ITEM 1. BUSINESS
Introduction
Lunar Corporation develops and sells x-ray and ultrasound bone densitometers for the diagnosis and monitoring of osteoporosis and other metabolic bone diseases. Lunar also develops and sells medical imaging equipment used by orthopedists and radiologists for imaging extremities. Except as the context otherwise requires, as used herein the terms "Lunar" and the "Company" mean Lunar Corporation, its wholly owned subsidiaries Lunar GmbH, Lunar Europe, N.V., Bona Fide, Ltd., Lunar FSC, Inc., and Lunar Finance Corporation.
BACKGROUND ON OSTEOPOROSIS
Osteoporosis is a disease generally associated with aging and characterized by excessive loss of bone mineral, resulting in decreased bone density over time. Demineralization weakens bone so that minor physical stress can cause debilitating fractures, usually in the wrists, hips, and spine. These fractures can result in disfigurement, decreased mobility, and, in some cases, extensive hospitalization and chronic nursing home care.
Osteoporosis is a major and growing public health problem in the United States and worldwide. In the United States, 25% of women over age 60 develop vertebral fractures related to osteoporosis, and as many as 50% of women will develop vertebral fractures by age 75. According to the National Institutes of Health, there are currently more than 10 million adults affected by osteoporosis in the United States. Factors contributing to bone loss include age- and sex-related hormonal changes, low calcium intake, excessive alcohol consumption, and certain drug therapies.
An estimated 1.3 million osteoporosis-related fractures occur each year in the United States. The Scientific Advisory Board of the National Osteoporosis Foundation ("NOF") estimated the annual direct and indirect costs of osteoporosis-related fractures in the United States in 1984 to be over $7 billion, with the costs related to hip fractures being a major component of the aggregate cost. Without effective diagnosis and treatment, the medical and social consequences of such fractures will worsen as the population ages. Osteoporosis is at least partially preventable if individuals at the greatest risk of fracture are diagnosed and treated in the early stages.
Diagnosis and Monitoring. Relatively few people are diagnosed in time for effective therapy since there are no obvious symptoms of osteoporosis in the early stages. Often the first symptom is a debilitating fracture. Studies show that bone mineral density is correlated highly with bone strength. Since bone strength is a determinant of an individual's susceptibility to fracture (along with the likelihood of sustaining sufficient trauma), bone mineral density indicates fracture risk. Bone mineral density can be measured with accuracy (referring to how well the scanners measure the actual bone density) and precision (referring to whether the scanners yield the same result upon multiple scans of the same bone) using dual-photon absorptiometry ("DPA") or dual-energy x-ray absorptiometry ("DEXA") techniques.
Bone densitometer technology is based on the fact that bone absorbs x-ray photons at a different rate than does soft tissue. Photons are directed at the body, and their differential absorption is measured. The first commercial bone densitometers utilized single-photon absorptiometry ("SPA"), a method which was developed at the University of Wisconsin - Madison, Department of Medical Physics, by investigators including Drs. Richard B. Mazess, James Sorenson, and John Cameron. SPA, which uses photons at a single-energy level, became commercially available in 1972 and was widely utilized in research. During the 1970s, Dr. Richard B. Mazess, James A. Hanson, Philip Judy, Walter Peppler, Charles Wilson, and other researchers at the University of Wisconsin - Madison, Department of Medical Physics, developed a DPA scanner which used photons of two energy levels. Dr. Mazess organized Lunar to focus on the diagnosis and monitoring of osteoporosis and to market bone densitometers using DPA. In the 1980s, DPA and DEXA scanners were developed to measure bone density in the spine and the hip, which are more clinically significant areas of the skeleton. SPA and DPA scanners employ a radioactive source; DEXA scanners generate radiation using a conventional x-ray tube. DEXA scanners are accurate, have a low precision error, are safe because they emit low radiation, have scanning times of approximately 5 minutes, and have a low operating cost.
In recent years, ultrasound technology has been developed to measure the bone density of certain peripheral sites such as the heel. Ultrasound bone densitometers are less expensive than DEXA bone densitometers, and since they use nonionizing radiation, ultrasound bone densitometers encounter fewer regulatory and licensing requirements as compared to DEXA bone densitometers.
Reimbursement. To achieve broad acceptance and qualify for third- party reimbursement, diagnostic products not only must be safe and efficacious, but also must be deemed cost-effective by public and private health care payors. Sales of bone densitometers are also dependent upon the level of reimbursement provided by public and private health care payors. Reimbursement for DEXA scans has been approved in several countries. Reimbursement for ultrasound scans is generally not yet provided by public health systems.
In June 1997, the United States Health Care Finance Administration ("HCFA")announced proposed reductions in Medicare reimbursement rates for axial bone density measurement tests, reducing such reimbursements from $121 to $40 per test. The announcement also proposed higher reimbursement rates for peripheral measurements, increasing those rates from $38 to $57 per test. In conversations with HCFA, the Company and the National Osteoporosis Foundation ("NOF") learned that the proposed new rates do not fully reflect the costs incurred for axial measurements and that HCFA plans to publish corrected reimbursement rates in the December 1997 Federal Register. If the proposed reduction for axial bone density tests were implemented, Lunar's United States business would be adversely impacted.
In August 1997, President Clinton signed into law the Medicare Bone Mass Measurement Coverage Standardization Act as a provision in the Balanced Budget Act. The provision sets forth national criteria under which Medicare would cover bone density diagnostic tests, and will be effective July 1, 1998.
While many private insurance carriers currently provide reimbursement for bone mass measurement, a significant number do not. California, Florida, Oklahoma, Tennessee, Texas, and Maryland have legislation mandating insurance coverage for bone density tests.
During fiscal 1997, the Japanese Ministry of Health adjusted the reimbursement rate for peripheral measurements from approximately $36 to $18 while leaving axial measurement reimbursement rates unchanged at $36 per measurement.
Therapies. The demand for bone densitometers sold by the Company is dependent on the availability of therapies for the treatment of postmenopausal osteoporosis. The Company does not sell any of the therapies discussed in this subsection.
Estrogen replacement therapies ("ERT") are approved for marketing and sale in the United States for the treatment of postmenopausal osteoporosis. ERT is currently believed to be an effective means to prevent bone loss and related fractures, but does not stimulate bone formation. In the United States, ERT most often is used to relieve symptoms related to menopause; however, usage for osteoporosis is steadily increasing. The FDA approval of a combined estrogen-progestin pill (Prempro by Wyeth Ayerst) has increased interest in long-term and potential compliance therapy of osteoporosis.
Calcitonins are approved for marketing and sale in the United States for the treatment of osteoporosis. Calcitonins seem to prevent further bone loss, but do not stimulate bone formation. Miacalcin nasal spray, by Sandoz Pharmaceuticals, is a nasal delivery formulation which was approved for sale by the Food and Drug Administration ("FDA") in the United States in 1995.
A bisphosphonate (Fosamax, developed by Merck & Co.) was approved in October 1995 for marketing and sale in the United States for the treatment of osteoporosis. Studies have shown that bisphosphonates appear to inhibit bone resorption without interrupting normal bone formation, thereby increasing bone mass and possibly reducing vertebral fractures. Several other pharmaceutical companies are developing bisphosphonates to treat osteoporosis and expect to market these products within the next two years.
