the Contracts and the Equipment. Hologic's or SBCC's knowledge at any time of any breach of or non-compliance with any of such covenants, agreements, representations or warranties shall not constitute a waiver of any thereof by the applicable party. -15- None of SBCC's or Hologic's rights under this Agreement or any Program Supplement will be waived except by a writing signed by the other party and any such waiver will be effective only as to matters expressly set forth in such writing. (h) Wherever possible each provision of this Agreement and each Program Supplement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement or such Program Supplement. (i) Any notice under this Agreement shall be in writing and shall be delivered in person, by recognized overnight air courier, by telecopy, or by United States first class mail, postage prepaid, and sent as follows, provided -------- however, that notice by telecopy will be effective only if, contemporaneous with - ------- such notice, a duplicate notice is given in another manner provided in this Section: (i) if to Hologic at: 590 Lincoln Street Waltham, MA 02154 Attention: Chief Financial Officer telecopy number: (ii) if to SBCC, at One South Wacker Drive Chicago, Illinois 60606 Attention: President, Vendor Finance Division telecopy number:, and (iii)to either party at any other address or telecopy number as such party may, by notice as herein provided, received by the other, designate as its address for all notices under this Agreement. -16- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. Address: 590 Lincoln Street HOLOGIC INC. ("Hologic") Waltham, MA 02154 By: /s/ Glenn P. Muir ---------------------------- Title: Vice President, Finance ---------------------------- Address: One South Wacker Drive SANWA BUSINESS CREDIT CORPORATION Chicago, Illinois 60606 ("SBCC") By: /s/ William P. Gmaz ---------------------------- Title: Vice President ---------------------------- Attachments: Exhibit A (Notice of Assignment) -17- PROGRAM SUPPLEMENT NUMBER 1 TO MASTER PRODUCT FINANCING AGREEMENT (Strategic Alliance Lease Program) This Program Supplement Number 1 ("Supplement") is entered into between ---------- Hologic Inc., ("Seller") and Sanwa Business Credit Corporation ("Buyer"), ------ ----- effective as of __________________. This Supplement is made pursuant to, and shall constitute additional terms and conditions to that certain Master Product Financing Agreement ("Master Agreement") dated September 25, 1996, between Buyer ---------------- and Seller. The terms of this Supplement are incorporated into the Master Agreement as if set forth in full, and the terms of this Supplement will, with respect to the Program identified below ("Program"), supersede and control over ------- any conflicting terms of the Master Agreement. Capitalized terms used herein shall have the same meanings given in the Master Agreement. PROGRAM DESIGNATION: Strategic Alliance Lease Program - ------------------- PROGRAM APPLICABLE TO: - --------------------- Equipment Model/Configuration: Model QDR4500C Acclaim Series (Model C) ["QDR4500C"] -------- Model QDR1000 Plus Series ["QDR1000"] ------- Contract Summary: Term: 60 months Non-refundable deposit: $5,000 for Model QDR4500C; $3,000 for Model QDR1000 Free initial scans (during trial period): 100 Fee per scan (in excess of free scans during trial period and for all scans after trial period): $50.00 Trial period: 6 months Cancellation by Obligor: At any time during trial period; no fee; deposit retained. Conversion options (exercisable by Obligor): (1) Purchase Equipment for not less than Investment Balance -18- [NOTE: IN CERTAIN INSTANCES, AN OBLIGOR MAY PURCHASE QDR1000 EQUIPMENT FOR LESS THAN THE INVESTMENT BALANCE. SELLER AGREES THAT IN CONNECTION WITH SUCH PURCHASES, IT WILL IMMEDIATELY PAY ------------------------ THE DIFFERENCE BETWEEN THE OBLIGOR'S PURCHASE PRICE AND THE ----------------------------------------------------------- INVESTMENT BALANCE TO BUYER.] --------------------------- (2) Convert to fixed monthly payment for term, with nominal purchase option ($1,750.00 minimum monthly rental amount for Model QDR4500C; $1,500.00 minimum monthly rental amount for Model QDR1000) (3) Convert to fixed monthly payment for term, with fair market value purchase option ($1,500.00 minimum monthly rental amount for Model QDR4500C; $1,250.00 minimum monthly rental amount for Model QDR1000) Cancellation by Seller: Permitted after trial period, but prior to conversion, if billable scans are less than 35 per one month period for Model QDR4500C or less than 30 per one month period for Model QDR1000, and Obligor does not make rental payment of the minimum monthly rental amount for such month. All specified minimums may be adjusted by mutual agreement of Buyer and Seller. FAIR MARKET VALUE PURCHASE PRICE FOR EQUIPMENT/CONTRACTS COVERED BY PROGRAM: - --------------------------------------------------------------------------- QDR4500C: [Language Deleted Due To Confidential Treatment Request.] per unit QDR1000: [Language Deleted Due To Confidential Treatment Request.] per unit ATTRIBUTED RENT FOR EQUIPMENT/CONTRACTS COVERED BY PROGRAM: - ---------------------------------------------------------- Model QDR4500C: $5,000.00 non-refundable deposit (paid at closing); $0.00 months 1-6; $1,500.00 months 7-12; $1,750.00 months 13-60. Model QDR1000: $3,000.00 non-refundable deposit (paid at closing); $0.00 months 1-6; $1,250.00 months 7-12; $1,500.00 months 13-60. AS-PLACED INVESTMENT SCHEDULE: - ----------------------------- Model QDR4500C Model QDR1000 -19- RESIDUAL INVESTMENT: - ------------------- Model QDR4500C [Language Deleted Due To Confidential Treatment Request.] per unit Model QDR1000 [Language Deleted Due To Confidential Treatment Request.] per unit ADDITIONAL/SUPERSEDING PROVISIONS APPLICABLE TO PROGRAM: - ------------------------------------------------------- 1. Additional Definitions. ---------------------- "EXCESS RENTALS" means, with respect to any Payment received by SBCC on account of a Fee Per Scan Contract, the portion of such Payment which exceeds the amount of unrecovered Attributed Rent for the Contract and the covered Equipment through the date of determination, plus the amount, if any, of unpaid taxes or other costs and expenses accrued or incurred by SBCC with respect to the Equipment or the Contract. "FEE PER SCAN CONTRACT" means any Contract purchased pursuant to this Supplement under which the Obligor has not exercised a conversion option consistent with the Contract Summary section of this Supplement. "NON-PERFORMING CONTRACT" means a Fee Per Scan Contract under which the average amount of Rent due over any three (3) month period occurring after the trial period is less than [Language Deleted Due To Confidential Treatment Request.] per month for Model QDR4500C or less than [Language Deleted Due To Confidential Treatment Request.] per month for Model QDR1000. "OFF-LEASE" has the meaning given in this Supplement. "REMARKET" or "REMARKETING" has the meaning given in this Supplement. "REMARKETING PROCEEDS" has the meaning given in this Supplement. 2. Additional Eligibility Provisions. The following additional --------------------------------- eligibility requirements apply with respect to the Contracts, Payments and Equipment subject to this Program. Contract Provisions. The Contract [IS IN THE FORM OF EXHIBIT ------------------- ______ HERETO, HAS NOT BEEN MODIFIED OR AMENDED FROM SUCH FORM, AND] unconditionally provides that: 1. The terms of the Contract conform to the terms specified in the Contract Summary section of this Supplement; -20- 2. All taxes, governmental charges, fines and fees will be paid by the Obligor; 3. The Obligor will maintain casualty and theft insurance with respect to the Equipment in an amount not less than the greater of the replacement cost of or Investment Balance of such Equipment, and such policies of insurance will name Seller and its assignees as loss payee. [CONSIDER ADDITIONAL ELIGIBILITY PROVISIONS FOR MAINTENANCE AND SERVICE TO BE PERFORMED UNDER CONTRACT] 3. Fee Per Scan Information, Excess Rentals. Seller agrees to provide ---------------------------------------- Buyer with meter counts and information upon which billings may be rendered for Fee Per Scan Contracts. Seller acknowledges that Buyer may rely upon such information in billing for and allocating Payments due under Fee Per Scan Contracts. Buyer may use whatever means as are available to it to obtain and verify such information if not so provided by Seller, and Seller will reimburse Buyer for all costs and expenses incurred in connection therewith. Excess Rentals received by Buyer will be remitted monthly to Seller, provided that Buyer is not in default under the Agreement and that there is not, as of the date for remittance, any unsatisfied obligation owed from Seller to Buyer, in which case(s) Seller may retain such Excess Rentals as security as provided under Section 2(d) of the Agreement. 4. Non-Performing and Terminated Contracts, Repositioning. If a Contract ------------------------------------------------------ becomes a Non-Performing Contract or the Contract is terminated prior to its initial scheduled term (but not terminated in connection with a prepayment in full or conversion to a Converted Contract) and upon Buyer's request or at Seller's option, with Buyer's consent (which will not be unreasonably withheld), Seller will "Reposition" the Equipment covered by ---------- the Contract by (i) recovering possession of the Equipment and (ii) attempting to place such Equipment with a different lessee, user or purchaser in the same manner as if the Seller were Remarketing the Equipment under paragraph 5 of this Supplement. Upon Seller's successful Repositioning of Equipment, any resulting lease or rental contract will constitute a replacement for the Contract originally relating to the Equipment and any payments under the new contract will be treated and applied as Payments with respect to the Equipment (any payments in excess of the applicable Attributed Rentals will, however, be applied first against any future Attributed Rentals for which there is no corresponding required payment under the replacement contract). Upon the successful Repositioning of any Equipment by sale, the proceeds of such sale will be applied in an inverse order of maturity against the unpaid Investment Balance for the Equipment. 5. Remarketing. The following provisions will apply with respect to ----------- Contracts and Equipment covered by this Supplement: (a) Appointment, Priority. Buyer hereby appoints Seller as its --------------------- agent, to Remarket Equipment covered by this Supplement for a term commencing with -21- the date of this Supplement and continuing until each item of Equipment subject to Remarketing is sold to the then Obligor or other end user, and the provisions of this Section will apply with respect to the Remarketing of Equipment during such term. The terms "Remarket" or -------- "Remarketing" as used herein will mean the re-lease, rental, lease and ----------- sale of Equipment as provided in this Section 3, on prices, terms and conditions acceptable to Buyer. Seller shall use its best efforts to Remarket Equipment. No priority is required to be given by Seller to Remarket Equipment owned by Buyer, but Seller shall not discriminate against Buyer in favor of any new or used equipment or upgrades owned, managed or remarketed by Seller. Seller will not replace any Equipment owned by Buyer with Equipment owned by Seller or any other third party that performs substantially the same functions as Buyer's Equipment (e.g. no "like for like" replacements). (b) Off-Lease Equipment, Duties. At such time as the Contract --------------------------- or other agreement covering any item of Equipment covered by this Supplement ceases to be subject to a Contract, renewal or extension of a Contract or a rental or lease agreement, the Equipment covered by such Contract or agreement will be deemed "Off-Lease" and Seller will diligently perform the following Remarketing services with respect to each such item of Equipment: (i) Take possession of Off-Lease Equipment as it becomes Off-Lease and exercise such of the lessor's remedies under the appropriate Contract as Buyer may request. (ii) Transport, store, refurbish, perform such service and repairs as necessary to place the Equipment in proper working order, and otherwise perform such duties as set forth in Section 3(d); (iii) Certify the Equipment to the Remarketing lessee or purchaser for inclusion under the Equipment manufacturer's standard maintenance policy; (iv) Seek new rental customers or purchasers for the Equipment (including, but not limited to, arranging for the transportation, storage, maintenance and installation of the Equipment, and making available to any Obligor such operating and other software, service, and maintenance, spare parts, and training as necessary). (c) Reporting. Seller will provide periodic market reports to --------- Buyer, which will be prepared to the best of Seller's knowledge and will show summaries of market information for goods comparable to any Equipment which were offered, represented, sold or brokered by Seller during the previous period, including average sale price information by model and the number of units held for disposition and number of units actually disposed of in such period. Seller also will provide to Buyer, for any month in which Seller Remarkets Equipment, a -22- monthly Remarketing report, which will cover in detail (i) a listing of Equipment which became Off-Lease Equipment and Equipment which was Remarketed during the prior month, and (ii) an inventory description showing as of the last day of the prior month, the number of and model(s) of all units of Off-Lease Equipment covered by this Supplement. (d) Removal, Refurbishing. Seller's refurbishment duties --------------------- hereunder shall include, but are not limited to, a duty to return the Equipment to an attractive appearance suitable for Remarketing, and a duty to cause such Equipment to perform in accordance with applicable product and certification specifications for new equipment of the same model. Seller shall update all Equipment subject to Remarketing to incorporate changes or new version releases of software and/or microcode which affects the Equipment's value, compatability, performance, ability to be upgraded, or ability to accept interchangeable parts. Seller shall also provide all engineering changes made to substantially all other equipment of the same model for which Buyer shall not pay greater charges than Seller's reasonable and customary charges for any such services and products for equipment similar to the Equipment and for customers similar to Obligors. Seller shall refurbish Off-Lease Equipment on a schedule sufficient to make items of refurbished Equipment available to satisfy orders for Equipment of the same type as the same are received by Buyer or Seller. Upon the re-lease of Off-Lease Equipment, Seller shall install, or cause to be installed, such Equipment at the Obligor's place of business. (e) Terms of Remarketing. Any proposed Remarketing of Equipment -------------------- will be with parties and upon terms (including but not limited to price or rental term) and conditions satisfactory to Buyer in its discretion. Prior to any proposed Remarketing, Seller will transmit to Buyer for approval: (i) The identity of those prospective lessees, users or purchasers who are considered reasonable prospects to lease or purchase Equipment, setting forth the name (and address if reasonably available) of each such party; (ii) A copy of each proposed lease, renewal, extension or contract for the sale of the Equipment, as the case may be, together with a copy of any other agreement that may exist or be under consideration between Seller and each proposed lessee, user or purchaser, as the case may be, relating to the Equipment or the leasing or sale thereof; and (iii) Sufficient credit information (as may be reasonably requested by Buyer and which can be reasonably provided by Seller) with respect to each proposed lessee, user or purchaser to enable Buyer to make an informed judgment as to the prospective lessee's, user's or purchaser's -23- creditworthiness, it being understood that any such information will be provided without any warranty as to the accuracy of such information. Buyer will notify Seller in writing prior to the seventh (7th) business day after Buyer receives the information described above of its approval of any or all of the transaction proposed by Seller. Failure to so notify Seller within such period of its approval of any proposed transaction will constitute disapproval of any transaction will be in Buyer's sole discretion. (f) Documentation. Upon the Remarketing of any Equipment, Seller ------------- will deliver promptly to Buyer, in the case of a cash sale, the executed contract for the sale of the Equipment and all other documents effecting or evidencing such sale, and the collected sale proceeds immediately following such date of sale, and in the case of a re-lease or an installment sale: (i) Each original executed lease, installment sale agreement or document of extension or renewal with respect to the Equipment; (ii) All other documents, including executed financing statements in appropriate form for filing and releases of any liens, necessary or appropriate to evidence and record Buyer's title and interest in the Equipment, the Contract, all monies due under the Contract, and all proceeds of all of the foregoing; (iii) An executed assignment to Buyer of each lease or installment sale agreement (iv) An installation certificate to the effect that such Equipment has been installed, is ready for use and has been unqualifiedly accepted by the lessee purchaser or user; (v) A letter in the form attached hereto to the Agreement as Exhibit A to each purchaser or lessee signed by an authorized representative of Seller notifying such purchaser or lessee of the assignment to Buyer of Seller's rights under the lease or installment sales agreement. (g) Rates. In establishing rental or sales rates for the ----- Remarketing of any item of Equipment, Seller shall apply rates that, in its best commercial judgment, are the most favorable rates obtainable for equipment of the same type. Seller shall not offer any credits or discounts to lessees or purchasers of Off-Lease Equipment. (h) Remarketing Proceeds. All proceeds of any Remarketing, net -------------------- of sales, use, property, excise, ad valorem, or similar taxes ("Remarketing Proceeds") ---------------------- -24- shall be Buyer's property and shall, if received by Seller, be immediately remitted to Buyer by Seller, in the form in which they were received. However, Seller will be entitled to receive such of its documented out-of-pocket costs as have been approved by Buyer and incurred in connection with the Remarketing of such Equipment, but in no event will the aggregate of such amounts (exclusive of Equipment transportation costs) recoverable by Seller with respect to any item of Equipment exceed ________ percent (_____%) of the Remarketing Proceeds for such Equipment. (i) Communications With Obligors. Buyer may communicate directly ---------------------------- with an Obligor, lessee or user of Equipment