Calcium supplements have not been approved for marketing and sale in the United States for the treatment of osteoporosis. Calcium supplements are often recommended for postmenopausal women, but evidence of their efficacy in treatment and prevention of osteoporosis is controversial. Calcium supplements are also recommended for use with bisphosphonates and ERT.
Fluoride preparations have not been approved for marketing and sale in the United States for the treatment of osteoporosis. However, one preparation is awaiting consideration by the FDA. Fluoride preparations are known to increase bone density in the spine (the most common site of osteoporosis fractures), but have little effect on bone density in the hip (the most debilitating site of osteoporosis fractures).
A new class of compounds, selective estrogen receptor modulators, have been shown to prevent bone loss. An NDA has been submitted for the first of these compounds, Raloxifene (Evista by Eli Lilly).
In Japan and Europe, there is an active market for osteoporosis therapies. In Japan, available therapies include vitamin D-3 compounds, calcitonin, and ipriflavone. In Europe, available therapies include estrogens, calcitonins, vitamin D-3 compounds, ipriflavone, and sodium fluoride. Vitamin D-3 compounds, primarily 1 alpha-D-3, which are available in Japan and Europe, are activated by the body into hormones which help regulate blood levels of calcium required for essential body functions, including normal bone growth. Studies have shown that low dosages of 1 alpha-D-3 have little efficacy as an osteoporosis therapy, but at higher dosages, bone mineral content increased and bone fracture rates decreased.
THE COMPANY'S PRODUCTS
X-Ray Densitometry Systems. In 1988, Lunar introduced its DEXA system, the DPX, which replaced the radioactive source with an x-ray source thereby allowing for faster scan times and improved precision. Since that time, the Company has developed numerous enhancements and instrument sizes available within this product line. Some of the more popular models are described below.
Lunar's leading product is the DPX-IQ, introduced in 1996. The DPX-IQ includes a broad range of clinical applications, including software for the analysis of the spine, femur, hand, and total body bone density and soft-tissue composition. Additional applications are available via software upgrades versus hardware modifications. The DPX-IQ is available in a full-size model for complete clinical utility, and a compact model which requires less space. The versatility of the DPX-IQ meets a wide range of clinical and research needs. Primary customers include radiologists, gynecologists, rheumatologists, endocrinologists and orthopedists.
The EXPERT is a high-end imaging bone densitometer, having improvements on previous densitometers because of its better speed (10X faster) and spatial resolution (3X finer). The spatial resolution with the EXPERT is at least two to three times that of existing densitometers, allowing it to provide much better images. This enables the physician to identify artifacts that may be in the field and to exclude them if need be. It also provides better visual identification of the region of interest and eliminates anatomical blurring at key areas (for example, the intervertebral spaces.)
In addition, the imaging capability of the EXPERT allows determinations of the entire lateral spine to be achieved in less than a minute. Morphometry of individual vertebra can be readily done with standardized, semiautomated algorithms. EXPERT morphometry, compared to conventional radiographs, provides uniformity in geometry; there is no distortion along the axis of the spine, leading to exact values for vertebral height. The EXPERT is sold primarily to research institutions and high-end imaging centers.
In 1997, Lunar introduced PIXI, the first peripheral instantaneous x-ray imager. PIXI is a new generation of peripheral densitometer, utilizing cone-beam geometry for rapid (5 seconds), high resolution imaging of both the heel and forearm. While the forearm is an adequate site to assess bone loss due to hyperparathyroidism, it is only a modest predictor of future fractures and a poor site to monitor therapeutic response. In contrast, the heel, as a weight-bearing site with metabolically active bone, has been shown to be both: (1) a good predictor of hip fractures, and (2) responsive to anti-resorptive therapies, much like the spine. For maximum clinical versatility, PIXI measures both of these peripheral sites.
PIXI is designed to become an integral part of day-to-day patient management, occupies minimal floor space, requires no patient preparation, and weighs less than 25 kg, making it the lightest DEXA densitometer. Lunar sells the PIXI to medical specialists such as gynecologists, and other primary care physicians.
Ultrasound Densitometry Systems. Lunar introduced the Achilles ultrasound densitometer in 1991. The Achilles series of products can measure bone using either speed of sound or broadband ultrasound attenuation. They are the first densitometers to combine both of these ultrasound measurements in one device. The Achilles is sold to customers such as endocrinologists, obstetricians, gynecologists, and family practitioners outside of the United States.
In 1995, the Company introduced the Achilles+ having the same performance features as its predecessor with increased ease of operation and reduced patient measurement time. In September 1997, the Company introduced the Achilles+ Solo featuring a faster scan time (40 seconds per measurement) and operates without an external computer. An application for premarket approval has been submitted to the FDA to sell the Achilles+ to customers in the United States.
Orthopedic Imaging Systems - Magnetic Resonance Imaging System. In September 1993, the Company signed an exclusive distributor agreement with ESAOTE Biomedica Spa, a medical device manufacturer based in Italy, to distribute the Artoscan dedicated MRI system in the United States. The Artoscan is a specialized MRI scanner suitable for imaging extremities such as knees, wrists, and ankles. The Company sells the Artoscan in the United States for less than $350,000, which is significantly below competitive whole body MRI systems. The Company believes that this lower price, and the fact that installation and siting costs associated with the Artoscan are minimal may be attractive to radiologists, orthopedists, sports medicine specialists, and other MRI users to buy the product. Under the agreement with ESAOTE Biomedica, Lunar is required to meet certain minimum annual purchase commitments. The agreement expires in September 1998. The Company intends to negotiate the renewal of the agreement. There can be no assurance that the agreement will be renewed on terms satisfactory to the Company.
Fluoroscopic C-Arm. The Company introduced a fluoroscopic C-arm for extremity imaging at the 1996 Conference of the American Academy of Orthopedic Surgeons. ORCA utilizes digital imaging capabilities coupled with proprietary processing techniques to produce distortion-free images, particularly of bone. ORCA is designed for the orthopedic and radiology market.
CUSTOMERS, SALES, AND MARKETING
Lunar's products are sold to leading medical institutions, hospitals, pharmaceutical companies active in the field of bone mineral metabolism, radiological, orthopedic, and other specialty group practices.
In the United States, Lunar markets and sells its products through a direct sales force. Outside of the United States, Lunar markets and sells its products primarily through independent distributors, all of whom offer sales and technical support. Employees of these distributors have undergone product and technical training related to the Company's systems. The Company's wholly owned German and Belgian subsidiaries provide direct sales and service support to German and Belgian customers. The Company also maintains offices in Brussels, Belgium, and Sydney, Australia, to support its distributors with marketing, sales support, and service.
Lunar markets and sells the Artoscan MRI scanner through a direct sales force and the fluoroscopic C-arm through various orthopedic surgery equipment dealers.
Lunar markets its products through advertising in medical journals, direct mailings of brochures, attendance of and presentations at medical seminars and trade shows, and personal visits by sales representatives with customers. Lunar had 129 employees engaged in the marketing, sales support, and service of bone densitometry equipment as of June 30, 1997. Lunar products carry a one-year warranty. Extended service contracts are also available.
For the years ended June 30, 1995, 1996, and 1997, approximately 73%, 55%, and 39% of sales, respectively, were to customers located in foreign countries. For the fiscal years ended June 30, 1995 and 1996, sales to the Company's distributor in Japan accounted for 21% ($9,170,611) and 13% ($8,580,406) of the Company's sales, respectively. No individual end user accounted for more than 2% of Lunar's sales for the fiscal year ended June 30, 1997.
As of June 30, 1997, substantially all of the Company's backlog was deliverable within 120 days. Orders included in backlog may generally be canceled or rescheduled by customers, without significant penalty, and therefore cannot be considered firm. Also, the Company's revenues tend to be somewhat seasonal, generally being lower in the first fiscal quarter due primarily to lower activity in Europe and North America in the summer months.
MANUFACTURING
Lunar's manufacturing operations consist primarily of assembly, testing, and quality control. Lunar purchases a majority of the parts and peripheral components for its systems and manufactures certain subsystems, such as the x-ray tube head, from basic components. Parts and materials are generally readily available from several supply sources.
PATENTS AND PROPERTY RIGHTS
Lunar relies in part upon know-how, trade secrets, trademarks and copyrights, and patents to protect technology which it considers important to the development of its business.
Although the Company believes patents are not critical in protecting its competitive advantage in x-ray bone densitometry, it has obtained a number of United States patents relating to its technology. The Company owns a number of issued United States and foreign patents and patent applications related to various aspects of x-ray and ultrasound bone densitometry. The Company continues to file United States and foreign patent applications covering its developments in the bone densitometry and imaging technologies. Recently, the Company filed United States and foreign patent applications covering features of ORCA and PIXI. In addition to patents and patent applications concerning technology developed by the Company, the Company has licensed patented technology developed at various universities.
The Company has obtained United States and foreign trademark registrations for "LUNAR," "DPX," "Achilles," "EXPERT," "LUNAR Expert." Applications for trademark registration are being sought worldwide for "DPX-IQ" and "ORCA".
The Company claims international copyright in its software, user's manuals, customer brochures, and advertising materials.
The Company also relies on unpatented trade secrets. The Company requires its employees, consultants, and advisors to execute confidentiality agreements upon the commencement of an employment or a consulting relationship with the Company. The agreements provide that all confidential information developed or made known to the individual during the course of the relationship shall be kept confidential and not disclosed to third parties except in specified circumstances. The agreements also provide that all inventions conceived by the individual during his employment and relating to the business of the Company shall be the exclusive property of the Company. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's trade secrets in the event of unauthorized use or disclosure of such information. Additionally, others may independently develop substantially equivalent proprietary information and techniques, or otherwise gain access to the Company's trade secrets or disclose such technology.
For information regarding patent litigation, see Item 3 below.
COMPETITION
Lunar product sales are dependent on competition, reimbursement levels, and availability of therapies on a country-by-country basis. The medical instrumentation industry is highly competitive and characterized by continual change and improvement in technology. Many of the companies in the medical instrumentation industry have significantly greater research, manufacturing, marketing, and financial resources than the Company.
To date, the market for bone densitometer systems has been characterized by companies such as Lunar which specialize in instruments for bone density measurement. Hologic, Inc., based in Massachusetts, and Norland Medical Systems, Inc., based in Fort Atkinson, Wisconsin, sell bone densitometer scanners which compete directly with the DPX series and the EXPERT. Two Japanese companies, an Italian and a French company are developing or have introduced x-ray bone densitometers in their respective countries. Lunar expects additional competitors to enter the bone densitometry market, both in the United States and foreign countries. Competition has intensified as new models have been introduced by competitors.
The Company believes it is the world's largest seller of ultrasound bone densitometry instruments. Hologic and at least 5 other companies have commercially introduced devices which compete with the Achilles ultrasound product line. Lunar is aware of several other companies developing ultrasound bone densitometers.
In addition to competition from other medical equipment manufacturers and devices, biochemical markers have gained increased interest among researchers for the detection of high bone turnover which can lead to osteoporosis. Such markers could be used as an adjunct to bone densitometry.
The primary competitors to the ORCA C-arm include OEC Medical Systems, Inc., Fluoroscan (a subsidiary of Hologic), and Xitec. Innervision sells an extremity MRI device competitive to the Artoscan, although the Company is not aware of any actual installations.
REGULATION
The Company's products are subject to regulation by the FDA and by many foreign governments. Under the United States Food, Drug, and Cosmetic Act ("FDA Act"), manufacturers of medical devices must comply with certain regulations governing the manufacturing, testing, packaging, and marketing of medical devices. The Company's x-ray bone densitometry 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. Lunar believes it is in compliance in all material respects with these various laws and regulations.
The FDA generally must authorize the commercial sale of new medical devices. Commercial sales of the Company's bone densitometry 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 premarket approval for a particular medical device. The Section 510(k) notification filing must contain information which establishes that the device is substantially equivalent to a legally marketed device or to a device which was marketed prior to May 28, 1976. The FDA may either deny the Section 510(k) submission or require further information within 90 days of submission. Commercial marketing of the device cannot begin until the 510(k) submission is cleared by the FDA. Because of backlog presently existing in the FDA, 510(k) clearance now takes on the average longer than 90 days. The premarket approval procedure involves a more complex and lengthy review process by the FDA than the Section 510(k) premarket notification procedure.
The following table summarizes FDA Section 510(k) clearance received by Lunar during the last 10 years:
DPX Bone Densitometer June 1988 DPX Total Body Software June 1989 DPX Population Reference Data April 1990 DPX-L/DPX-alpha Bone Densitometers December 1990 Lateral Spine Software August 1991 DPX Forearm Software February 1992 DPX Orthopedics Software February 1992 EXPERT Bone Densitometer April 1995 Morphometry Software May 1995 DPX Tissue Quantitation Software October 1995 DPX Hand Software October 1995 ORCA Orthopedic C-arm May 1996 EXPERT Forearm and Hand Software November 1996 PIXI Densitometer April 1997 PIXI Reference Data August 1997
In August 1997, the Company submitted an application to the FDA for premarket authorization to sell the Achilles+ ultrasound densitometer in the United States. Lunar believes new products being developed in the x-ray densitometry and imaging product lines will be eligible for a Section 510(k) marketing clearance.
Lunar is also subject to regulation by the Nuclear Regulatory Commission ("NRC") as a result of its manufacturing of medical devices which use radioactive materials and through its storage and handling of radioactive materials used in the testing of such medical devices. The NRC regulates the type, amount, form, storage, use, disposal, and handling of such radioactive materials. Licenses from the NRC must be renewed every five years. Lunar has in place a Radiation Safety Program and believes it is in compliance in all material respects with NRC regulations.
The Company's product line is subject to approval by certain foreign regulatory and safety agencies. Lunar believes it is currently in compliance with all regulations in foreign countries applicable to its business.
As a manufacturer of medical devices, Lunar is subject to certain FDA regulations which relate to its manufacturing processes and facilities, and these processes and facilities are subject to continuing review by the FDA. Lunar has had several FDA on-site inspections and has complied with FDA regulations. Most states and certain foreign countries monitor and require licensing of x-ray devices, such as DEXA scanners. Federal, state, and foreign regulations regarding the manufacture and sale of medical devices are subject to future change. Lunar cannot predict what impact, if any, such changes might have on its business.