if Seller fails to perform any of its Remarketing duties with respect to the Equipment. (j) Brokers; Termination of Remarketing. With respect to any ----------------------------------- Off-Lease Equipment and with prior notice to Seller, Buyer may arrange sales to brokers or dealers. If Buyer arranges a sale of such Equipment and notifies Seller before Seller Remarkets such Equipment to an end-user, Buyer will be free to conclude such sale. Further, if any item of Equipment subject to Remarketing due to the occurrence of an Obligor Default is Off-Lease for a period of ninety (90) days or more, or if any item of Equipment subject to Remarketing due to any other reason is Off-Lease for a period of sixty (60) days or more, Buyer may, upon ten (10) days prior written notice, notify Seller of Buyer's intention to Remarket such Equipment. If Seller fails to Remarket the item within such ten (10) days, Buyer or its designee may remarket such item of Equipment on its own behalf. In the event Buyer arranges a sale of Equipment to a broker or dealer or undertakes to remarket any Equipment, Seller shall only be entitled to receive payment of its permitted costs and expenses as provided under Section ______3(h). Seller will not be entitled to any other compensation in connection with the Remarketing of such Equipment and all Remarketing Proceeds will be for the Buyer's account. Notwithstanding any sale to a broker or dealer or any undertaking to remarket by Buyer, Seller agrees that it will make available to Buyer and to any lessee, purchaser or user of Equipment, at prevailing commercial rates, all services, parts, attachments, maintenance and upgrades as it generally makes available to owners or users of similar equipment. (k) Overseas Transactions. If conversion of the Equipment to a --------------------- different model or modification of the Equipment to allow its use in any country other than the United States is required in connection with any remarketing, Seller will undertake such conversion, with Buyer's prior written approval, but the cost thereof will be paid by Buyer. Buyer may require that some or all of such Off-Lease Equipment be transported by Seller to destinations outside the United States. In the event Buyer requests that Equipment be transported outside the United States, then Buyer will be responsible for the costs of such transportation. -25- 4. Application of Remarketing Proceeds; Revenue Sharing. All REMARKETING ---------------------------------------------------- PROCEEDS DERIVED FROM THE REMARKETING OF EQUIPMENT COVERED BY THIS SUPPLEMENT, net of any costs payable to Seller under Section 5(h), will be applied in an inverse order of maturity against the unpaid INVESTMENT BALANCE for the Equipment. Provided that Seller continues to Remarket Equipment which is subject to this Supplement; after the Investment Balance for such Equipment has been reduced to zero, all Remarketing Proceeds, and other proceeds received by Buyer from or on account of such Equipment and/or related Contracts shall be payable as follows and in the following order: (a) To the payment of all unpaid sums due and payable to Buyer from Seller; then (b) one-half to Buyer and one-half to Seller. BINDING EFFECT; RATIFICATION. This Supplement shall be binding upon and inure - ---------------------------- to the benefit of Buyer and Seller and their respective permitted successors and assigns. Buyer and Seller each acknowledge that the Master Agreement is in full force and effect and ratify the same. Except as specifically provided to the contrary under this Supplement, the Master Agreement shall apply to and govern all purchases made under this Supplement. HOLOGIC INC. SANWA BUSINESS CREDIT CORPORATION ("Seller") ("Buyer") By: By: --------------------------- ------------------------------------ Title: Title: ------------------------ --------------------------------- -26- EX-10.35 3 DISTRIBUTION AGREEMENT BETWEEN CO AND PSS FOR DXA Exhibit 10.36 HOLOGIC, INC. UNITED STATES DISTRIBUTION AGREEMENT (EXCLUSIVE - SAHARA PRODUCT LINE/ UNITED STATES) This Agreement is made as of October 1, 1997 (the "Effective Date") by and between: HOLOGIC, INC., a corporation organized under the laws of the State of Delaware, which has a usual place of business at 590 Lincoln Street, Waltham, Massachusetts 02154, United States of America, its subsidiaries and affiliates (hereinafter "Hologic") and PHYSICIAN SALES AND SERVICE, INC., a corporation which has a usual place of business at 4345 Southpoint Boulevard, Jacksonville, Florida 32216, its subsidiaries and affiliates (not including Diagnostic Imaging, Inc., or its subsidiaries) (hereinafter referred to as "Distributor"). 1. Facts. ----- Hologic designed and created the SAHARA Product as hereinafter defined, and is the owner of all trade secret, trademark, patent, and other intellectual property rights associated with the SAHARA Product. Distributor desires to obtain certain rights for PSS to act as distributor for its SAHARA Product line for resale to certain Target Customers in the Territory for the Term of this Agreement, as these terms are hereinafter defined. 2. Definitions. (a) "SAHARA Product," as used in this Agreement, means the items described in Exhibit A, which is attached hereto and incorporated herein, together with Successor Products as defined in Section 5(a) hereto. (b) "Target Customers," as used in this Agreement, means the persons and entities to whom the Distributor is authorized to sell in the Territory, not including Reserved Customers, as said Target Customers are described in Exhibit C which is attached hereto and incorporated herein.. (c) "Reserved Customers," as used in this Agreement, means the persons and entities to whom the Distributor is NOT authorized to sell, and which Reserved Customer are reserved for Hologic or third party sales, as said Reserved Customers are described in Exhibit C which is attached hereto and incorporated herein. (d) "Territory," as used in this Agreement means the respective geographic areas described in Exhibit C which is attached hereto and incorporated herein. 3. Exclusive Distribution Rights. ----------------------------- (a) Subject to the terms of this Agreement, Hologic hereby grants to Distributor an EXCLUSIVE license to distribute its SAHARA Product solely to Target Customers as described in Exhibit C in the Territory provided that Hologic reserves the right to market, sell and license SAHARA Product for placement at Target Customers in the Territory (including without limitation through its affiliates, third-party pharmaceutical manufacturers, and with the assistance of sales agents), in accord with the terms set out in Exhibit C hereto. Hologic also reserves the right to market, sell, and license SAHARA Product directly or indirectly to Reserved Customers inside (and outside) of the Territory. Distributor shall not market, sell, license or accept orders from Reserved Customers, or for installation outside of the Territory without the advance written consent of Hologic. Distributor's rights pursuant to this Section 3(a) may be sublicensed to subdistributors in the Territory only with Hologic's prior written consent, which consent may be withheld for any reason. (b) Subject to the terms of this Agreement, Hologic hereby grants Distributor (but not their subdistributors) a non-exclusive, non-transferable license to represent themselves as an "Authorized Distributor" of the SAHARA Product and to use Hologic trademarks identified in Exhibit D (attached hereto and incorporated herein) in connection therewith. 4. Obligations of Distributor. -------------------------- Distributor shall: (a) Establish for each year period of the Term, commencing as of the Effective Date, a mutually agreed Sales Target, together with a Product Plan with quarterly targets and milestones, noting significant actions necessary to accomplish the said Sales Target, comply with the Product Plan, and use its best efforts to meet said Sales Target. (b) Use its best efforts to market and sell, at least as aggressively as it does similar products, the SAHARA Product to Target Customers in the Territory. (c) During the Term of this Agreement, not represent or offer for sale, or enter into any negotiation or discussion with any third party to represent or offer for sale, any product or device directly competitive with the SAHARA Product, including Dual X-Ray Absorptiometry ("DXA"), peripheral DXA, bone ultrasound, Single X-Ray Absorptiometry ("SXA"), Radiological Absorptiometry ("RA"), or Quantitative Computed Tomography ("QCT") bone devices (hereafter "Competitive Product"). (d) Meet with and provide Hologic with a written business report on a quarterly basis, describing its sales and marketing activities for the preceding quarter and providing a forecast and summary of marketing and promotional activities scheduled for the next quarter. (e) Not incur any liability on behalf of Hologic, nor in any way pledge or purport to pledge Hologic's credit; nor describe or hold itself out as an employee of Hologic; nor describe -2- itself other than as a distributor of the SAHARA Product; nor make any claims, warranties or representations with respect to the SAHARA Product except such which have been previously approved in writing by Hologic; and (f) Not distribute advertising or other printed matter created by Distributor referring to the SAHARA Product without the specific prior approval in writing of Hologic with regard to the form, manner, extent and wording of each such item of advertising and printed matter. Advertising copy, brochures, promotional materials and manuals provided to Distributor by Hologic shall be deemed to be so approved by Hologic, unless Hologic otherwise informs Distributor in writing. All advertising by Distributor shall be without recourse to Hologic for any expense incurred unless such expense shall have been specifically authorized in writing by Hologic. 5. Obligations and Rights of Hologic. --------------------------------- (a) Hologic will continue to offer for sale the SAHARA Product, or a Successor Product, for the term of this Agreement. Hologic reserves the right, in its absolute and sole discretion, at any time and from time to time, to modify, alter or improve the SAHARA Product, or to discontinue the SAHARA Product (provided that it offers for sale a Successor Product), always providing Distributor with reasonable notice thereof, using its best commercial efforts to provide Distributor with a minimum of 90 days notice. The term "Successor Product," as used in this Agreement shall mean all products sold by Hologic in the Territory to Target Customers utilizing ultrasound technology (but not x-ray or other technologies) to analyze bone structure for the purpose of assisting in the diagnosis of bone disease or other bone conditions in humans, including replacements for and enhancements to the SAHARA Products listed on Exhibit A hereto. (b) Hologic shall supply Distributor with (i) reasonable quantities of brochures, other promotional materials, and manuals for the SAHARA Product; and (ii) the artwork and mechanicals required to support Distributor's production of its brochures and other promotional materials. Such materials shall be in English and shall be provided free of charge. (c) Hologic will provide such other marketing incentive programs as Hologic may, in its sole discretion, determine. (d) Prior to any Hologic announcement for sale in the Territory of any new product line directed primarily at Target Customers in the Territory (most particularly any biochemical marker product) (and prior to entering into distribution agreements relating thereto) Hologic will provide Distributor with information as to its general marketing and sales goals for said new product line, in order that Distributor may provide to Hologic a proposal to distribute said product line under the terms of this Agreement or such other terms as may be appropriate. -3- 6. Prices, Payment, and Shipping. ----------------------------- (a) Hologic's current Distributor Prices (F.O.B. customer (two day delivery - air or ground shipment at Hologic's option)) are as set forth in Exhibit A-1 hereto. Expenses associated with Hologic compliance with any request for any other method of packaging or shipping will be Distributor's sole responsibility. At any time after one (1) year following the Effective Date of this Agreement, Hologic may change its Distributor Prices at its sole discretion upon ninety (90) days advance written notice. SAHARA Product ordered before, but shipped after the effective date of any price change shall be charged for at the lower of the price before and after said change. (b) RESERVED - SUBSECTION NOT USED. (c) Payment for all SAHARA Product ordered (and shipping services provided) shall be due as specified on Exhibit A hereto. (d) Distributor will pay or reimburse Hologic for any taxes, however designated, arising from or based upon Hologic's sale of the SAHARA Product to Distributor, this Agreement, the licenses granted pursuant to this Agreement, or Distributor's use or sale of the SAHARA Product ("Taxes"), but not including any income or corporate excise tax assessed against, or levied on, Hologic. If applicable, Distributor shall furnish Hologic with whatever certificates or other instruments may be necessary or appropriate to evidence that Hologic's sales of the SAHARA Product to Distributor are not subject to Taxes under applicable law. (e) Distributor shall order SAHARA Product by submitting a written purchase order, which order shall be valid solely for the purpose of identifying SAHARA Product ordered, prices, and requested delivery date(s); no other terms on any such purchase order shall be valid or a part of the agreement between Hologic and Distributor. Distributor shall provide at the same time such documents executed by the customer as Hologic deems necessary to evidence the customer's acceptance of Hologic's software and warranty terms, (Hologic's current form to be attached as Exhibit E hereto). Hologic will confirm by Sales Order Acknowledgment, the delivery dates for ordered SAHARA Product, and shall use reasonable efforts to meet Distributor's requested delivery dates, but shall not have any liability for failure to do so. Orders shall contain no variations from Hologic's standard product offering or description without Hologic's advance written consent. While Hologic shall have the right in its sole discretion to refuse to accept any order, before doing so it shall consult with Distributor as to its reasons for doing so; and in no case shall any Hologic refusal to accept any such order be used in conjunction with Sales Targets outlined in Attachment B as grounds for termination. 7. Independent Contractor - Expenses. (a) Distributor is engaged in business as an independent distributor, and the parties acknowledge and agree that Distributor, in the performance of its duties and obligations pursuant to this Agreement, shall be acting as an independent contractor and not as an employee, agent or sales representative of Hologic. -4- (b) Distributor shall bear all expenses incurred by it in acting hereunder, including (without limiting the generality of the foregoing) all office expenses, traveling and entertainment expenses, postage and salaries of its salesmen and its other personnel, as well as all advertising and promotional expenses except as provided in Section 5 hereof. 8. Term. ---- (a) This Agreement shall commence on the Effective Date hereof, shall extend for a period of two (2) years following the date of first approval by the United States FDA for sale of the Product in the United States ("FDA Approval") (the "Term"), and shall expire on the second anniversary date of FDA Approval. The parties may extend this Agreement by mutual consent in writing at any time prior to its expiration. (b)(i) Either party may terminate this Agreement for cause upon the material breach of any provision of this Agreement by the other party, effective ninety (90) days following receipt of written notice by the other party and opportunity to cure. Beginning six months after FDA Approval, if Distributor does not meet its Minimum Sales Target as specified in Exhibit B for any quarter period, the parties shall consult as to the reasons therefor, and for thirty (30) days following the end of such quarter, Hologic may terminate this Agreement for cause on sixty (60) days advance written notice. (b)(ii) Either party may terminate this Agreement without cause and for no reason, effective one-hundred eighty (180) days following receipt of written notice by the receiving party. (c) Notwithstanding the foregoing, this Agreement shall terminate (i) without notice, effective immediately, in the event of the bankruptcy or insolvency of Distributor, or in the event Distributor enters into a composition with its creditors, or (ii) upon notice, effective immediately, if Distributor undergoes a Change In Its SAHARA Management or (iii) upon notice, effective immediately, if Distributor becomes Controlled By any developer, manufacturer, seller or marketer of a Competitive Product. For purpose of this provision, a "Change In Its SAHARA Management" shall be deemed to have occurred if Distributor makes a change in its senior officers with responsibility for sales and marketing of the SAHARA Product, which in the opinion of Hologic after consultation with Distributor will reduce or impair said sales and marketing of the SAHARA Product (c); and the term "Controlled By" shall be deemed to mean the acquisition, directly or indirectly, of twenty percent (20%) or more of any class of voting securities of the subject company, or the right to elect or appoint one or more members of the board or directors or management thereof, or the capability to exert a controlling influence on any management policy. (d)(i) Immediately upon expiration or termination of this Agreement by either party, Distributor will discontinue marketing the SAHARA Product, and Hologic will repurchase all of Distributor's remaining inventory of the SAHARA Product at the invoice price. Distributor will prepare and provide to Hologic within fifteen (15) days of any such expiration or termination a list of all then-active prospective customers and the type and amount of SAHARA Product -5- expected to be sold to said customers during the six month period following the effective date of expiration or termination of this Agreement. For said six month period, so long as Distributor is in compliance with the terms of this Section, Hologic will honor any orders placed by Distributor for drop shipment during said period to said customers, at prices no less favorable to Distributor than Hologic's prices to other distributors for similar quantities of SAHARA Product under similar terms and conditions, and subject to the provisions of this Agreement. (d)(ii) If Distributor terminates this Agreement pursuant to Section 8(b)(ii) without cause, or if Hologic terminates this Agreement pursuant to Section 8(b)(i) for cause, Distributor shall not represent, attempt to sell, or solicit orders for, any Competitive Product for one hundred eighty (180) days following said termination of this Agreement. (e) Upon expiration or termination of this Agreement, Distributor shall promptly return to Hologic all technical information and literature relating to SAHARA Products, including price lists, samples, documents and papers that may have been supplied to Distributor by Hologic. 