The Company is subject to various federal, state, and local laws and regulations relating to the protection of the environment. Lunar believes its current operations comply with all currently applicable environmental laws and regulations. Lunar's expenditures for environmental compliance have not had, nor are they expected to have, a material adverse effect on the results of operations or financial condition of the Company.
Export clearance for the Company's products varies by country. Generally if FDA 510(k) or premarket approval is received in the United States, there are no other export clearances required. Even in the absence of the FDA clearances, many countries generally only require the Company to comply with safety standards. An exception to the above requirements is Japan which requires Ministry of Health and Welfare approval.
In May 1997 the Company received ISO-9001 certification indicating compliance with internationally recognized standards of design and development, manufacturing and post-market support.
RESEARCH AND DEVELOPMENT
As of June 30, 1997, the Company had 56 employees engaged in research and development. During fiscal 1995, 1996, and 1997, Lunar's research and development expenses were $4.3 million, $5.6 million, and $5.7 million, respectively.
PRODUCT LIABILITY INSURANCE
The Company maintains product liability insurance and considers its current level of product liability insurance coverage to be adequate. While the Company has not experienced any material product liability claims to date, if such claims arise in the future, they could have a material adverse effect on the results of operations or financial condition of the Company.
EMPLOYEES
As of June 30, 1997, Lunar had 265 full-time employees, including 58 in manufacturing operations; 56 in research and development; 129 in marketing, sales support, and service; and 22 in finance and administration. None of the Company's employees is represented by a union. The Company considers its employee relations to be excellent.
SPINOFF OF BONE CARE
From its inception until October 1995, Bone Care had focused on the development of one-alpha D-2, a D-hormone compound. Lunar independently researched and patented several other novel D-hormone compounds from 1988 to 1995. In October 1995, Lunar contributed its ownership of Continental Assays Corporation, and all of its D-hormone-related assets with a book value of $175,867, and forgave intercompany loans receivable of $634,683 in exchange for 1,806,075 shares of Bone Care common stock. Lunar also contributed $10,000,000 in exchange for 1,698,674 shares of Bone Care common stock on May 8, 1996 and reimbursed Bone Care $725,000 for tax savings realized in prior years when Bone Care losses were included in Lunar's consolidated tax returns. On May 8, 1996, Lunar distributed all of its shares of Bone Care to Lunar shareholders of record as of April 24, 1996 in a transaction intended to qualify as a tax-free distribution. The shares distributed to Lunar shareholders represent 97% of the total outstanding Bone Care shares as of the date of the distribution.
Bone Care entered into a Transition Agreement with the Company, pursuant to which certain employees of the Company perform administrative services for Bone Care. Such services include legal, treasury, accounting, insurance and employee benefit administration. As compensation, Bone Care pays the Company a monthly fee of $7,000 plus certain costs. The Company leases 3,000 square feet of office space to Bone Care for $2,000 per month under the Transition Agreement. The term of the Transition Agreement is three years; however, Bone Care may terminate the agreement by giving the Company 90 days advance written notice.
GLOSSARY OF DEFINED TERMS
1A-D-2 - one alpha hydroxyvitamin D-2 Bone Care - Bone Care International, Inc. CT - computer tomographic DEXA - dual-energy x-ray absorptiometry DPA - dual-photon absorptiometry ERT - estrogen replacement therapies FDA - Food and Drug Administration FDA Act - United States Food, Drug, and Cosmetic Act HCFA - Health Care Finance Administration Hologic - Hologic, Inc. MRI - magnetic resonance imaging NOF - National Osteoporosis Foundation NRC - Nuclear Regulatory Commission SPA - single-photon absorptiometry
ITEM 2.
ITEM 2. PROPERTIES
The Company owns and occupies a building of approximately 70,000 square feet on approximately 3 acres in Madison, Wisconsin. The Company's facilities were originally acquired in 1986 and expanded by approximately 30,000 square feet in 1994. The Company also leases office facilities in Germany and Belgium.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Patent Litigation: On March 5, 1996, the Company and University of Alabama - Birmingham Research Foundation (UAB) (collectively the co-plaintiffs) sued EG&G Astrophysics (EG&G) of Long Beach, California, in the United States District Court for the Western District of Wisconsin for infringement of U.S. Patent 4,626,688 (the '688 Patent) by EG&G's dual- energy baggage scanners. A trial of the matter in December of 1996 concluded with a verdict in favor of the co-plaintiffs. The Company and UAB were awarded $4.2 million in damages which was divided between the co-plaintiffs after deducting legal expenses. The co-plaintiffs also entered into a Settlement and License Agreement with EG&G whereby EG&G was licensed under the '688 patent and a related U.S. patent. The license agreement provides for payment of royalties to the co-plaintiffs on EG&G's dual-energy baggage scanners manufactured or sold in the United States. The license agreement ends on December 2, 2003.
The Company is presently co-defendant and counterclaim co-plaintiff with the UAB in two declaratory judgment actions filed in the United States District Court for the Central District of California. Both actions seek a determination of non-infringement and invalidity of the 688 Patent. The first declaratory judgment action was filed on January 21, 1997 by RapiScan Security Systems, Inc. ("RapiScan"). RapiScan manufactures and sells baggage scanning equipment and is a competitor of EG&G. The second declaratory judgment action was filed on February 26, 1997 by Osteometer Meditech A/S ("Osteometer"), a competitor of the Company. Osteometer manufactures and sells bone densitometry products and is located in Denmark. The Company intends to vigorously defend against these lawsuits. The Company does not believe these lawsuits will have a material effect on the results of operations or financial condition of the Company.
During fiscal 1995 and part of fiscal year 1996, the Company was involved in patent litigation with Hologic, Inc., a Massachusetts-based competitor. On November 22, 1995, the Company announced the signing of a definitive agreement with Hologic settling all disputes between the parties. The agreement provides for certain continuing payments between the companies related to future sales, the net effect of which Lunar does not believe will be material to its revenues or earnings. The agreement also provides that the companies will not engage each other in patent litigation in the area of x-ray and ultrasound densitometry for a ten-year period.
Other Matters: The Company is a defendant from time to time in actions arising out of its ordinary business operations. There are no other legal proceedings known to the Company at this time which it believes would likely have a material adverse impact on the results of operations or financial condition of the Company. To the Company's knowledge, there are no material legal proceedings to which any director, officer, affiliate, or more than 5% shareholder of the Company (or any associate of the foregoing persons) is a party adverse to the Company or any of its subsidiaries or has a material interest adverse to the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth high and low sales prices as reported on the National Market System of the NASDAQ Stock Market for fiscal year 1997 and 1996. These prices have been adjusted for the December 1995 3-for-2 stock split.
First Second Third Fourth Quarter Quarter Quarter Quarter High 40.00 35.75 40.75 34.50 Low 32.00 26.25 29.25 15.00
High $22.83 $29.33 $49.50 $48.25 Low 17.00 20.58 25.50 32.75
On September 24, 1997, the Company's common stock was held by approximately 5,500 stockholders of record or through nominee or street name accounts with brokers.