9. Customer Support and Warranties. ------------------------------- (a) Except as provided In Exhibit F hereto, Hologic shall be solely responsible for customer support and warranty service for all SAHARA Product purchased pursuant to this Agreement in accord with the terms set forth on Exhibit E hereto. Unless otherwise agreed in writing in advance, Hologic shall be solely responsible for all claims, suits, or other legal proceedings founded upon on any allegation of breach of customer support, warranty or product liability relating to SAHARA Product purchased pursuant to this Agreement in, except insofar as any such claim may be founded on Distributor's responsibilities pursuant to this Agreement (including Exhibit F), or on Distributor's breach of this Agreement, willful act or negligence ("Product Claim"). Provided that Distributor gives Hologic prompt written notice of any such Product Claim, and that Distributor cooperates fully with Hologic's defense thereof and does not enter into any settlement or other voluntary resolution of such Product Claim, Hologic will indemnify and hold Distributor harmless from and against any loss, cost, damage, or other expenses incurred by Distributor as a result of such Product Claim. This indemnification provision shall be null and void and Hologic shall have no liability to the extent that any such Product Claim is based on any use of the SAHARA Product in accord with Distributor directions or claims not approved in writing by Hologic, or if the SAHARA Product has been modified or tampered with in any way by or with Distributor's approval without the express written consent of Hologic, or if Distributor, or any of its subsidiaries or affiliates, have any interest in said Product Claim. Hologic shall cause Distributor to be named as an additional named insured on its product liability and excess liability insurance policies relating to its SAHARA and Successor Products. (b) Except as expressly set forth herein, or in Hologic's warranty accompanying the SAHARA Products as packaged and shipped by Hologic (and accordingly subject to all conditions and limitations set forth therein), HOLOGIC MAKES, AND DISTRIBUTOR AND ITS CUSTOMERS RECEIVE, NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING -6- WITHOUT LIMITATION NO WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR AGAINST INFRINGEMENT. 10. Software License and Intellectual Property Rights ------------------------------------------------- (a) Under this Agreement, computer software ("Software") may be delivered in printed or machine-readable form. Title to the Software, including all patents, copyrights and property rights applicable thereto, and all foreign language versions thereof (whether prepared by Distributor or Hologic or a third party), shall at all times remain with Hologic. Software is valuable to Hologic and shall be treated as confidential information subject to the Confidential Information provisions of this Agreement. Distributor shall maintain all copyright, proprietary and other notices on the Software, and shall not decompile, disassemble or reverse engineer the Software, and shall not make it available to any party except employees using the Software as part of their duties. (b) Subject to the provisions of Article 10(a) hereof, Distributor is granted a non-exclusive royalty-free license to use Software for the Term of this Agreement solely on scanning equipment purchased under this Agreement and on which the Software is first installed, for performing and analyzing scans acquired on said equipment, and for no other purpose or business. No license is provided to use Software for multi-site quality control or data review purposes. (c) Subject to the provisions of Article 10(a) hereof, Distributor is granted a non-exclusive royalty-free license for the Term of this Agreement to transmit Software with equipment purchased hereunder to its customers solely for operation of scanning equipment purchased from Distributor and on which the Software is first installed, provided that such customer first agrees in writing to be bound by terms and conditions set out in Exhibit E hereto. Hologic shall have the right to audit Distributor's compliance with this subsection upon reasonable notice. Distributor shall promptly notify Hologic of any violation of any license or sublicense or suspected misuse of Software in the Territory, and take all reasonable steps to cure said violation or misuse. Except as expressly provided by this section, Distributor has no right to use, sell, assign, transfer, copy or sublicense Software. 11. Infringement. In the event that any claim, suit, or other legal proceeding is threatened or commenced against Distributor that is founded, in whole or in part, on an allegation that the SAHARA Product infringes any trade secret, trademark, patent or other intellectual property rights belonging to a third party, Distributor will give Hologic prompt written notice of such legal proceeding and Hologic may elect to assume sole control of the defense to or settlement of such dispute. Distributor shall cooperate fully with Hologic in any defense, settlement or compromise made by Hologic. Distributor shall not enter into any settlement agreement or other voluntary resolution of any such claim, suit, or other legal proceeding without obtaining Hologic's prior written consent thereto. If Distributor has complied with the procedures set forth in this Section -7- 9(c), Hologic will indemnify and hold Distributor harmless from and against any loss, cost, damage, or other expenses incurred by Distributor as a result of such claim, suit or legal proceeding. If a final injunction is obtained against Distributor's use of the SAHARA Product, or if in the opinion of Hologic the SAHARA Product is likely to become the subject of a successful claim of infringement, Hologic may, at its option and expense, (i) procure for Distributor the right to continue distributing and/or using the SAHARA Product, (ii) replace or modify the SAHARA Product so that it becomes non-infringing, or (iii) if neither (i) or (ii) are reasonably available, accept return of SAHARA Product held by Distributor and grant a credit therefor as depreciated, and terminate this Agreement without further obligation or liability. This indemnification provision shall be null and void and Hologic shall have no liability to the extent that any claim is based on any use by or expressly approved by Distributor of the SAHARA Product in combination with any item not supplied or approved for use by Hologic, or if the SAHARA Product has been modified or tampered with in any way by or with Distributor's approval without the express written consent of Hologic, or if Distributor, any of its subsidiaries or affiliates, or customer has any interest in said claim, suit or legal proceeding. or any license to any right so asserted. 12. LIMITATION OF LIABILITY ----------------------- EXCEPT WITH RESPECT TO CLAIMS PURSUANT TO SECTIONS 4(C), 9, 10, 11, 14, 16 17(c) OR 17(d) HEREOF, NEITHER PARTY BE LIABLE FOR ANY LOSS OF DATA, PROFITS OR USE OF THE SAHARA PRODUCTS, OR FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR THE USE OR PERFORMANCE OF THE SAHARA PRODUCT. THIS PROVISION SHALL NOT APPLY TO DISTRIBUTOR CLAIMS AGAINST HOLOGIC FOR DAMAGES INCURRED AND CLAIMED BY DISTRIBUTOR'S CUSTOMERS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR THE USE OR PERFORMANCE OF THE SAHARA PRODUCT. 13. Non-assignment. -------------- This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that any assignment or transfer of this Agreement or any of the rights or obligations hereunder by Distributor without the written consent of Hologic shall be void and of no effect. 14. Confidentiality Provisions. -------------------------- (a) Each party (Receiving Party) agrees that it and its employees, agents and sub-Distributors shall treat and maintain as the disclosing party's (Disclosing Party's) confidential property, and not use or disclose to others during or for a period of three (3) years from the date this Agreement expires or is terminated, any business, financial or technical information, or other information of a confidential or proprietary nature, of or concerning the Disclosing Party, -8- including information regarding the Disclosing Party's plans, programs, plants, processes, products, costs, equipment, operations or customers, (the "Confidential Information") which may come within the knowledge of the Receiving Party or its employees, agents or sub-Distributors in connection with the services performed hereunder, unless in each instance the Receiving Party secures the prior written consent of the Disclosing Party. The terms of this Agreement are agreed to comprise such Confidential Information. (b) Without limiting the foregoing, each party agrees that all drawings, specifications, calculations, data, customer lists, memoranda, notes, other material, that contains Confidential Information (collectively, the "Confidential Material") which are made available to a Receiving Party shall not be used except in working for the Disclosing Party and that upon the termination of this Agreement, or at any time upon request, the Receiving Party shall return to the Disclosing Party (or, at the Disclosing Party's election, destroy) all such Confidential Material. (c) The obligations set forth in this Section shall not preclude a Receiving Party from using or disclosing in any manner information which is, at the time of use or disclosure, public knowledge other than by a breach of duty by said party, or is disclosed pursuant to any requirement of law or regulation, or an order of a court or governmental agency, provided that the Receiving Party first notifies Disclosing Party and affords it an opportunity to obtain legal protection for the information to be so disclosed, and/or to oppose such order. 15. Notices. ------- Any notice required or permitted to be given under this Agreement shall be in writing and shall be sufficiently given when delivered in person or deposited in the United States mail (registered or certified) postage prepaid, addressed as follows: If to Hologic, addressed to: HOLOGIC, Inc. 590 Lincoln Street Waltham, MA 02154 (USA) Attention: Mark A Duerst, Vice-President - Sales & Marketing Copy To: Law Department If to Distributor, addressed to: Physician Sales and Service 4345 Southpoint Boulevard Jacksonville, Florida 32216 Attention: Douglas Harper, Senior Vice President -9- or to such other addresses as may be specified from time to time in a written notice given by such party. Both parties agree to acknowledge receipt of any notice delivered in person. 16. Trademarks and Trade Names. -------------------------- (a) Distributor acknowledges that Hologic is the sole owner of the trademarks and trade names which designate and identify the SAHARA Product and business (the "Marks"). Hologic's current Marks associated with the SAHARA Product are listed in Exhibit D hereto. (b) Distributor agrees that it may only use those Marks which identify the Product it is authorized to sell and then only to further the promotion and sale of the SAHARA Product such Marks identify. Distributor may only use such Marks in their standard form and style as they appear upon the SAHARA Product or as instructed in writing by Hologic. No other letter(s), word(s), design(s), symbol(s), or other matter of any kind shall be superimposed upon, associated with or shown in such proximity to the Marks so as to tend to alter or dilute them. (c) In all advertisements, sales and promotional literature or other printed matter in which any of such Marks appear, Distributor must identify itself by full name and address and state its relationship to Hologic. Every such Mark used or displayed by Distributor must be identified as a Mark owned by Hologic, in a form and manner approved by Hologic. (d) On its letterheads, business cards, invoices, statements, etc., Distributor may identify itself as a distributor of the applicable unit of Hologic. (e) Distributor agrees that it will never use the Marks or any trademark or trade name of Hologic or its subsidiaries or affiliates, or any simulation of such marks or names as a part of Distributor's corporate or other trading name or designation of any kind. (f) Upon expiration or in the event of any termination of this Agreement, Distributor shall promptly discontinue every use of the Marks or any other confusingly similar word or symbol and will also promptly discontinue use of any language stating or suggesting that Distributor is a distributor of Hologic. 17. Miscellaneous. ------------- (a) Section Headings as to the contents of particular paragraphs are for convenience only and are in no way to be construed as part of this Agreement, or as a limitation of the scope of the particular paragraph to which they refer. (b) Force Majeure. Neither party shall be deemed to be in default pursuant to this Agreement so long as its failure to perform any of its obligations hereunder is occasioned solely by fire, labor disturbance, acts of civil or military authorities, acts of God, or any similar cause beyond such party's control. -10- (c) USA Export Controls. Notwithstanding anything contained in this Agreement to the contrary, Distributor agrees not to export, re-export, or knowingly permit the re-exportation of the SAHARA Product to any country now or hereafter included in the US Department of Commerce's list of countries to which exportation of the SAHARA Product is or may be restricted or prohibited, unless that exportation or re-exportation is specifically authorized by a special license issued by the US Office of Export Administration. This provision shall not be interpreted to expand the definition of "Territory" set forth in Section 2 (d) of this Agreement in any way. (d) Compliance with Laws. Each Party shall comply with all laws, rules, regulations, governmental requirements and industry standards existing in the Territory from time to time with respect to the SAHARA Product and its activities, as well as all applicable laws of the United States, including the Foreign Corrupt Practices Act and regulations promulgated thereunder. (e) Choice of Law. This Agreement shall, for all purposes, be construed and enforced in accordance with the internal laws of the Commonwealth of Massachusetts, not including its choice of laws provisions or the United Nation Convention on the International Sale of Goods. Any controversy or claim arising out of or relating to this Agreement, or breach thereof, which the parties fail to resolve by agreement, shall be settled by binding arbitration in the Commonwealth of Massachusetts in accordance with the commercial arbitration rules of the American Arbitration Association, applying the laws of the Commonwealth of Massachusetts as provided in this paragraph. Judgment upon any arbitration award so rendered may be entered in any court having jurisdiction, or application may be made to any such court for confirmation of such award or a judicial acceptance of such award, and for an order of enforcement or other legal remedy, as the case may be. If any portion of this Agreement shall be found to be unenforceable, such provision shall be construed by limiting and reducing its effect so as to be enforceable to the full extent compatible with respect to applicable law. The unenforceability of any one clause hereof shall in no way impair the enforceability of any other clause hereof. (f) Waiver and Severability. Any waiver by either party of any provision of this Agreement shall not be construed or deemed to be a waiver of any other provision of this Agreement nor a waiver of a subsequent breach of the same provision. If any portion of this Agreement shall be found to be unenforceable, such provision shall be construed by limiting and reducing its effect so as to be enforceable to the full extent compatible with respect to applicable law. The unenforceability of any one clause hereof shall in no way impair the enforceability of any other clause hereof. (g) Entire Agreement. This Agreement contains the entire Agreement of the parties, and supersedes all prior agreements, understandings, representations, conditions, warranties, and covenants, whether oral or written, between Hologic and Distributor. Any provision of any Distributor purchase documentation which is inconsistent with this Agreement shall be of no force or effect unless specifically agree to by Hologic as follows. This Agreement may not be changed or amended unless in a writing specifically referencing this Agreement, purporting to do so, and signed by both parties. -11- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written by their respective authorized officials. PHYSICIAN SALES AND SERVICE, INC. HOLOGIC, INC. By: /s/ Douglas J. Harper By: /s/ Steve L. Nakashige -------------------------- ----------------------------------- Printed Name: Douglas J. Harper Printed Name: Steve L. Nakashige -------------------- ------------------------ Title: Senior Vice President Title: President & COO --------------------- --------------- -12- EXHIBIT A SAHARA PRODUCT, DISTRIBUTOR PRICING, ------------------------------------ AND PAYMENT TERMS -----------------
SAHARA PRODUCT DESCRIPTION DISTRIBUTOR PRICING - ------------------------------------------------------------------------------------------------ Hologic Bone Analyzer Products, utilizing ultrasound technology but not x-ray technology, currently consisting of: SAHARA ultrasonic bone densitometers SEE PRICE LIST ATTACHED AS EXHIBIT A-1
Notes - ----- 1. F.O.B. customer prices include a constructed shipping charge generally reflecting average costs associated with shipment of the products in question to customer sites in the 48 contiguous United States. F.O.B. customer prices for Alaska and Hawaii are available upon request. For F.O.B. Factory purchases, shipping charges will be prepaid and added to invoice and are due upon installation. 2. Delivery: Normally approximately 60 days following receipt of order. Hologic will use reasonable commercial efforts to expedite Distributor orders which request more rapid delivery. 3. Warranty: Customer warranty is twelve (12) months from date of installation. Warranty includes computer and peripheral equipment supplied with system. 4. Customer Installed. SAHARA Product is to be installed and set up by the customer. Hologic provides written training materials and a videotape. 5. SAHARA Product sold in the U.S. are not authorized for re-export. Warranty and service will be provided in the United States only. PAYMENT TERMS - ------------- Payment in full (for all product and any shipping services, etc.) due 30 days following delivery. -13- Attachment A-1 SAHARA Prices: - --------------
List Price Dealer Price -------------- ------------------- FOB Customer Sahara Clinical: [Language [Language Deleted Deleted Due Due To To Confidential Confidential Treatment Request.] Treatment Request.] Sahara Research with workstation/printer: [Language [Language Deleted Deleted Due Due To To Confidential Confidential Treatment Request.] Treatment Request.] Sahara Research Software: [Language [Language Deleted Deleted Due Due To To Confidential Confidential Treatment Request.] Treatment Request.]