LUNAR has not paid any cash dividends on its shares of common stock since its initial public offering on August 14, 1990, and does not expect to pay any cash dividends in the foreseeable future. Lunar intends to reinvest its earnings on the continued development and operation of its business. Any payment of dividends would depend upon Lunar's pattern of growth, profitability, financial condition, and such other factors as the Board of Directors may deem relevant.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for each of the five years in the period ended June 30, 1997 have been derived from the audited consolidated financial statements of LUNAR. The consolidated financial statements for the fiscal years ended June 30, 1993 through 1997 have been audited by KPMG Peat Marwick LLP, independent auditors. References to a year are to Lunar's fiscal year ended June 30, unless otherwise designated.
The following data should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
STATEMENTS OF INCOME DATA
Year Ended June 30, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (in thousands, except per-share data) REVENUES Equipment sales and other revenue $81,467 $66,859 $44,572 $30,027 $24,654 Licensing revenue - - - - 1,489
81,467 66,859 44,572 30,027 26,143
OPERATING EXPENSES Cost of sales 36,145 30,236 18,871 11,720 8,743 Research and development 5,682 5,610 4,349 2,744 3,348 Sales and marketing 17,144 14,447 9,813 6,783 6,049 General and administrative 4,950 4,731 4,327 2,532 2,073
63,921 55,024 37,360 23,779 20,213
Income from operations 17,546 11,835 7,212 6,248 5,930
OTHER INCOME (EXPENSE) Interest income 1,533 1,549 1,312 1,229 1,046 Settlement of lawsuit 1,829 - - - - Other 619 (238) 328 178 (1)
3,981 1,311 1,640 1,407 1,045
Income before income taxes 21,527 13,146 8,852 7,655 6,975
Income tax expense 7,241 3,910 2,151 1,849 1,793
NET INCOME $14,286 $9,236 $6,701 $5,806 $5,182
NET INCOME PER COMMON AND COMMON-EQUIVALENT SHARE $1.57 $1.04 $.76 $.68 $.61
Weighted average shares outstanding 9,106 8,908 8,824 8,526 8,474
BALANCE SHEET DATA
As of June 30, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (in thousands) Working capital $45,549 $38,999 $33,140 $17,603 $29,531 Total assets 83,283 62,872 56,700 45,515 38,369 Long-term liabilities - - - - - Shareholders' equity 70,243 52,405 48,096 40,451 34,437
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
STATEMENTS OF INCOME (percent of sales)
Year Ended June 30, 1997 1996 1995 ---- ---- ---- REVENUES 100% 100% 100%
OPERATING EXPENSES Cost of sales 44 45 42 Research and development 7 8 10 Sales and marketing 21 22 22 General and administrative 6 7 10
78 82 84
Income from operations 22 18 16
OTHER INCOME (EXPENSE) Interest income 2 2 3 Other, net 3 - 1
5 2 4
Income before income taxes 27 20 20 Income tax expense 9 6 5
NET INCOME 18% 14% 15%
YEAR ENDED JUNE 30, 1997 VERSUS 1996 - Equipment sales and other revenue increased 22% to $81,467,000 in fiscal year 1997, from $66,859,000 in fiscal year 1996. Sales by product line are summarized as follows:
Revenues by Product (in thousands)
Fiscal Year Fiscal Year 1997 1996 ---- ---- X-ray densitometry $61,827 $51,399 Ultrasound densitometry 5,528 5,054 Orthopedic Imaging 8,851 6,245 Other 5,261 4,161 -------- -------- $81,467 $66,859 ======== ========
The increase in x-ray densitometry sales in the current fiscal year is primarily attributable to increased shipments in the United States, which the Company believes are related to the introduction of several new drug therapies during the last 24 months. The increase in orthopedic imaging sales is due to the Company's introduction of the ORCA mini C-arm, a portable x-ray device used by surgeons to image extremities, and higher Artoscan MRI sales resulting from increased acceptance of the system, particularly by orthopedic surgeons.
Cost of sales as a percentage of equipment sales averaged 44% in the year ended June 30, 1997 and 45% in the year ended June 30, 1996.
Research and development expenditures remained stable at $5,682,000 in fiscal year 1997 compared to $5,610,000 in fiscal year 1996. Expenditures related to the development of densitometry products increased approximately $1,044,000 over 1996 levels offset by the discontinuance of D-hormone research. The Company spun off Bone Care to its shareholders on May 8, 1996 in a transaction intended to qualify as a tax-free distribution. The costs of clinical trials and any other costs related to the research and development of D-hormones are not included in the Company's consolidated net income after the spin-off. D-hormone related expenses were $972,000 in fiscal year 1996.
Sales and marketing expenses increased 19% to $17,144,000 (21% of product sales) in fiscal year 1997 from $14,447,000 (22% of product sales) in fiscal year 1996. This increase is primarily attributable to increased marketing personnel and sales force placed in position for an expanding market with increased products.
General and administrative expenses increased to $4,950,000 in fiscal year 1997 from $4,731,000 in fiscal year 1996. Legal expenses decreased approximately $965,000. Lunar had been involved in several patent lawsuits initiated in September 1994 with Hologic, Inc., a Massachusetts-based competitor, related to x-ray and ultrasound densitometers. These lawsuits were settled in November, 1995. Offsetting this reduction were increases in labor and other office-related costs.
Interest income of $1,533,000 in fiscal year 1997 approximated interest income of $1,550,000 in fiscal year 1996.
In December 1996, a court awarded the Company and the University of Alabama-Birmingham (the co-plaintiffs) $4,200,000 in a patent infringement case against EG&G Astrophysics (EG&G). The co-plaintiffs split the award after deducting legal expenses. The Company's resulting $1,829,000 share of the award is reflected in other income. The co-plaintiffs entered into a Settlement and License Agreement with EG&G providing for future royalty payments based on the volume of EG&G equipment sales utilizing the technology subject to the license.
The effective tax rate averaged 34% in fiscal year 1997 and 30% in fiscal year 1996. The Company's effective rate has been below the 34% federal statutory rate as a result of the tax benefit from the Company's foreign sales corporation, Lunar FSC, Inc., and tax-exempt interest income offset by the effect of state income taxes. The effective tax rate was higher in the current fiscal year due to increased profits from sales within the United States, which do not benefit from foreign sales corporation treatment.
YEAR ENDED JUNE 30, 1996 VERSUS 1995 - Equipment sales and other revenue increased 50% to $66,859,000 in fiscal year 1996, from $44,572,000 in fiscal year 1995. Sales by product line are summarized as follows:
Revenues by Product (in thousands)
Fiscal Year Fiscal Year 1996 1995
X-ray densitometry $51,399 $29,500 Ultrasound densitometry 5,054 7,211 Orthopedic Imaging 6,245 5,320 Other 4,161 2,541 --------------------------- $66,859 $44,572
The increase in DPX sales in fiscal year 1996 is primarily attributable to increased shipments in the United States, which the Company believes are related to the introduction of several new drug therapies during the prior 12 months. The increase in EXPERT shipments is the result of solving several problems related to detector production experienced in prior fiscal years. Achilles sales decreased in fiscal year 1996 as compared to fiscal year 1995 due to lower sales in Japan caused by cutbacks in government-sponsored programs to support low-cost densitometry. The increase in Artoscan sales is a result of increased acceptance of the system, particularly by orthopedic surgeons.
Cost of sales as a percentage of equipment sales increased to 45% in the year ended June 30, 1996 from 42% in the year ended June 30, 1995. This increase is primarily a result of increased sales of the lower-margin EXPERT and Artoscan extremity MRI products, and proportionately less sales of the higher-margin Achilles.