NOTES: - ------ Hologic shall also use its best commercial efforts to arrange for Distributor to represent Hologic's SAHARA product line for lease pursuant to Hologic's then-current Fee Per Scan (FPS) lease program, with a commission to be agreed from time to time. F.O.B. Customer Prices are quoted on the basis of two day delivery - (using air or ground shipment at Hologic's option). Incremental expenses associated with Hologic compliance with any request for any other method of packaging or shipping will be Distributor's sole responsibility. -14- EXHIBIT B SALES TARGET AND SALES PLAN --------------------------- SALES TARGET ------------ For the first two quarters following FDA Approval, the parties shall work together to maximize sales of the SAHARA Product, but there shall be no Sales Target or binding Minimum Sales Target. Beginning with Targets for the third quarter following FDA Approval, unless otherwise mutually agreed, Distributor's initial Sales Target (non-binding) shall be [Language Deleted Due To Confidential Treatment Request.] with a Minimum Sales Target of [Language Deleted Due To Confidential Treatment Request.], provided that the parties shall consult as part of each business review described in Section 4(d) of the Agreement, with respect to the Sales Targets and Minimum Sale Targets for upcoming quarters and endeavor to agree as to any adjustments the above-stated initial Targets to reflect market conditions. Distributor's Sales Target (non- binding) and Minimum Sales Target for the second year following FDA Approval may also be adjusted in this way from the above-stated initial Targets as mutually agreed. SALES PLAN ---------- (a) Distributor to assign a team to work with Hologic marketing in support of Sahara introduction. Distributor to provide a training schedule sufficient to ensure complete training of all PSS staff on Sahara prior to launch. Distributor to coordinate special [Language Deleted Due To Confidential Treatment Request.] designed to sell [Language Deleted Due To Confidential Treatment Request.] per branch to the local luminary sites and opinion leaders. Distributor and Hologic shall continue to consult and agree upon, and implement an optimal training program for Distributor's sales staff and subdistributors, which program shall include in-person training by Hologic personnel within an agreed time following commencement of this Agreement, and follow-up training during each year thereafter (b) Distributor will inform and assign all of its sales personnel and sub- distributors in the Territory to market and sell the SAHARA Product, will provide for appropriate training, and will use its usual marketing efforts to promote the SAHARA Product, including calling on general prospects, and follow- up calls to interested prospects, and participation in significant trade shows aimed at Target Customers in the Territory. (c) For the duration of this Agreement, Distributor shall designate a full-time SAHARA Product Manager whose assignment will be to oversee distributor's relationship with Hologic under this Agreement, to manage distributor's marketing program for SAHARA Product in the Territory, to serve as the primary contact with Hologic, and to be responsible for compliance with section 4(d) of this Agreement. (d) Distributor hereby agrees to purchase [Language Deleted Due To Confidential Treatment Request.] Sahara Clinical systems for delivery on or before the date of FDA Approval -15- of the SAHARA Product, for use as field demonstration equipment by Distributor's branches and offices("Demonstration Systems") at a special price of [Language Deleted Due To Confidential Treatment Request.] per system and a total price of [Language Deleted Due To Confidential Treatment Request.] to be paid for as follows: Distributor shall make a downpayment of [Language Deleted Due To Confidential Treatment Request.] within thirty (30) days of FDA Approval to be applied against the total price of [Language Deleted Due To Confidential Treatment Request.] specified above, and representing purchase of [Language Deleted Due To Confidential Treatment Request.] Demonstration Systems. Thereafter, the Dealer Price for each system sold to Distributor pursuant to this Agreement shall be increased by [Language Deleted Due To Confidential Treatment Request.] per system to be applied as a credit against Distributor's remaining balance due (of [Language Deleted Due To Confidential Treatment Request.]), until said balance due is eliminated, and all Demonstration Systems are fully paid for (after [Language Deleted Due To Confidential Treatment Request.] systems are purchased and paid for, representing [Language Deleted Due To Confidential Treatment Request.] times [Language Deleted Due To Confidential Treatment Request.] equaling [Language Deleted Due To Confidential Treatment Request.]). After said balance is eliminated and the total price for all Demonstration Systems is paid, the Dealer Price for each system shall revert to the price stated on Attachment A-1 hereto. If Distributor has not sold sufficient systems subject to the above-described credit within six-months following FDA Approval, it will pay any remaining balance due or return sufficient Demonstration Systems for full credit (at [Language Deleted Due To Confidential Treatment Request.] per system) to eliminate said balance. All returned Demonstration Systems shall be in good order and condition and Distributor shall use its best efforts to also return the carrying case, phantom, and all parts originally delivered. All SAHARA Product purchased pursuant to this Section shall be used solely for marketing and demonstration use, and shall not be sold for six (6) months after purchase. (e) The parties shall consult and enter into an agreement in accord with the following principles as to continuation of the above-described Demonstration System program for each six-month period following six months following FDA Approval: Distributor shall maintain an ongoing inventory of at least the number of Demonstration Systems held following six months following FDA Approval, with a goal of at least one (1) Demonstration System per branch. Hologic shall make available special purchase terms for Demonstration Systems in accord with the principles set out in paragraph (d) above, sufficient to permit Distributor to replenish and maintain its ongoing inventory of Demonstration Systems in good working condition. Distributor may purchase reasonable additional quantities of demonstration systems at an additional discount of [Language Deleted Due To Confidential Treatment Request.] off of Hologic's then-current Dealer prices. (f) DELETED (g) Distributor agrees to accumulate a "Sahara prospect database" based upon submission of prospect names by its field staff. Database to be collected prior to Sahara introduction and to be used in product launch marketing activities by Distributor. (h) Distributor shall provide Hologic with the opportunity to be a "Can-Do" vendor for Distributor's financial year 1998 (beginning 4/1/98) and shall allow Hologic the opportunity to make presentations to its sales force and to showcase its products including an exhibit, if desired, -16- during Distributor's 1998 Sales Meeting, all under conditions and charges to be agreed, and at least as favorable conditions and charges to Hologic as granted to any other vendor selling an equal or lesser dollar volume of product to Distributor. -17- EXHIBIT C TERM, TERRITORY, ---------------- TARGET CUSTOMERS, AND RESERVED CUSTOMERS ---------------------------------------- TERM: two (2) years from the Date of FDA Approval (See Section 8(a)). TERRITORY: United States of America, not including its territories or possessions. TARGET CUSTOMERS: All physicians and chiropractors and their ambulatory care clinics and offices, except RESERVED CUSTOMERS. RESERVED CUSTOMERS: Radiologists: All radiologists and their clinics and offices, and all medical organization controlled and/or administered by radiologists, including clinics and centers providing imaging or mammography which are controlled and/or administered by radiologists. Hospitals: Any organization purchasing for the use of a hospital and/or Radiologists, not including purchases for permanent installation or use at (as evidenced by ship-to addresses of) ambulatory care centers and/or physician office sites of primary care (non-Radiologist) physicians and chiropractors. National Accounts: The parties understand that Hologic shall have the right to add as National Accounts buying contracts with organizations which may increase Hologic's market acceptance with Reserved Customers, such as hospital chains, group purchasing organizations, physicians groups, and pharmaceutical companies. However, before doing so, Hologic agrees to consult with PSS and discuss any proposals that if accepted, would impact the pricing or sales of products to Target Customers, with the aim of attempting to mutually agree to pricing and terms. In the event that Hologic enters into any such National Account agreement that significantly impacts PSS's available target market, it must also adjust Sales Targets and Minimum Sales Targets to take account thereof. -18- NOTE: If Distributor wishes to make a sale to Target Customers which involves installation of any SAHARA Product in the office or other facility of a Reserved Customer, it shall first consult with Hologic, and upon Hologic's approval, the parties shall determine how to allocate sales effort and sales prices. If Hologic sells any SAHARA Product for installation in the office or other facility of a Target Customer which does not also include a sale to a Reserved Customer, it shall first consult with Distributor prior to entering into such agreement and agree as to appropriate compensation and revenue recognition, or pay to Distributor an amount equal to the difference between the greater of Hologic's net sales price therefor or [Language Deleted Due To Confidential Treatment Request.], and the Dealer price listed on Exhibit A-1. -19- EXHIBIT D HOLOGIC MARKS ------------- (as of date of Agreement) ------------------------- HOLOGIC (logo) SAHARA Subject to change and addition of Marks. -20- EXHIBIT E HOLOGIC WARRANTY AND SOFTWARE LICENSE CERTIFICATE ------------------------------------------------- TO BE ATTACHED -------------- -21- EXHIBIT F AGREEMENT RESPECTING DISTRIBUTION OF ------------------------------------ SAHARA CONSUMABLES/ACCESSORIES ------------------------------ In addition, Distributor shall have the rights to distribute and sell Sahara Consumables/Accessories pursuant to the terms of this Exhibit F. 1. The term "Sahara Consumables/Accessories" as used in this Exhibit F, shall mean the items described in Exhibit F-1 hereto, which is attached and incorporated herein. Except as modified by this Exhibit F, the term "SAHARA Product" as used in the Agreement shall be read to include Sahara Consumables/Accessories. 2. Distribution Rights. Subject to the terms of this Exhibit F and notwithstanding anything to the contrary in the Agreement, Hologic hereby grants to Distributor an EXCLUSIVE license to distribute Sahara Consumables/Accessories solely to Target Customers (as described in Exhibit C of the Agreement) in the Territory, provided always that Hologic reserves the right to market, sell and license Sahara Consumables/Accessories directly or indirectly to (a) Reserved Customers and (b)Target Customers to which Hologic has sold any SAHARA Product inside (and outside) of the Territory. Distributor shall not market, sell, license or accept orders from Reserved Customers, or from any customer for installation or use outside of the Territory without the advance written consent of Hologic. Distributor's rights pursuant to this Section may be sublicensed to subdistributors in the Territory only with Hologic's prior written consent, which consent may be withheld for any reason. 3. Obligations of Distributor. As these terms are used in the Agreement, Distributor's Sales Targets and Product Plans with respect to Sahara Consumables/Accessories shall be as set out in Exhibit F-2 hereto. Distributor's turnaround on customer orders for Sahara Consumables/Accessories shall not exceed its average turnaround for other consumable products offered for sale by Distributor. Distributor shall provide Hologic, as part of its quarterly business report with information demonstrating compliance with this provision, and with any customer complaint respecting delivery delays and the parties shall agree upon a joint action plan to remedy any underlying problem. 4. Forecasts, Prices, Payment, and Shipping. (a) On or before the date of Distributor's first order of a SAHARA Product or thirty (30) days following FDA approval to market the SAHARA Product in the United States, whichever date is earlier, Distributor shall place the Initial Stocking Order for Sahara -22- Consumables/Accessories set out in Exhibit F-2, and provide a forecast for its purchases thereof for each of the following six months ("Rolling Forecast"). On or before the first day of each subsequent calendar quarter, Distributor shall update said Rolling Forecast (b) Hologic's current Distributor Prices (F.O.B. Waltham) and payment terms are as set forth on Exhibit F-1 hereto. Minimum order quantities and minimum inventory levels shall be as set forth on Exhibit F-2. 5. Term and Termination. If (a) Distributor has not met its Sales Target as specified in Exhibit F-2 for any quarter period, or (b) the parties have not reached agreement as to a joint action plan to remedy delivery problems identified pursuant to Section 3 of this Exhibit F with respect to any prior quarter, the parties shall consult as to the reasons therefor, and for thirty (30) days following the end of such quarter, Hologic may terminate Distributor's Exclusive right to market, sell and license Sahara Consumables/Accessories pursuant to this Exhibit F upon notice, and may thereafter appoint additional distributors and representatives for Sahara Consumables/Accessories. Except as expressly provided to the contrary in this Exhibit F, all provisions of the Agreement shall apply to Distributor's activities pursuant hereto IN WITNESS WHEREOF, the parties hereto have set their hands and seals as of the date of the Agreement of which this Exhibit F is a part. DISTRIBUTOR HOLOGIC, INC. By: ______________________________ By : ___________________________________ Printed Name: ____________________ Printed Name: _________________________ Title: ___________________________ Title: ________________________________ -23- EX-10.36 4 DISTRIBUTION AGREEMENT BETWEEN CO AND PSS FOR SAHA Exhibit 10.35 HOLOGIC, INC. UNITED STATES DISTRIBUTION AGREEMENT (DXA PRODUCTS/UNITED STATES) This Agreement is made as of June 1, 1998 (the "Effective Date") by and between: HOLOGIC, INC., a corporation organized under the laws of the State of Delaware, which has a usual place of business at 590 Lincoln Street, Waltham, Massachusetts 02154, United States of America (hereinafter "Hologic") and PHYSICIAN SALES AND SERVICE, INC., (hereinafter "PSS") which has a usual place of business at 4345 Southpoint Blvd, Jacksonville, Florida 32216, (hereinafter referred to as "Distributor"). 1. Facts. ----- Hologic designed and created the Product as hereinafter defined, and is the owner of all trade secret, trademark, patent, and other intellectual property rights associated with the Product. Distributor desires to obtain certain rights for PSS to act as distributor for the Product for resale to certain Target Customers in the Territory for the Term of this Agreement, as these terms are hereinafter defined. 2. Definitions. ----------- (a) "Product," as used in this Agreement, means the items described in Exhibit A, which is attached hereto and incorporated herein. (b) "Target Customers," as used in this Agreement, means the persons and entities to whom the Distributor is authorized to sell in the Territory, not including Reserved Customers, as said Target Customers are described in Exhibit C which is attached hereto and incorporated herein. (c) "Reserved Customers," as used in this Agreement, means the persons and entities to whom the Distributor is NOT authorized to sell, and which Reserved Customer are reserved for Hologic or third party sales, as said Reserved Customers are described in Exhibit C which is attached hereto and incorporated herein. (d) "Territory," as used in this Agreement means the respective geographic areas described in Exhibit C which is attached hereto and incorporated herein. 3. Exclusive and Non Exclusive Distribution Rights. ----------------------------------------------- (a) Subject to the terms of this Agreement, Hologic hereby grants to Distributor an EXCLUSIVE license to distribute its QDR 4000 and 4500C Product line solely to its Target Customers as described in Exhibit C in the Territory and a non-exclusive license to distribute its QDR 4500C Product line solely to Target Customers that are existing DXA users as described in Exhibit C in the Territory. Distributor shall not market, sell, license or accept orders from Reserved Customers, or for installation outside of the Territory without the advance written consent of Hologic. Distributor's rights pursuant to this Section 3(a) may be sublicensed to subdistributors in the Territory only with Hologic's prior written consent, which consent may be withheld for any reason. (b) Subject to the terms of this Agreement, Hologic hereby grants Distributor (but not its subdistributors) a non-exclusive, non-transferable license to represent themselves as an "Authorized Distributor" of the Product and to use Hologic trademarks identified in Exhibit D (attached hereto and incorporated herein) in connection therewith. 4. Obligations of Distributor. -------------------------- Distributor shall: (a) Establish for each year period of the Term, commencing as of the Effective Date, a mutually agreed Sales Target, not less than as stated in Exhibit B hereto, together with a Product Plan with quarterly targets and milestones, noting significant actions necessary to accomplish the said Sales Target. (b) Use its best efforts to comply with the Sales Target and Product Plan described in Section 4(a) hereof, and to market and sell the Product to Target Customers in the Territory. (c) Consult with Hologic before entering into any negotiation or discussion with any third party to directly or indirectly represent or offer for sale any product or device directly competitive with the Product, including Dual X-Ray Absorptiometry ("DXA"), peripheral DXA, bone ultrasound, Single X-Ray Absorptiometry ("SXA"), Radiological Absorptiometry ("RA"), or Quantitative Computed Tomography ("QCT") bone devices. If Distributor represents or offers for sale or sell any such directly competitive product or device, Hologic shall be entitled to terminate this Agreement pursuant to Section 8(b) hereof on thirty (30) days advance written notice. (d) Meet with and provide Hologic with a written business report on a quarterly basis, describing its sales and marketing activities for the preceding quarter and providing a forecast and summary of marketing and promotional activities scheduled for the next quarter. -2- (e) Not incur any liability on behalf of Hologic, nor in any way pledge or purport to pledge Hologic's credit; nor describe or hold itself out as an employee of Hologic; nor describe itself other than as a distributor of the Product; nor make any claims, warranties or representations with respect to the Products except such which have been previously approved in writing by Hologic; and (f) Not distribute advertising or other printed matter created by Distributor referring to the Product without the specific prior approval in writing of Hologic with regard to the form, manner, extent and wording of each such item of advertising and printed matter. Advertising copy, brochures, promotional materials and manuals provided to Distributor by Hologic shall be deemed to be so approved by Hologic, unless Hologic otherwise informs Distributor in writing. All advertising by Distributor shall be without recourse to Hologic for any expense incurred unless such expense shall have been specifically authorized in writing by Hologic. 5. Obligations and Rights of Hologic. --------------------------------- (a) Hologic will continue to offer for sale the Product, or a successor product, for the term of this Agreement. Hologic reserves the right, in its absolute and sole discretion, at any time and from time to time, to modify, alter or improve the Product, or to discontinue the Product (provided that it offers for sale a successor product), always providing Distributor with reasonable notice thereof, using its best commercial efforts to provide Distributor with a minimum of 90 days notice. (b) Hologic shall supply Distributor with (i) reasonable quantities of brochures, other promotional materials, and manuals for the Product; and (ii) the artwork and mechanicals required to support Distributor's production of its brochures and other promotional materials. Such materials shall be in English and shall be provided free of charge. (c) Hologic will provide such other marketing incentive programs as Hologic may, in its sole discretion, determine. (d) Prior to any Hologic announcement for sale in the Territory of any new product line directed primarily at Target Customers in the Territory (most particularly, any bone ultrasound product or any biochemical marker product) (and prior to entering into distribution agreements relating thereto) Hologic will provide Distributor with information as to its general marketing and sales goals for said new product line, in order that Distributor may provide to Hologic a proposal to distribute said product line under the terms of this Agreement or such other terms as may be appropriate. 6. Prices, Payment, and Shipping. ----------------------------- (a) Hologic's current Distributor Prices (F.O.B. Waltham and F.O.B. customer in the 48 contiguous United States (ground shipment)) are as set forth in Exhibit A-1 hereto. Hologic may -3- change its Distributor Prices at its sole discretion upon sixty (60) days advance written notice. Product ordered before, but shipped after the effective date of any price change shall be charged for at the lower of the price before and after said change. (b) Distributor may purchase on an F.O.B. Waltham or F.O.B. customer (ground shipment) basis. Expenses associated with Hologic compliance with any request for any other method of packaging or shipping or any other F.O.B. point will be Distributor's sole responsibility. Distributor shall insure all Product ordered on an F.O.B. Waltham basis for full replacement value, including shipping charges, and shall submit evidence of such insurance to Hologic upon request. Upon request, Hologic will arrange for shipment of Product ordered on an F.O.B. Waltham basis to Distributor or its customer, provided that all Taxes, shipping and insurance charges and risks will be the responsibility of, and will be invoiced to Distributor. (c) Payment for all Product ordered (and shipping services provided) shall be due as specified on Exhibit A hereto. (d) Distributor will pay or reimburse Hologic for any taxes, however designated, arising from or based upon Hologic's sale of the Product to Distributor, this Agreement, the licenses granted pursuant to this Agreement, or Distributor's use or sale of the Product ("Taxes"), but not including any income or corporate excise tax assessed against, or levied on, Hologic. If applicable, Distributor shall furnish Hologic with whatever certificates or other instruments may be necessary or appropriate to evidence that Hologic's sales of the Product to Distributor are not subject to Taxes under applicable law. (e) Distributor shall order Product by submitting a written purchase order, which order shall be valid solely for the purpose of identifying Product ordered, prices, and requested delivery date(s); no other terms on any such purchase order shall be valid or a part of the agreement between Hologic and Distributor. Distributor shall provide at the same time a Installation, Software License and Confidentiality Agreement and Hologic Warranty Certificate, executed by the customer, (in the form attached as Exhibit E hereto). Hologic will confirm by Sales Order Acknowledgment, the delivery dates for ordered Product, and shall use reasonable efforts to meet Distributor's requested delivery dates, but shall not have any liability for failure to do so. Hologic reserves the right, in its absolute and sole discretion, at any time and from time to time, to decline the acceptance of any order submitted by Distributor or through Distributor's efforts. 7. Independent Contractor - Expenses. --------------------------------- (a) Distributor is engaged in business as an independent distributor, and the parties acknowledge and agree that Distributor, in the performance of its duties and obligations pursuant to this Agreement, shall be acting as an independent contractor and not as an employee, agent or sales representative of Hologic. -4- (b) Distributor shall bear all expenses incurred by it in acting hereunder, including (without limiting the generality of the foregoing) all office expenses, traveling and entertainment expenses, postage and salaries of its salesmen and its other personnel, as well as all advertising and promotional expenses except as provided in Section 5 hereof. 8. Term. ---- (a) This Agreement shall commence on the Effective Date hereof, shall extend for a period of two (2) years thereafter (the "Term"), and shall expire on May 31, 2000. The parties may extend this Agreement by mutual consent in writing at any time prior to its expiration. (b) Either party may terminate this Agreement for any reason or for no reason, effective thirty (30) days following receipt of written notice by the receiving party. Hologic may terminate this Agreement by written notice following the end of any quarter period hereof on fifteen (15) days written notice if Distributor has not complied with its Minimum Sales Target for said quarter period, as specified in Exhibit B. (c) Notwithstanding the foregoing, this Agreement shall terminate upon notice from Hologic, effective immediately, in the event of the bankruptcy or insolvency of Distributor, or in the event Distributor enters into a composition with its creditors, or if Distributor undergoes a change in control, management, or operating personnel responsible for sales of the Product. (d) Immediately upon expiration or termination of this Agreement by either party, Distributor will discontinue marketing the Product, and Hologic will repurchase all of Distributor's remaining inventory of the Product at the invoice price. Distributor will prepare and provide to Hologic within fifteen (15) days of any such expiration or termination a list of all then-active prospective customers and the type and amount of Product expected to be sold to said customers during the six month period following the date of expiration or termination of this Agreement. For said six month period, so long as Distributor is in compliance with the terms of this Section, Hologic will honor any orders placed by Distributor for drop shipment during said period to said customers, up to the level of Distributor purchases during the prior six months, and subject to the provisions of this Agreement. In consideration for the fulfillment of said orders, Distributor agrees that it shall not, with respect to any customer prospect reported to Hologic in any Business Report during the six-months prior to said termination or expiration, or named on the list described above, represent, attempt to sell, or solicit orders for, any products competitive with the Product for six months following said expiration or termination of this Agreement. (e) Upon expiration or termination of this Agreement, Distributor shall promptly return to Hologic all technical information and literature relating to Products, including price lists, samples, documents and papers that may have been supplied to Distributor by Hologic. 9. Installation, Customer Training and Warranties ---------------------------------------------- -5- (a) Unless otherwise agreed in writing in advance, Hologic shall be solely responsible for installation, customer training and warranty service for all Product purchased pursuant to this Agreement in accord with the terms set forth on Exhibit E hereto, provided that the Distributor provides with its order a Hologic Installation, Software License and Confidentiality Agreement in the form attached as Exhibit E executed by the customer. (b) Except as expressly set forth herein, or in Hologic's warranty accompanying the Products as packaged and shipped by Hologic (and accordingly subject to all conditions and limitations set forth therein), HOLOGIC MAKES, AND DISTRIBUTOR AND ITS CUSTOMERS RECEIVE, NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION NO WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR AGAINST INFRINGEMENT. 10. Software License and Intellectual Property Rights ------------------------------------------------- (a) Under this Agreement, computer software ("Software") may be delivered in printed or machine-readable form. Title to the Software, including all patents, copyrights and property rights applicable thereto, and all foreign language versions thereof (whether prepared by Distributor or Hologic or a third party), shall at all times remain with Hologic. Software is valuable to Hologic and shall be treated as confidential information subject to the Confidential Information provisions of this Agreement. Distributor shall maintain all copyright, proprietary and other notices on the Software, and shall not decompile, disassemble or reverse engineer the Software, and shall not make it available to any party except employees using the Software as part of their duties. (b) Subject to the provisions of Article 10(a) hereof, Distributor is granted a non-exclusive royalty-free license to use Software for the Term of this Agreement solely on scanning equipment purchased under this Agreement and on which the Software is first installed, for performing and analyzing scans acquired on said equipment, and for no other purpose or business. No license is provided to use Software for multi-site quality control or data review purposes. (c)(i) Subject to the provisions of Article 10(a) hereof, Distributor is granted a non-exclusive royalty-free license for the Term of this Agreement to transmit (and to the extent not licensed directly to the customer by Hologic, to sublicense) Software with equipment purchased hereunder to its customers solely for operation of scanning equipment purchased from Distributor and on which the Software is first installed, provided that such customer first agrees in writing to be bound by terms and conditions set out in Exhibit E hereto. Hologic shall have the right to audit Distributor's compliance with this subsection upon reasonable notice. Distributor shall promptly notify Hologic of any violation of any license or sublicense or suspected misuse of Software in the Territory, and take all reasonable steps to cure said violation or misuse. Except as expressly provided by this section, Distributor has no right to use, sell, assign, transfer, copy or sublicense Software. (ii) Sublicenses granted by Distributor in conformity with this -6- Agreement, and in connection with Product for which Hologic has been paid in full, shall survive termination or expiration of this Agreement. 11. Infringement. ------------- In the event that any claim, suit, or other legal proceeding is threatened or commenced against Distributor that is founded, in whole or in part, on an allegation that the Product infringes any trade secret, trademark, patent or other intellectual property rights belonging to a third party, Distributor will give Hologic prompt written notice of such legal proceeding and Hologic may elect to assume sole control of the defense to or settlement of such dispute. Distributor shall cooperate fully with Hologic in any defense, settlement or compromise made by Hologic. Distributor shall not enter into any settlement agreement or other voluntary resolution of any such claim, suit, or other legal proceeding without obtaining Hologic's prior written consent thereto. If Distributor has complied with the procedures set forth in this Section 9(c), Hologic will indemnify and hold Distributor harmless from and against any loss, cost, damage, or other expenses incurred by Distributor as a result of such claim, suit or legal proceeding. If a final injunction is obtained against Distributor's use of the Product, or if in the opinion of Hologic the Product is likely to become the subject of a successful claim of infringement, Hologic may, at its option and expense, (i) procure for Distributor the right to continue distributing and/or using the Product, (ii) replace or modify the Product so that it becomes non-infringing, or (iii) if neither (i) or (ii) are reasonably available, accept return of Product held by Distributor and grant a credit therefor as depreciated, and terminate this Agreement without further obligation or liability. This indemnification provision shall be null and void and Hologic shall have no liability to the extent that any claim is based on any use of the Product in combination with any item not supplied by Hologic, or if the Product has been modified or tampered with in any way without the express written consent of Hologic, or if Distributor, affiliate, or customer has any interest in said claim, suit or legal proceeding or any license to any right so asserted. 