Research and development expenditures increased to $5,610,000 in fiscal year 1996 from $4,349,000 in fiscal year 1995. This increase is primarily attributable to expenditures related to the development of the DPX-IQ bone densitometer and the ORCA mini C-arm. Also, Bone Care increased expenditures for clinical testing of 1-alpha D2 in the treatment of secondary hyperparathyroidism associated with end-stage renal disease. D-hormone-related research expenses totaled $972,000 in fiscal year 1996 compared to approximately $882,000 in fiscal year 1995.
Sales and marketing expenses increased to $14,447,000 in fiscal year 1996 from $9,812,000 in fiscal year 1995, representing 22% of equipment sales in both years. During fiscal 1996, Lunar expanded the number of direct sales representatives and sales and marketing administration staff in the United States in response to higher customer demand levels.
General and administrative expenses increased to $4,731,000 in fiscal year 1996 from $4,327,000 in fiscal year 1995. This increase is primarily attributable to higher legal expenses associated with the Hologic litigation.
Interest income increased to $1,550,000 in fiscal year 1996 from $1,313,000 in fiscal year 1995. In fiscal year 1996, increased interest income from the Company's higher level of financed trade receivables in South America more than offset the decreased interest income from a lower level of marketable securities. In connection with the Bone Care spin-off the Company transferred $10,725,000 to Bone Care.
The effective tax rate averaged 30% in fiscal year 1996 and 24% in fiscal year 1995. The Company's effective rate is below the 34% federal statutory rate as a result of the tax benefit from the Company's foreign sales corporation, Lunar FSC, Inc., and tax-exempt interest income. The effective tax rate was higher in the current fiscal year due to increased profits from sales within the United States, which do not benefit from foreign sales corporation treatment.
LIQUIDITY AND CAPITAL RESOURCES - Total cash and cash equivalents increased $6,416,000 to $14,417,000 at June 30, 1997 from $8,001,000 at June 30, 1996. Marketable securities increased $19,108,000 to $22,483,000 at June 30, 1997 from $3,375,000 at June 30, 1996. Marketable securities consist of a laddered portfolio of readily marketable high-grade municipal bonds with various maturities not exceeding 48 months.
The Company's accounts receivable decreased $6,896,000 to $29,057,000 at June 30, 1997 from $35,953,000 at June 30, 1996. This decrease is attributable to the sale of approximately $10,800,000 of accounts receivable from selected customers in Latin America to a leasing company during the year. The Company continues to have recourse of approximately 10% of the sales price in the event non-payment of the underlying accounts receivable should occur. The resulting decrease was partially offset by higher accounts receivable resulting from increases in sales.
Inventories increased 8% to $9,373,000 on June 30, 1997 from $8,675,000 on June 30, 1996. This increase is primarily attributable to increased sales.
The Company does not have any pending material commitments for capital expenditures.
On April 22, 1997, the Company approved a stock repurchase program pursuant to which it may repurchase up to 1,000,000 shares of its common stock from time to time based upon market conditions and other factors. The Company has repurchased 20,000 shares under this program as of September 25, 1997.
Management believes the current level of cash and short-term investments is adequate to finance the Company's operations for the foreseeable future.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In January 1997, the SEC released amended Rule 4-08 of Regulations S-X (General Notes to the Financial Statements), as part of Release No. 33-7386, requiring additional disclosure with respect to accounting policies followed in connection with the accounting for derivative financial instruments and derivative commodity instruments. This disclosure is required for all period ending after June 15, 1997, unless a registrant's most recent Form 10-K is in compliance. The Release also added Item 305 to Regulation S-K to require quantitative and qualitative disclosures outside the financial statements about market risk inherent in derivative and other financial instruments. The requirements of Item 305 become effective for non-bank registrants with market capitalization in excess of $2.5 billion at January 28, 1997, for filings that include annual financial statements for periods ending after June 15, 1997. For registrants with market capitalization under $2.5 billion, the requirements of Item 305 become effective for filings that include annual financial statements for periods ending after June 15, 1998. The Registrant believes it is currently in compliance with amended Rule 4-08 of Regulation S-X in its most recent Form 10-K. Based on the Registrant's market capitalization being under $2.5 billion on January 28, 1997, the requirement of Item 305 will commence with its Form 10-K for the period ended June 30, 1998, at which time the additional requirements of Item 305 will be addressed.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF INCOME
LUNAR CORPORATION AND SUBSIDIARIES
Years ended June 30, 1997 1996 1995 ----------- ----------- ----------- REVENUES $81,466,859 $66,859,196 $44,571,992
OPERATING EXPENSES Cost of sales 36,145,433 30,236,372 18,871,021 Research and development 5,681,860 5,610,321 4,349,414 Sales and marketing 17,143,861 14,446,553 9,812,468 General and administrative 4,949,633 4,731,340 4,327,424 ----------- ----------- ----------- 63,920,787 55,024,586 37,360,327 ----------- ----------- ----------- INCOME FROM OPERATIONS 17,546,072 11,834,610 7,211,665
OTHER INCOME (EXPENSE) Interest income 1,533,127 1,549,786 1,312,500 Settlement of Lawsuit 1,828,905 - - Other 618,721 (237,952) 327,600 ----------- ----------- ----------- 3,980,753 1,311,834 1,640,100 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 21,526,825 13,146,444 8,851,765
INCOME TAX EXPENSE (BENEFIT) Currently payable 7,548,000 4,714,000 2,448,503 Deferred (307,000) (804,000) (298,000) ----------- ----------- ----------- 7,241,000 3,910,000 2,150,503 ----------- ----------- -----------
NET INCOME $14,285,825 $9,236,444 $6,701,262 =========== =========== ===========
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE $1.57 $1.04 $0.76 ====== ====== ======
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS LUNAR CORPORATION AND SUBSIDIARIES ASSETS
June 30, 1997 1996 ----------- ----------- CURRENT ASSETS Cash and cash equivalents $14,417,155 $ 8,001,582 Marketable securities 5,891,350 2,347,400 Receivables: Trade, less allowance for doubtful accounts of $2,602,000 in 1997 and $2,235,000 in 1996 25,468,881 27,966,620
Other 1,061,558 328,662 ----------- ----------- 26,530,439 28,295,282
Inventories: Finished goods and work in process 2,909,854 3,920,431 Materials and purchased parts 6,463,636 4,755,056 ----------- ----------- 9,373,490 8,675,487
Other current assets 84,790 161,829 Deferred income taxes 2,291,000 1,984,000 ----------- -----------
TOTAL CURRENT ASSETS 58,588,224 49,465,580
PROPERTY,PLANT AND EQUIPMENT AT COST Buildings and improvements 2,376,763 2,203,036 Furniture and fixtures 680,413 669,284 Machinery and other equipment 5,276,267 3,554,535 ----------- ----------- 8,333,443 6,426,855 Less accumulated depreciation and amortization 3,889,838 2,977,468 ----------- ----------- 4,443,605 3,449,387
Land 138,858 138,858 ----------- ----------- 4,582,463 3,588,245
Long-term trade accounts receivable 2,485,022 7,658,079 Long-term marketable securities 16,592,053 1,028,088 Patents and other intangibles, net of accumulated amortization of $1,185,613 in 1997 and $832,573 in 1996 850,867 990,382 Other 183,954 141,556 ----------- ----------- $83,282,583 $62,871,930 =========== ===========
See accompanying notes to consolidated financial statements.