12. LIMITATION OF LIABILITY ----------------------- EXCEPT WITH RESPECT TO CLAIMS PURSUANT TO SECTIONS 4(C), 10, 11, 14, OR 16 HEREOF, NEITHER PARTY BE LIABLE FOR ANY LOSS OF DATA, PROFITS OR USE OF THE PRODUCTS, OR FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR THE USE OR PERFORMANCE OF THE PRODUCT. THIS PROVISION SHALL NOT APPLY TO DISTRIBUTOR CLAIMS AGAINST HOLOGIC FOR DAMAGES INCURRED AND CLAIMED BY DISTRIBUTOR'S CUSTOMERS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR THE USE OR PERFORMANCE OF THE PRODUCT. 13. Non-assignment. -------------- -7- This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that any assignment or transfer of this Agreement or any of the rights or obligations hereunder by Distributor without the written consent of Hologic shall be void and of no effect. 14. Confidentiality Provisions. -------------------------- (a) Each party (Receiving Party) agrees that it and its employees, agents and sub-Distributors shall treat and maintain as the disclosing party's (Disclosing Party's) confidential property, and not use or disclose to others during or for a period of three (3) years from the date this Agreement expires or is terminated, any business, financial or technical information, or other information of a confidential or proprietary nature, of or concerning the Disclosing Party, including information regarding the Disclosing Party's plans, programs, plants, processes, products, costs, equipment, operations or customers, (the "Confidential Information") which may come within the knowledge of the Receiving Party or its employees, agents or sub-Distributors in connection with the services performed hereunder, unless in each instance the Receiving Party secures the prior written consent of the Disclosing Party. The terms of this Agreement are agreed to comprise such Confidential Information. (b) Without limiting the foregoing, each party agrees that all drawings, specifications, calculations, data, customer lists, memoranda, notes, other material, that contains Confidential Information (collectively, the "Confidential Material") which are made available to a Receiving Party shall not be used except in working for the Disclosing Party and that upon the termination of this Agreement, or at any time upon request, the Receiving Party shall return to the Disclosing Party (or, at the Disclosing Party's election, destroy) all such Confidential Material. (c) The obligations set forth in this Section shall not preclude a Receiving Party from using or disclosing in any manner information which is, at the time of use or disclosure, public knowledge other than by a breach of duty by said party, or is disclosed pursuant to any requirement of law or regulation, or an order of a court or governmental agency, provided that the Receiving Party first notifies Disclosing Party and affords it an opportunity to obtain legal protection for the information to be so disclosed, and/or to oppose such order. 15. Notices. ------- Any notice required or permitted to be given under this Agreement shall be in writing and shall be sufficiently given when delivered in person or deposited in the United States mail (registered or certified) postage prepaid, addressed as follows: If to Hologic, addressed to: HOLOGIC, Inc. 590 Lincoln Street -8- Waltham, MA 02154 (USA) Attention: Mark A Duerst, Vice-President - Sales & Marketing Copy To: Law Department If to Distributor, addressed to: Physician Sales and Service 4345 Southpoint Blvd Jacksonville, Florida 32216 Attention: Doug Harper, Senior Vice-President or to such other addresses as may be specified from time to time in a written notice given by such party. Both parties agree to acknowledge receipt of any notice delivered in person. 16. Trademarks and Trade Names. -------------------------- (a) Distributor acknowledges that Hologic is the sole owner of the trademarks and trade names which designate and identify the Products and business (the "Marks"). Hologic's current Marks associated with the Product are listed in Exhibit D hereto. (b) Distributor agrees that it may only use those Marks which identify the Products it is authorized to sell and then only to further the promotion and sale of the Products such Marks identify. Distributor may only use such Marks in their standard form and style as they appear upon the Products or as instructed in writing by Hologic. No other letter(s), word(s), design(s), symbol(s), or other matter of any kind shall be superimposed upon, associated with or shown in such proximity to the Marks so as to tend to alter or dilute them. (c) In all advertisements, sales and promotional literature or other printed matter in which any of such Marks appear, Distributor must identify itself by full name and address and state its relationship to Hologic. Every such Mark used or displayed by Distributor must be identified as a Mark owned by Hologic, in a form and manner approved by Hologic. (d) On its letterheads, business cards, invoices, statements, etc., Distributor may identify itself as a distributor of the applicable unit of Hologic. (e) Distributor agrees that it will never use the Marks or any trademark or trade name of Hologic or its subsidiaries or affiliates, or any simulation of such marks or names as a part of Distributor's corporate or other trading name or designation of any kind. (f) Upon expiration or in the event of any termination of this Agreement, Distributor shall promptly discontinue every use of the Marks or any other confusingly similar word or -9- symbol and will also promptly discontinue use of any language stating or suggesting that Distributor is a distributor of Hologic. 17. Miscellaneous. ------------- (a) Section Headings as to the contents of particular paragraphs are for convenience only and are in no way to be construed as part of this Agreement, or as a limitation of the scope of the particular paragraph to which they refer. (b) Force Majeure. Neither party shall be deemed to be in default pursuant to this Agreement so long as its failure to perform any of its obligations hereunder is occasioned solely by fire, labor disturbance, acts of civil or military authorities, acts of God, or any similar cause beyond such party's control. (c) USA Export Controls. Notwithstanding anything contained in this Agreement to the contrary, Distributor agrees not to export, re-export, or permit the re- exportation of the Product to any country now or hereafter included in the US Department of Commerce's list of countries to which exportation of the Product is or may be restricted or prohibited, unless that exportation or re-exportation is specifically authorized by a special license issued by the US Office of Export Administration. This provision shall not be interpreted to expand the definition of "Territory" set forth in Section 2 (d) of this Agreement in any way. (d) Compliance with Laws. Each Party shall comply with all laws, rules, regulations, governmental requirements and industry standards existing in the Territory from time to time with respect to the Product and its activities, as well as all applicable laws of the United States, including the Foreign Corrupt Practices Act and regulations promulgated thereunder. (e) Choice of Law. This Agreement shall, for all purposes, be construed and enforced in accordance with the internal laws of the Commonwealth of Massachusetts, not including its choice of laws provisions or the United Nation Convention on the International Sale of Goods. Any controversy or claim arising out of or relating to this Agreement, or breach thereof, which the parties fail to resolve by agreement, shall be settled by binding arbitration in the Commonwealth of Massachusetts in accordance with the commercial arbitration rules of the American Arbitration Association, applying the laws of the Commonwealth of Massachusetts as provided in this paragraph. Judgment upon any arbitration award so rendered may be entered in any court having jurisdiction, or application may be made to any such court for confirmation of such award or a judicial acceptance of such award, and for an order of enforcement or other legal remedy, as the case may be. If any portion of this Agreement shall be found to be unenforceable, such provision shall be construed by limiting and reducing its effect so as to be enforceable to the full extent compatible with respect to applicable law. The unenforceability of any one clause hereof shall in no way impair the enforceability of any other clause hereof. (f) Waiver and Severability. Any waiver by either party of any provision of this Agreement shall not be construed or deemed to be a waiver of any other provision of this Agreement nor a waiver of a subsequent breach of the same provision. If any portion of this Agreement shall be found to be unenforceable, such provision shall be construed by limiting and -10- reducing its effect so as to be enforceable to the full extent compatible with respect to applicable law. The unenforceability of any one clause hereof shall in no way impair the enforceability of any other clause hereof. (g) Entire Agreement. This Agreement contains the entire Agreement of the parties, and supersedes all prior agreements, understandings, representations, conditions, warranties, and covenants, whether oral or written, between Hologic and Distributor. Any provision of any Distributor purchase documentation which is inconsistent with this Agreement shall be of no force or effect unless specifically agree to by Hologic as follows. This Agreement may not be changed or amended unless in a writing specifically referencing this Agreement, purporting to do so, and signed by both parties. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written by their respective authorized officials. PHYSICIAN SALES AND SERVICE, INC. HOLOGIC, Inc. By: /s/ Douglas J. Harper By: /s/ Steve L. Nakashige ------------------------- --------------------------------- Printed Name: Douglas J. Harper Printed Name: Steve L. Nakashige -------------------- ----------------------- Title: Senior Vice President Title: President & COO --------------------- ------------------------------ -11- EXHIBIT A PRODUCT, DISTRIBUTOR PRICING, ----------------------------- AND PAYMENT TERMS -----------------
PRODUCT DESCRIPTION DISTRIBUTOR PRICING - ------------------------------------------------------------------------------------------------ The following Hologic QDR Bone Densitometer Products: QDR 4000 product line SEE PRICE LIST ATTACHED AS EXHIBIT A-1 - ---------------------------------------------- SEE PRICE LIST ATTACHED AS EXHIBIT A-1 QDR 4500C product line - ----------------------------------------------
ALSO SEE FINDERS FEE ADDENDUM INCORPORATED INTO THIS AGREEMENT AS ATTACHMENT A- 11 TO THIS EXHIBIT A. Notes - ----- 1. F.O.B. customer prices include a constructed shipping charge generally reflecting average costs associated with shipment of the products in question to customer sites in the 48 contiguous United States. F.O.B. customer prices for Alaska and Hawaii are available upon request. For F.O.B. Factory purchases, shipping charges will be prepaid and added to invoice and are due upon installation (estimated shipping charge by padded van approx. $1,000 - $2,500 depending on zone). 2. Delivery: Normally approximately 60 days following receipt of order. Hologic will use reasonable commercial efforts to expedite Distributor orders which request more rapid delivery. 3. Warranty: Customer warranty is twelve (12) months from date of installation. Warranty includes computer and peripheral equipment supplied with system. 4. Installation of unit by Hologic included unless otherwise agreed. Customer is responsible to receive the unit and have a room of suitable size (as specified in Hologic technical documentation) available at date of delivery. Installations and warranty service are scheduled during standard working hours, 8AM - 6PM Monday through Friday. 5. Hologic standard operator in-service training included. 6. Products sold in the U.S. are not authorized for re-export. Warranty and service will be provided in the United States only. 7. Orders must include Hologic's Installation, Software License and Confidentiality Agreement with attached Hologic Warranty and Software License Certificate (or an equivalent document -12- where customer provides installation), executed by the customer. (Current version is attached as Exhibit E). PAYMENT TERMS - ------------- PAYMENT IN FULL (FOR ALL PRODUCT AND ANY SHIPPING SERVICES, ETC.) DUE 30 DAYS FOLLOWING CUSTOMER INSTALLATION. -13- ATTACHMENT A-3 4500C SAP PROGRAM General Description: - -------------------- The Strategic Alliance Program (SAP) is a financial program that allows the customer to try the 4500C DXA technology in his practice before being required to commit to purchase. The program allows for payments based upon use after enrollment in the program, collection of a deposit, and acceptance of enrollment forms. The customer is able to return the system and exit the program without penalty within the first six months. There is no minimum usage for the first six months. Program contracts have been attached for full description of the program. (Attachment A-3.1) Program Terms: - -------------- General terms are included in Attachment A-3.2. Financial Arrangements: - ----------------------- A $5000 deposit is collected from the customer by PSS and forwarded with the required enrollment documents to Hologic Finance. Hologic approves all orders and forwards to Sanwa for credit approval. After acceptance and delivery, Sanwa sends [Language Deleted Due To Confidential Treatment Request.] for the purchase to PSS who in turn pays Hologic a transfer price of [Language Deleted Due To Confidential Treatment Request.]. Upon conversion of the SAP placement to a permanent lease or purchase, a second transaction occurs where Sanwa sends [Language Deleted Due To Confidential Treatment Request.] for the purchase to PSS who in turn pays Hologic a transfer price of [Language Deleted Due To Confidential Treatment Request.]. Re-Marketing Agreement: - ----------------------- This program is offered in conjunction with general program guidelines and re- marketing agreement shown in Attachment A-4. Program Documentation: - ---------------------- See Attachment A-3.1 for contracts. Required documentation also includes credit application and program deposit. -14- Attachment A-3-2 4500C SAP PROGRAM GENERAL PROGRAM TERMS 1) THE STRATEGIC ALLIANCE PROGRAM (SAP) SHALL BE GOVERNED BY STANDARD DOCUMENTS ISSUED BY HOLOGIC AND SHALL BE MADE AVAILABLE AS A SPECIAL "PRICING" PROGRAM. THE PROGRAM MAY BE WITHDRAWN BY HOLOGIC AT ANY TIME IN THE EVENT THAT THE REQUIRED SUPPORT FOR THIS PROGRAM IN TERMS OF THE RE- MARKETING OF RETURNED SYSTEMS OR LEASE SUPPORT FOR THE PROGRAM BY SANWA BECOMES UNSATISFACTORY. A COPY OF THE SAP CONTRACT HAS BEEN ATTACHED IN SECTION A-3.1. 2) SAP ORDERS WILL BE CLOSELY REVIEWED BY BOTH HOLOGIC AND PSS TO ENSURE LEGITIMATE ORDERS AND SINCERE COMMITMENTS BY THE PHYSICIANS INVOLVED. HOLOGIC WILL HAVE FINAL SAY IN ACCEPTING ANY ORDER. 3) PSS AGREES TO HOLD OUT [Language Deleted Due To Confidential Treatment Request.] OF THE TOTAL COMMISSION, REVENUE, AND BOOKING CREDIT FROM THE SPONSORING REP, BRANCH, AND REGION UNTIL THE SAP IS CONVERTED TO PERMANENT PLACEMENT THROUGH A SALE OR LEASE. THE BALANCE OF THE [Language Deleted Due To Confidential Treatment Request.] COMMISSION, REVENUE, AND BOOKING CREDIT MAY ONLY BE EARNED IF A SUCCESSFUL CONVERSION OCCURS WITHIN 6 MONTHS FROM DATE OF INSTALLATION. PRICING OF THE SAP PROGRAM TO PSS MAY BE REVIEWED IN THE FUTURE BASED UPON SYSTEM RETURN RATES AND PROGRAM PERFORMANCE. 4) IN THE EVENT OF A "FAILED" PLACEMENT, A UNIT RETURNED BEFORE CONVERSION, PSS AGREES TO USE "BEST EFFORTS" TO ASSIST IN RE-MARKETING THE SYSTEM TO A NEW LOCATION ON A TIMELY BASIS WITHIN 90 DAYS OF NOTIFICATION OF RETURN BY THE CUSTOMER. "BEST EFFORTS" SHALL INCLUDE HAVING AN ACTIVE PROGRAM OF PROMOTION AVAILABLE TO ITS SALES STAFF ALONG WITH SUITABLE INCENTIVES FOR OBTAINING SALES FOCUS ON THE RE-MARKETING TASK AT ALL TIMES. IF RE- MARKETING IS NOT SUCCESSFUL WITHIN THE 90 DAY PERIOD, HOLOGIC MAY USE ITS DIRECT SALES STAFF OR OTHER VEHICLES DEFINED IN THE RE-MARKETING AGREEMENT WITH PSS, AND TO ANY PHYSICIAN MARKET NECESSARY, IN ORDER TO SECURE SUCCESSFUL REPLACEMENT OF THESE UNITS. 5) IN THE EVENT OF THE NEED FOR RE-MARKETING AS DEFINED IN #4 ABOVE, HOLOGIC WILL PROVIDE FOR ALL COSTS OF DE-INSTALL, RE-INSTALL, AND OPERATOR TRAINING. -15- ATTACHMENT A-4 Strategic Alliance Re-Marketing Agreement Hologic and PSS hereby agree to terms of re-marketing for all units placed under the Hologic Strategic Alliance Program (SAP) as follows; SAP ORDERS ACCEPTED BY HOLOGIC PRIOR TO 4/6/98 - ---------------------------------------------- PSS agrees to use "best efforts" to re-market any systems returned using mutually established formal relocation programs. PSS and Hologic my agree to revise these programs periodically in order to ensure their continued competitiveness. Hologic may also decide to cancel any of these programs at any time should Hologic decide that its financial risks are not best protected through the continued promotion of these programs. First 25 QDR 1000 Units to be Returned - -------------------------------------- PSS has agreed to use "best efforts" to expeditiously relocate the first 25 QDR 1000 units to be returned under the pre-4/6/98 Strategic Alliance Program. PSS shall be responsible for the design and implementation of a sales incentive program to place urgency on the re-location of these systems. This incentive program shall be outlined to Hologic and updated as any changes are required. It is projected that all 25 units will be relocated by about 8/1/98. Hologic has agreed to offer the following optional support for these first 25 re-locations: 1) Hologic shall provide for all costs of system de-installation, storage, transportation, re-installation, operator training, lease payments required by Sanwa and warranty extension required in the re-location process. 2) Hologic shall offer special customer financing programs which shall offer the customer reduced buyout opportunities on these units and more favorable lease rates as compared to the initial SAP contract. (see Attachment A-7) 3) For all systems placed under re-SAP agreements, Hologic shall allow the entire amount of any customer deposits taken by PSS to be retained as commission in compensation for re-SAP efforts. QDR 1000 Units Returned After the First 25 Systems - -------------------------------------------------- PSS has agreed to also use "best efforts" to expeditiously relocate any additional QDR 1000 units beyond the first 25 to be returned under the pre- 4/6/98 Strategic Alliance Program. PSS shall be responsible for the design and implementation of a sales incentive program to place urgency on the re-location of these systems. The current incentive program used in these efforts is described in attachment A-4.1 and shall be updated as required to be effective. -16- Hologic has agreed to offer the following support for these re-locations: 1) Hologic shall provide for all costs of system de-installation, storage, re- installation, operator training, lease payments required by Sanwa and warranty extension required in the re-location process. 2) Hologic shall offer special financing programs which shall offer the customer reduced buyout opportunities on these units and more favorable lease rates as compared to the initial SAP contract. See attachment A-7. 3) For all systems placed under re-SAP agreements, Hologic shall allow the entire amount of any customer deposits taken by PSS to be retained as commission in compensation for PSS' re-SAP efforts. Any returned units shall also be re-marketed by Hologic's direct sales staff. These sales efforts shall not be restricted by any previous contract terms as to sales territories or physician specialties where these units may be placed. For SAP orders which have unusual circumstances surrounding them and may not be legitimate orders, PSS and Hologic agree to review these orders under the guidelines listed below. QDR 4500C SAP ORDERS ACCEPTED BY HOLOGIC BEGINNING 4/6/98 - --------------------------------------------------------- SAP orders accepted by Hologic beginning 4/6/98 shall be governed by new commission, revenue, and gross margin incentives as contained in the General Program Terms outlined in A-3.2. The following defines the process for re- marketing any units returned by customers under terms of SAP agreements accepted on or after 4/6/98: 1) PSS sales reps and Branches shall be given a period of up to six months from date of installation to convert SAP placements to permanent lease or purchase. If placements are converted during this 6 month period, the remaining 50% of commissions, revenue, and margins shall be earned by the rep/Branch. If units are not converted within this period, the rep/Branch shall permanently forfeit all rights to such credits. 2) Relocation of a returned system shall immediately become the responsibility of the branch which initially was credited with placement of that SAP system upon notification of intent to return by customer. The branch may place no additional new SAP units until the returned unit has been successfully relocated through a new order for that unit. Hologic shall place any additional new SAP orders from that branch on "hold" until it has received an acceptable contract for the re-location of the returned unit. All SAP orders from that branch, that had been previously accepted by Hologic but had not been delivered prior customer notice of a SAP system return, shall be processed and shall not be delayed by the return. 3) The Branch shall have 90 days to cure the problem of a SAP system return through successful re-location of that unit to a new customer. If the branch should not be successful within this period, the returned system shall be automatically substituted for the next SAP order placed by that Branch. 4) If the Branch has unsuccessfully attempted to relocate a returned unit for 90 days, and at the end of 90 days has no new SAP orders that would accommodate the substitution described in -17- #3 above, the Region within which that branch resides shall lose all commission, revenue, and gross margin associated with the initial SAP placement until it is successfully relocated the system within any of its Branches. In addition, at 90 days after notification of customer intent to return, Hologic shall begin to assist in the relocation of this system through use of its own direct sales force. These sales efforts shall not be restricted by any contract terms as to sales territories or physician specialties where these units may be placed. If Hologic successfully re-locates the system through use of its direct sales staff, no commissions, deposits, Sahara credits / special discounts, or other compensation shall be due to PSS for this placement. 5) If at the end of 120 days following customer return, the Branch, Region, and Hologic have all been unsuccessful in re-location of this system, the system shall be substituted for the next new SAP order placed by the Region. 6) For any SAP returned system, PSS shall have the option of placing the system with a new customer using the then current, Hologic "lease conversion" financing program. REVIEW OF "UNUSUAL" TRANSACTIONS - -------------------------------- Both Hologic and PSS shall use best efforts to "screen" orders submitted to ensure legitimate, good faith efforts by both the customer and sales rep to secure successful SAP placements. However, despite these efforts, "unusual transactions" may occur where a sales rep or customer may not have acted in good faith in placing the SAP order. Such "unusual transactions" may include: . Refused system deliveries . Systems not installed . Customers unwilling to obtain operator training . Systems performing no clinical studies following installation . System placements creating legal disputes with customers . Orders where deposit was not funded by the customer. . Units placed where side letters exist providing the customers with additional services or accommodations beyond the terms of the SAP contracts. In instance of an "unusual transaction", these matters shall be documented to the Vice President of Sales at both Hologic and PSS. They shall attempt to mutually resolve these instances and may impose at their discretion, penalties, back-charges, or other sanctions as to equitably resolve these disputes for both companies. Transactions deemed "unusual" will not be considered a "sale". PSS will be responsible for re-marketing the system and covering the costs of interim lease payments, de-installation, and transportation. Hologic will cover the costs of reinstallation and retraining. -18- SAHARA SALES TO SAP SITES - ------------------------- PSS will not substitute or sell any Sahara ultrasound unit to a customer holding a SAP system and Hologic will not knowingly accept any such orders. In order to discourage this practice, PSS will agree that if such a sale does occur, it will (I) withhold all Sahara commissions on these sales to the salesperson, (ii) back charge any revenue on these sales to the Branch and Region, (iii) require the SAP to convert before any credits are given for the Sahara sale. UPGRADE OF DXA EQUIPMENT UNDER SAP CONTRACTS - -------------------------------------------- PSS shall use "best efforts" to convert SAP placements to permanent status under a lease or purchase and shall not encourage the return of any SAP equipment in favor of system upgrades to QDR 4000, QDR 4500C or any other Hologic model. From time to time, customers may demand such transactions. These transactions are costly to Hologic and therefore will be accommodate by Hologic under special terms. These terms include the charging of $5000, in addition to normal PSS transfer prices on the replacement equipment, to cover costs of system return . The replacement must be provided within a purchase or permanent lease agreement. Hologic will not replace SAP equipment with other SAP equipment. To discourage these practices, PSS shall not allow the branch, rep or region to obtain any revenue, booking credit, or commission in these transactions. These transactions shall also not qualify as a "conversion" of a SAP placement with respect to PSS earning the conversion revenue, commission, and booking credit on the original SAP placement. SUMMARY - ------- This re-marketing agreement seeks to define the "best efforts" process of limiting the financial risk of SAP system returns for all parties using this program. It does not impose any financial "recourse" to PSS for any systems placed under the program. These programs may be mutually reviewed and modified from time to time to ensure their continued effectiveness in securing a maximum number of permanent placements of SAP units. -19- Attachment A-5 1000 PLUS CONVERSION LEASE PROGRAM General Description: This program is offered for the purpose of converting QDR 1000 Plus SAPs from FY97 to permanent lease agreements. Financial Arrangements: No new funding or revenue is available to PSS on these DXA leases. As an incentive to promote conversion of FY97 SAPs, a sales incentive of [Language Deleted Due To Confidential Treatment Request.] shall be paid to the PSS sales rep converting the SAP agreement to a permanent lease using this program. Customer has the option of choosing either: $1000 / mo. , 60 months, 90 day deferral, FMV OR $1000 / mo., 60 months, no deferral, $1.00 buyout Program Documentation: - ---------------------- Required lease documents are shown in Attachment A-5.1 and A-5.2. -20- ATTACHMENT A-6 4500C CONVERSION LEASE PROGRAM General Description: - -------------------- This program is offered for the purpose of converting QDR 4500C SAPs to permanent lease agreements. See Attachment A-4 for a description of re-marketed systems converted to this lease program. Financial Arrangements: - ----------------------- No new funding or revenue is available to PSS on these DXA leases. As an incentive to promote conversion of FY97 SAPs, a sales incentive of [Language Deleted Due To Confidential Treatment Request.] shall be paid to the PSS sales rep converting the SAP agreement to a permanent lease under this program. No incentives are paid for FY 98 SAPs that are converted. Customer financing is 90 day deferred FMV lease, $1250/mo., 60 payments. Program Documentation: - ---------------------- Required lease documents are shown in Attachment A-6.1. -21- ATTACHMENT A-7 1000 PLUS RE-SAP LEASE PROGRAM General Description: - -------------------- This program is offered for the purpose of re-SAPing returned QDR 1000 Plus SAPs from FY97. Program prices are modified to reflect "used / demo" systems. Financial Arrangements: - ----------------------- No new funding or revenue is available to PSS on these DXA leases. As an incentive to place Re-SAP units, a sales incentive equal to [Language Deleted Due To Confidential Treatment Request.] shall be paid to PSS. [Language Deleted Due To Confidential Treatment Request.] Customer financing allows normal SAP terms but modifies buyout price to [Language Deleted Due To Confidential Treatment Request.] and allows full credit of deposit to purchase (within first 12 months) and scans paid (within first 6 months) if converted to purchase. (see example contract) Program Documentation: - ---------------------- Required Re-SAP documents are shown in Attachment A-7.1. -22- Attachment A-8 QDR 4500C RE-SAP LEASE PROGRAM General Description: - -------------------- This program is offered for the purpose of re-SAPing returned QDR 4500C SAPs . Program prices are modified to reflect "used / demo" systems. Financial Arrangements: - ----------------------- No new funding or revenue is available to PSS on these DXA leases. As an incentive to place Re-SAP units, a sales incentive equal to [Language Deleted Due To Confidential Treatment Request.] shall be paid to PSS. [Language Deleted Due To Confidential Treatment Request.] Customer financing allows normal SAP terms but modifies buyout price to [Language Deleted Due To Confidential Treatment Request.] and allows full credit of deposit to purchase (within first 12 months) and scans paid (within first 6 months) if converted to purchase. (see example contract) Program Documentation: - ---------------------- Required Re-SAP documents are shown in Attachment A-8.1. -23- Attachment A-9 STANDARD HOLOGIC LEASE PROGRAMS General Description: - -------------------- Hologic shall offer general lease programs for all Hologic equipment for use by PSS. Lease options shall be: 90 day deferred, 60 month, FMV no deferral, 60 month, $1.00 buyout Financial Arrangements: - ----------------------- Rates will be updated every Tuesday and shall be available by contacting Hologic Finance. Program Documentation: - ---------------------- Required Lease documents are shown in Attachment A-9.1 , A-9.2 , and A-9.3. -24- Attachment A-10 HOLOGIC PROMOTIONAL INCENTIVES FOR ORDERS RECEIVED JULY 6 - SEPTEMBER 25 ONLY General Description: - -------------------- This program offers a special "promotional" incentives for business conducted between July 6th and September 25, 1998. (Hologic's 4th Quarter) Financial Arrangements: - ----------------------- [Language Deleted Due To Confidential Treatment Request.] Incentive to be paid to PSS for any new DXA "sale" (not including SAPs) with completed order received during this time period. [Language Deleted Due To Confidential Treatment Request.] Sahara incentive to be paid for any Sahara "sale" with completed order received during this time period. Sales of Saharas provided under special SAP "re-marketing" programs that are obtained at below normal transfer prices do not qualify for these incentives. Hologic agrees to increase this incentive payment to a total of [Language Deleted Due To Confidential Treatment Request.] per Sahara sale on all qualifying orders (excluding units from re-marketing programs as described above) once a total of [Language Deleted Due To Confidential Treatment Request.] orders have been received during this period. -25- ATTACHMENT A-11 FINDERS FEE ADDENDUM 1. Appointment and Obligations as Finder. ------------------------------------- (a) Hologic hereby appoints the Distributor to act as Hologic's Finder for the purpose of finding potential Hologic customers for Designated Products in the Territory, all in accord with Hologic's then-current Finder's Fee Policy (current version attached). (b) Finder shall not prepare or accept orders, or incur any liability on behalf of Hologic; nor in any way pledge or purport to pledge Hologic's credit; nor describe or hold itself out as an employee, distributor, sales representative or agent of Hologic for the Designated Product; nor describe itself other than as a Finder for the Designated Product; nor make any claims, warranties or representations with respect to the Designated Products, except such which have been previously approved in writing by Hologic. Finder shall bear all expenses incurred by it in acting hereunder, including (without limiting the generality of the foregoing) all office expenses, traveling and entertainment expenses, postage and salaries. 2. Obligations and Rights of Hologic. --------------------------------- (a) Hologic shall pay to Finder, in full consideration for its services, under the conditions set out in Exhibit A hereto the Finders Fees as described below:
Designated Product Finders Fee ------------------ ----------- QDR 4000 [Language Deleted Due To Confidential Treatment Request.] QDR 4500C [Language Deleted Due To Confidential Treatment Request.] QDR 4500W [Language Deleted Due To Confidential Treatment Request.] QDR4500SL or QDR4500A [Language Deleted Due To Confidential Treatment Request.]