LUNAR CORPORATION AND SUBSIDIARIES LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, 1997 1996 ----------- ----------- CURRENT LIABILITIES Accounts payable $ 4,209,485 $ 3,508,804 Customer advances and deferred income 639,707 565,364 Income taxes payable 2,375,955 551,852 Accrued liabilities: Commissions payable 2,146,189 2,502,323 Compensation payable 290,913 205,236 Property, payroll, and other taxes 141,906 331,139 Accrued warranty and installation expenses 2,984,000 2,570,000 Other 251,036 231,809 ----------- ----------- TOTAL CURRENT LIABILITIES 13,039,191 10,466,527
SHAREHOLDERS' EQUITY Common stock authorized 25,000,000 shares of $.01 par value; issued and outstanding, 8,721,425 shares in 1997 and 8,486,250 shares in 1996 87,214 84,863 Capital in excess of par value 26,500,942 22,802,103 ----------- ----------- 26,588,156 22,886,966
Retained earnings 43,706,139 29,420,314 Unrealized appreciation in marketable securities 34,220 29,122 Cumulative translation adjustment (85,123) 69,001 ----------- ----------- 70,243,392 52,405,403 ----------- ----------- $83,282,583 $62,871,930 =========== ===========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY LUNAR CORPORATION AND SUBSIDIARIES
Years ended June 30, 1997, 1996, and 1995 Unrealized Cumulative Number Capital in appreciation transla- of Common excess of Retained in marketable tion shares stock par value earnings securities adjustment Total --------- ------ --------- -------- ---------- ---------- ----- BALANCE AT JUNE 30, 1994 7,838,070 $52,254 $14,476,602 $25,920,978 $ - $ 830 $40,450,664 Issuance of shares under stock option plans 149,145 994 497,907 - - - 498,901 Tax benefit from issuance of shares under stock option plans - - 454,149 - - - 454,149 Issuance of stock awards 975 7 9,744 - - - 9,751 Net income for the year ended June 30, 1995 - - - 6,701,262 - - 6,701,262 Translation adjustment - - - - - (18,961) (18,961) - -------------------------------------------------------------------------------- BALANCE AT JUNE 30, 1995 7,988,190 53,255 15,438,402 32,622,240 - (18,131) 48,095,766
Issuance of shares under stock option plans 497,315 4,421 2,085,272 - - - 2,089,693 Effect of 3 for 2 stock split - 27,180 (27,180) - - - - Payment of fractional shares resulting from stock split (30) - (875) - - - (875) Tax benefit from issuance of shares under stock option plans - - 5,280,585 - - - 5,280,585 Issuance of stock awards 775 7 25,899 - - - 25,906 Net income for the year ended June 30, 1996 - - - 9,236,444 - - 9,236,444 Spin-off of Bone Care International, Inc. - - - (12,438,370) - - (12,438,370) Unrealized appreciation in marketable securities - - - - 29,122 - 29,122 Translation adjustment - - - - - 87,132 87,132 - -------------------------------------------------------------------------------- BALANCE AT JUNE 30, 1996 8,486,250 84,863 22,802,103 29,420,314 29,122 69,001 52,405,403
Issuance of shares under stock option plans 233,200 2,332 1,121,254 - - - 1,123,586 Tax benefit from issuance of shares under stock option plans - - 2,504,036 - - - 2,504,036 Issuance of stock awards 1,975 19 73,549 - - - 73,568 Net income for the year ended June 30, 1997 - - - 14,285,825 - - 14,285,825 Unrealized appreciation in marketable securities - - - - 5,098 - 5,098 Translation adjustment - - - - - (154,124) (154,124) - ------------------------------------------------------------------------------- BALANCE AT JUNE 30, 1997 8,721,425 $87,214 $26,500,942 $43,706,139 $34,220$(85,123)$70,243,392 ===============================================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS LUNAR CORPORATION AND SUBSIDIARIES
Years ended June 30, 1997 1996 1995 ----------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $14,285,825 $9,236,444 $6,701,262
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Depreciation and amortization 1,446,929 1,365,348 1,383,151 Minority interest in net income (loss) of subsidiary - 79,983 (38,160) Changes in assets and liabilities: Receivables 6,895,502 (11,727,295) (10,288,014) Inventories (698,003) (2,024,761) 3,360,842) Prepaid expenses 77,039 (52,094) (32,808) Deferred income taxes (307,000) (804,000) (298,000) Accounts payable 546,557 1,436,573 1,206,842 Customer advances and deferred income 74,343 103,314 206,081 Accrued liabilities (26,463) 2,164,204 1,151,630 Income taxes payable 1,824,103 (1,650,046) 1,003,846 - ------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 24,118,832 (1,872,330) (2,365,012)
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (cont.) LUNAR CORPORATION AND SUBSIDIARIES
Years ended June 30, 1997 1996 1995 ------------- ------------- - ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchases of marketable securities $(20,885,936) $ (700,000) $(1,042,910) Sales and maturities of marketable securities 1,601,600 13,132,594 5,786,129 Additions to property, plant, and equipment (1,906,588) (839,703) (1,155,586) Patents and other intangibles (213,525) (303,664) (300,597) - ------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (21,404,449) 11,289,227 3,287,036
CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from exercise of stock options 1,197,154 2,114,724 498,901 Income tax benefit from stock option exercises 2,504,036 5,280,585 454,149 Cash distributed with Bone Care spin-off - (11,388,279) - - ------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,701,190 (3,992,970) 953,050 - ------------------------------------------------------------------------------- Net increase in cash and cash equivalents 6,415,573 5,423,927 1,875,074 Cash and cash equivalents at beginning of year 8,001,582 2,577,655 702,581 - -------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 14,417,155 $ 8,001,582 $2,577,655 ============================================================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Income taxes paid $ 3,237,541 $ 1,083,461 $ 987,990 ============================================================================== See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS LUNAR CORPORATION AND SUBSIDIARIES
(1) Summary of Accounting Policies
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Lunar Corporation (the Company) and its wholly owned subsidiaries, Lunar GmbH, Lunar Europe, N.V., Lunar Finance Corporation, Bona Fide, Ltd., and Lunar FSC, Inc. In May 1996, the Company spun-off its 97% owned subsidiary, Bone Care International, Inc. (Bone Care), and its subsidiary, Continental Assays Corporation (note 2). The accompanying consolidated financial statements reflect the results of operations of Bone Care prior to the date of the spin-off. All significant intercompany accounts and transactions have been eliminated in consolidation.
DESCRIPTION OF BUSINESS: The Company develops and sells x-ray and ultrasound bone densitometers for the diagnosis and monitoring of osteoporosis and other metabolic bone diseases. The Company also develops and sells medical imaging equipment used by orthopedists and radiologists for imaging extremities. Lunar GmbH supports customers and sells Lunar's products in Germany. Lunar Europe, N.V. supports customers and sells Lunar's products in Belgium and supports customers in other European countries. Bona Fide, Ltd. reviews and analyzes data from clinical trials. Lunar FSC, Inc. is a foreign sales corporation responsible for the sale of Lunar's products outside of the United States. Lunar Finance Corporation manages and sells Latin American receivables to third-party leasing companies.