(b) In the event that Hologic does not receive full payment for Designated Product sold through the Finder's efforts, Hologic may deduct from future Finders Fees an amount equal to the Finders Fee paid in connection with said Designated Product. (c) Hologic shall be solely responsible for all negotiations with Hologic customers and implementation of the actual sales agreement, as well as the installation, in-service application customer training, support, warranty, and after-warranty service of all units of the Designated Product ordered by Hologic customers by reason of this Addendum. All credit appraisal of potential customers, risk of credit extended to such customers and collections pursuant to such -26- credit extensions shall be the sole responsibility of Hologic. At no time shall the title to any Designated Products be transferred to or vested in Finder, but shall remain in Hologic at all times until transferred to a customer. All remittances by the customer shall be made directly to the order of Hologic and transmitted by the customer directly to Hologic. Hologic reserves the right, in its absolute and sole discretion, at any time and from time to time, to refuse to sell to any customer and to decline the acceptance of any order transmitted to it through Finder's efforts, or to terminate this Addendum upon thirty (30) days notice. 3. Except as expressly stated in this Addendum, the Terms of the Agreement to which this Addendum is attached shall apply and govern the relationship of Hologic and Distributor. -27- HOLOGIC, INC. ------------- POLICY FOR FINDER'S FEE ELIGIBILITY April 2, 1997 Sales Finders - ------------- Under this form of relationship, the Sales Finder provides to Hologic active, interested sales prospects, which are not also being solicited by Hologic's direct sales force or another Sales Finder. Hologic coordinates the activities of its Sales Finders and sales force by requiring that sales prospects be registered. Hologic may approve, or disapprove a proposed sales prospect in its discretion. Normally, Hologic will not approve a sales prospect if either Hologic's sales force, or another ISO is pursuing the prospect. Once Hologic has approved a proposed prospect, the Sales Finder is eligible for a Finder's Fee if the prospect places an approved order directly with Hologic, but not if a sale is made through an Hologic Distributor. Hologic's registration process, and its Finder's Fee policies are described in more detail in the next section. Finder's Fees - ------------- Registration of Prospects - ------------------------- Hologic requires formal registration of prospects to become eligible for a Finder's Fee. A registration form has been attached for use in this process. Prospect registrations are to be filed with the Manager , Corporate Partners or Regional Sales Manager for your area. Status of prospect shall be confirmed with you, in writing, generally within 72 hours of receipt of registration form. Registrations remain "active" for six months from date of receipt and approval by Hologic. Prospects must be re-registered for consideration beyond this period. Hologic reserves the right to reject any prospects at its sole discretion. Finders Fees. - ------------ Once a prospect has been registered, Finder's fees are paid once a sale has been successfully completed including full collection of all amounts due. Checklist of Activities Required of Sales Organization to Earn Fees - ------------------------------------------------------------------- Hologic has attempted to keep the process for earning Finder's Fees simple yet fully documented for the protection of the ISO. For this procedure to work properly, Hologic's insists that all procedures be followed. Finder's Fee Program Steps - -------------------------- 1) ISO completes Prospect Registration Form; 2) ISO supplies registration form to Hologic's Corporate Partners' Group (mail to: Carol Vega, Hologic, Inc., 590 Lincoln St, Waltham, MA 02154); -28- 3) ISO obtains prospect status from Hologic (generally about 72 hours) confirming it is not an active Hologic prospect; 4) Hologic and ISO coordinate account follow up 5) Hologic issues quotation to prospect 6) ISO and Hologic cooperate in management and communicating account status 7) Order issued to Hologic by prospect 8) Prospect completes payments on purchase as required 9) Hologic issues fees to ISO -29- PROSPECT REGISTRATION FORM -------------------------- Prospect Name _______________________ Address _______________________ _______________________ City _______________________ State _______________________ Zip _______________________ Phone _______________________ FAX _______________________ Other Contacts at Account: (examples: partners, secretaries, business managers, - ------------------------- administrators, purchasing agents) Name / Phone: Account Background and Interest - ------------------------------- (Supply a short summary of account activity to date) Competition - ----------- Budget Information - ------------------ -30- EXHIBIT B SALES TARGET AND SALES PLAN --------------------------- SALES TARGET ------------ Distributor's Sales Target shall be mutually agreed. For PSS Fiscal 1998 goals shall correspond to corporate "can-do" targets. [Language Deleted Due To Confidential Treatment Request.] Sahara [Language Deleted Due To Confidential Treatment Request.] QDR 4500C [Language Deleted Due To Confidential Treatment Request.] QDR 4000 SALES PLAN ---------- (a) Distributor will inform and assign all of its sales personnel and sub- distributors in the Territory to market and sell the Product, will provide for appropriate training, and will use its usual marketing efforts to promote the Product, including calling on general prospects, and follow-up calls to interested prospects, and participation in significant trade shows aimed at Target Customers in the Territory. (b) For the duration of this Agreement, Distributor shall designate a full-time Product Manager whose assignment will be to oversee distributor's relationship with Hologic under this Agreement, to manage distributor's marketing program for Product in the Territory, to serve as the primary contact with Hologic, and to be responsible for compliance with section 4(d) of this Agreement. (c) Distributor shall have the right to purchase (under Hologic's standard terms) two (2) units of Product per year in the Territory for marketing and demonstration use, and not for resale for at least six (6) MONTHS after purchase, at an additional discount of [Language Deleted Due To Confidential Treatment Request.]. Any such purchase shall not count toward Distributor's minimum purchase obligation. (d) Distributor and Hologic shall consult and agree upon, and implement an optimal training program for Distributor's sales staff and subdistributors, which program shall include in-person training by Hologic personnel within an agreed time following commencement of this Agreement, and follow-up training during each year thereafter. -31- EXHIBIT C TERM, TERRITORY, TARGET CUSTOMERS, ----------------------------------- AND RESERVED CUSTOMERS ---------------------- TERM: two (2) years from (Effective Date) June 1, 1998, expiring on May 31, 2000. TERRITORY: United States of America, not including its territories or possessions. TARGET CUSTOMERS: all private offices and clinics of physicians and chiropractors, NOT INCLUDING radiologists, hospitals, imaging centers, mammography centers, or non-medical settings such as Pharmacies or retail settings. Non- exclusive rights to sell to any existing Hologic DXA user that is a member of the target customer specialties described in this section and is not trading in equipment as a condition of the new system purchase. RESERVED CUSTOMERS: System upgrades for QDR systems that involve a trade-in of QDR or other Hologic equipment. United States Veterans Administration Hospitals and all other hospitals, clinics, offices and entities owned or administered by any agency of the United States Government. Such other national accounts as may be agreed. Distributor and Hologic shall consult with respect to the best approach to selling to the following and other national accounts. NOTE: Hologic has direct agreements with the following buying groups which offer reduced prices to members of those groups. In individual cases, Hologic may be willing to grant concessions in its pricing to the Distributor with respect to members of these buying groups, or in certain circumstances to arrange for the Distributor to act as an Hologic sales representative in connection with sales to these accounts. See your sales support contact for details (before making any contact with the account). -32- Amerinet, Inc., St. Louis, MO, its participating shareholders (currently Hospital Shared Services, Warrandale, PA; Intermountain Health Care Inc., Salt Lake City, UT; and Vector Health Systems, Providence RI) and their member institutions. American Physician Partners, Dallas TX ., and their member institutions. Medecon and their member institutions. Purchase Connection / CHOR, Chatsworth, CA., and their member institutions American Imaging Alliance, Del Mar, CA., and their member institutions. Columbia Healthcare Corporation (One Park Plaza, Nashville, TN) and entities owned, managed or controlled by it. University Hospital Consortium, Oak Brook IL, and its Members and Network Partners Spectrascan Imaging, Inc., Winsor, CN, and its member institutions. Osteoporosis Centers of America, Inc., Chicago, IL, and its member institutions. -33- EXHIBIT D HOLOGIC MARKS ------------- (as of date of Agreement) ------------------------- QDR QDR-1000 HOLOGIC (logo) QDR 4500 ACCLAIM Subject to change and addition of Marks. -34- EXHIBIT E INSTALLATION, SOFTWARE LICENSE AND CONFIDENTIALITY AGREEMENT ------------------------------------------------------------ AND --- HOLOGIC WARRANTY AND SOFTWARE LICENSE CERTIFICATE ------------------------------------------------- ATTACHED -------- -35- HOLOGIC, INC. ------------- INSTALLATION, SOFTWARE LICENSE AND CONFIDENTIALITY AGREEMENT - ------------------------------------------------------------ This Installation, Software License and Confidentiality Agreement describes the relationship between Hologic, Inc. ("Hologic") and the Customer (which is the organization or entity described in the signature block to this Agreement). It provides for Hologic installation, service, and warranty of equipment, for the license of software, and for protection of Hologic confidential information in connection with purchases of Hologic products through an Hologic Distributor. INSTALLATION. Hologic will cause to be installed systems designated on the attached Quotation as Hologic-installed, at no charge, at the Customer's premises. Customer shall cooperate with Hologic and shall be responsible for maintaining the premises in compliance with Hologic's site specifications and all applicable government regulations. WARRANTY AND SOFTWARE LICENSE. Software is licensed and Hologic products are warranted under Hologic's Warranty and Software License Certificate attached to this Agreement. CONFIDENTIAL INFORMATION. Customer acknowledges that all drawings, diagrams, specifications, devices, information, documents and other materials (except as established to be in the public domain) furnished by Hologic and identified as "Confidential" or the like, including but not limited to customer manuals ("Confidential Information"), contain valuable proprietary information or trade secrets developed at great expense by Hologic. Customer agrees to hold Confidential Information in confidence, and not to use, reproduce or distribute it except to Customer's employees who may use it as part of their duties. Customer agrees to report promptly to Hologic any unauthorized disclosure of any Confidential Information. DISPUTES. This Agreement is entered into and governed by the laws of Massachusetts without reference to its conflict of laws provisions. Any action relating to Hologic, this Agreement, or goods purchased or licensed hereunder, shall be brought in Massachusetts. All objections to venue are waived, and Customer consents to service or process by certified mail addressed to the address set forth below. ENTIRE AGREEMENT THIS AGREEMENT (INCLUDING THE ATTACHED WARRANTY AND SOFTWARE LICENSE CERTIFICATE) CONTAIN HOLOGIC'S ENTIRE AGREEMENT WITH AND OBLIGATION TO THE CUSTOMER. It supersedes all other quotations, agreements, understandings, warranties and representations (written or oral) between the parties, or made by Distributor. It may be modified only by a subsequent written agreement which purports to do so, which refers specifically hereto, and which is signed by duly authorized officers of Customer and Hologic. DISTRIBUTOR IS NOT AUTHORIZED TO MODIFY THESE TERMS IN ANY WAY, AND HOLOGIC ASSUMES NO LIABILITY FOR ANY DISTRIBUTOR REPRESENTATIONS. ACCEPTED: AGREED: -36- ("CUSTOMER NAME") HOLOGIC, INC. - ------------------------------ By: By: --------------------------- ---------------------------------- Name: Name: --------------------------- ---------------------------------- Title: Title: --------------------------- ---------------------------------- Address: ---------------------- ---------------------- -37- HOLOGIC. INC. WARRANTY AND SOFTWARE LICENSE CERTIFICATE (US/Canada)V.5/2/11/97 WARRANTY. All Hologic goods sold hereunder are warranted to the original Buyer (purchaser or lessee) in the United States or Canada to perform substantially in accord with their published functional specifications as of the date of Delivery (shipment) and to be free from defects in material and workmanship for the period specified in an Hologic Quotation, or if no period is specified for one year from the date of installation (or Delivery if items are installed by Buyer). Hologic does not warrant that use of goods will be uninterrupted or error-free. THE FOREGOING WARRANTY IS IN LIEU OF AND EXCLUDES ALL OTHER WARRANTIES NOT EXPRESSLY SET FORTH HEREIN, WHETHER EXPRESS OR IMPLIED BY OPERATION OF LAW OR OTHERWISE, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. WARRANTY SUPPORT. Requests for warranty support should be placed by telephone with the Hologic Customer Support Center at 1-(800)-321-HOLX during the period 8 AM to 10 PM Eastern time, Monday through Friday, exclusive of Hologic holidays. Initial warranty support will be provided by telephone. If a telephone fix is not possible, Hologic and Buyer will determine the most appropriate and timely course of action to effect the repair. If Hologic determines that on-site support is required, it will promptly provide an ETA for arrival of appropriate personnel. Warranty support includes all costs of labor, parts and travel to the Buyer's site in the United States or Canada. PREVENTIVE MAINTENANCE. During the warranty period, warranted items will receive one preventive maintenance visit at no charge. This visit may be made in conjunction with a warranty service visit. LIMITATIONS ON WARRANTY. This warranty shall not apply to any item that is: (a) repaired, moved, or altered other than by Hologic or its authorized service personnel; (b) subjected to physical or electrical abuse, stress, or misuse; (c) operated in any manner inconsistent with applicable Hologic instructions for use; or (4) designated in an Hologic Quotation or its product description as supplied on a pre-release or "as-is" basis. In no event shall Hologic be liable on any claim unless written notice is received by Hologic within thirty (30) days after discovery of the defect or cause of action. Buyer shall afford Hologic prompt and reasonable opportunity to inspect all materials against which any claim is made. If Hologic and Buyer are unable to settle any claim, Buyer must institute legal action against Hologic within one year after such claim arises; thereafter all such claims shall be barred notwithstanding any statutory period of limitation. SOFTWARE LICENSE. Buyer is granted a non-exclusive royalty-free license to use software supplied under this Agreement ("Software") solely on the equipment on which it is first installed for as long as Buyer shall own such equipment, for performing and analyzing scans acquired on said equipment in the normal course of Buyer's business, and for no other purpose or business. No license is provided to use Software for multi-site quality control or data review purposes. Title to Software shall at all times remain with Hologic. Software shall be treated as confidential information subject to the Confidential -38- Information provisions of this Agreement. Buyer shall maintain all copyright, proprietary and other notices on the Software, and shall not decompile, disassemble or reverse engineer the Software, and shall not make it available to any party except employees using the Software as part of their duties. If Buyer transfers scanning equipment purchased hereunder to a third party, Buyer may assign the right to use Software on said equipment to said third party provided that such third party first agrees in writing to be bound by, and to permit Hologic to enforce these terms. Buyer has no other right to use, sell, assign, transfer, copy or sublicense Software. LIMIT OF LIABILITY. Notwithstanding any other provision, (1) Hologic shall not be liable for any SPECIAL, incidental or consequential losses, damages, or expenses (INCLUDING BUT NOT LIMITED TO LOSS OF PROFITS, DATA, OR USE), directly or indirectly arising from the sale, handling or use of items ordered or furnished hereunder, or from any cause relating thereto; and (2) Hologic's liability for any cause whatsoever, whether based upon warranty, contract, tort, negligence, or other legal theory, is expressly limited to repair or replacement (at Hologic's option and in the form originally shipped) of items not complying with these Terms or, at Hologic's election, the repayment of, or crediting Buyer with, an amount equal to the purchase price of such items. CUSTOMER AGREEMENT ------------------------------------------------------------- (INITIALS/DATE) - ------------------- -39- EX-21.01 5 SUBSIDIARIES OF THE COMPANY EXHIBIT 21.01 HOLOGIC SUBSIDIARIES Hologic Europe N.V. Horizon Park Leuvensesteenweg 510, Bus 31 1930 Zaventem Belgium Hologic France S.A. Parc du Moulin de Massy 35 rue du Saule Trapu F-91882 Massy Cedex France FluoroScan Imaging Systems, Inc. 650B Anthony Trail Northbrook, IL 60062 EX-23.01 6 CONSENT OF ARTHUR ANDERSON LLP Exhibit 23.01 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports and to all references to our Firm included in or made a part of this Form 10K, into the Company's previously filed Registration Statement File Nos. 33-35191, 33-47830, 33-87792, 333-11853, 333-11849 and 333-34003. ARTHUR ANDERSEN LLP Boston, Massachusetts December 21, 1998 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S ANNUAL REPORT ON FORM 10K FOR THE YEAR ENDED SEPTEMBER 26, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR SEP-26-1998 SEP-28-1997 SEP-26-1998 48,423 27,479 29,287 2,100 20,438 131,848 32,338 6,440 172,597 32,215 0 0 0 134 140,382 172,597 111,498 115,564 5,589 104,710 124 0 0 16,188 5,800 10,388 0 0 0 10,388 1.37 1.30
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