REVENUE RECOGNITION: Revenue is recognized from sales when a product is shipped. Amounts billed for service contracts are recognized as revenue when earned.
CASH AND CASH EQUIVALENTS: For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents.
MARKETABLE SECURITIES: Marketable securities generally consist of state and municipal bonds with original maturities generally ranging from less than one year to four years. The Company classifies its investment securities as available-for-sale. Available-for-sale securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity. Interest income is recognized when earned.
INVENTORIES: Inventories are stated at the lower of cost or market; cost is determined by the first-in, first-out method.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. A combination of straight-line and accelerated methods of depreciation are used for financial and income tax reporting purposes.
The cost of property and equipment are depreciated over the following estimated useful lives:
Asset classification Estimated useful life Machinery, furniture, and fixtures 5-7 years Building and improvements 19-39 years
Legal costs incurred to register patents are amortized over periods not exceeding ten years.
RESEARCH AND DEVELOPMENT COSTS: Materials, labor, and overhead expenses related to research and development projects are charged to operations as incurred.
PROVISION FOR WARRANTIES: In the normal course of business, the Company makes certain initial warranties as to material and workmanship. The estimated costs associated with these warranties are accrued at the time of sale.
STOCK-BASED COMPENSATION: Stock-based compensation related to employees is recognized using the intrinsic value method and thus recognizes no compensation expense for options granted with exercise prices equal to the fair value of the Company's common stock on the date of the grant. Stock-based compensation related to non-employees is not material.
INCOME TAXES: Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
INCOME PER SHARE: Income per share is based on the weighted average number of common and common equivalent shares outstanding during each year. Common equivalent shares include stock options, which have been included using the treasury stock method only when their effect is dilutive. Income per share is based upon common and common equivalent shares of 9,106,048, 8,907,823, and 8,824,265 for the years ended June 30, 1997, 1996, and 1995, respectively.
FOREIGN CURRENCY TRANSLATION: For the Company's foreign subsidiaries, the functional currency is its local currency. Accordingly, assets and liabilities are translated into U.S. dollars using current exchange rates. Revenue and expense accounts are translated at average exchange rates prevailing during the year. The resulting translation gains and losses are included as a separate component of shareholders' equity.
The Company uses forward currency contracts in its management of foreign currency exposures. Realized gains and losses on such contracts are included in other income at the time the hedged transaction occurs. Unrealized gains and losses, which were not significant at June 30, 1997 and 1996, are not recognized.
USE OF ESTIMATES: In preparing the consolidated financial statements, the Company's management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of financial instruments, which consisted of cash and cash equivalents, marketable securities, receivables, accounts payable, customer advances, and accrued liabilities, approximated their carrying values at June 30, 1997 and 1996.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: The Financial Accounting Standards Board has recently issued two new accounting standards, SFAS No. 128, Earnings Per Share, and SFAS No. 130, Reporting Comprehensive Income. These statements will affect the disclosure requirements for the 1998 annual financial statements. Currently, the Company is evaluating the effect of these new statements.
(2) Spin-off of Subsidiary
The Company distributed all of its shares of Bone Care to the Company's shareholders on May 8, 1996 in a transaction intended to qualify as a tax-free distribution. Previously in October 1995, the Company had contributed its ownership of Continental Assays Corporation, and all other D-hormone related assets with a book value of $175,867, and forgave intercompany loans receivable of $634,683 for 1,806,075 shares of Bone Care common stock. The Company also contributed $10,000,000 for 1,698,674 shares of Bone Care common stock on May 8, 1996 and reimbursed Bone Care $725,000 for tax savings realized in prior years when Bone Care losses were included in the Company's consolidated tax returns. The shares distributed to the Company's shareholders represented 97% of the total outstanding Bone Care shares as of the date of the distribution.
Bone Care entered into a Transition Agreement with the Company pursuant to which certain employees of the Company perform administrative services for Bone Care and lease office space to Bone Care. The term of the Transition Agreement is three years; however, Bone Care may terminate the agreement by giving the Company 90 days advance written notice. Total payments received under these arrangements were $135,000, $66,968, and $60,000 for the years ended June 30, 1997, 1996, and 1995, respectively.
(3) Marketable Securities
The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value for marketable securities at June 30, 1997 and 1996 were as follows:
Gross Gross unrealized unrealized Amortized holding holding cost gains losses Fair value --------- ---------- ---------- ---------- Available-for-sale: Current $ 5,872,101 $ 19,249 $ - $ 5,891,350 Due after one year 16,577,082 14,971 - 16,592,053 ----------- ---------- ---------- ----------- $22,449,183 $ 34,220 $ - $22,483,403 =========== ========== ========== =========== Available-for-sale: Current $2,318,278 $ 29,122 $ - $ 2,347,400 Due after one year 1,028,088 - - 1,028,088 ---------- ---------- ---------- ----------- $3,346,366 $ 29,122 $ - $ 3,375,488 ========== ========== ========== ===========
The scheduled maturities for investment securities at June 30, 1997 were as follows:
Less than 6 months More than 6 months to 1 year 1 year Total ---------- ---------- ---------- ----------- State and municipal bonds $2,720,800 $2,161,950 $16,592,053 $21,474,803 Other 1,008,600 - - 1,008,600 ---------- ---------- ----------- ----------- $3,729,400 $2,161,950 $16,592,053 $22,483,403 ========== ========== =========== ===========
The gross realized gains and losses on the sale of available-for-sale investment securities for the year ended June 30, 1997 were not material.
The Company had historically reported its marketable securities as held-to-maturity. In December 1995, the Company changed its classification of marketable securities from held-to-maturity to available-for-sale. The impact of the change in classification was not material to the consolidated financial statements as book value approximated the fair value.
(4) Incentive Compensation Programs
Lunar Corporation has granted options to key employees, directors, and consultants under two separate programs.
Under a September 1, 1984 agreement with an employee/officer, options to purchase 138,000 shares at $0.16 per share are outstanding and exercisable and will expire in the event of termination of employment. Under the second option program, titled the Non-Qualified Stock Option program, a total of 3,000,000 shares of common stock were made available, of which 287,190 remain available. Options granted under this program vest over a three-year or five-year period. The options will expire ten years from the granting date, or upon termination of employment.
The option price under both option programs was based on 100% of estimated fair market value of the Company's stock on the dates the options were granted.
A summary of the Company's stock option activity, and related information, are summarized as follows:
YEAR ENDED JUNE 30, 1997 1996 1995 ------------------------------------------------- Weighted Weighted Weighted average average average exercise exercise exercise Options price Options price Options price --------- ------- --------- ------- --------- ------- Outstanding- beginning of year 1,131,115 $ 8.21 1,482,720 $ 4.87 1,442,415 $ 4.20
Granted 531,480 20.31 203,750 22.97 201,300 8.70
Exercised (233,200) 4.82 (497,315) 4.20 149,145 3.34
Expired/ Canceled (357,780) 25.43 (58,040) 8.53 (11,850) 7.39 --------- --------- --------- Outstanding- end of year 1,071,615 9.20 1,131,115 $ 8.21 1,482,720 4.87 ========= ========= ========= Exercisable at end of year 486,290 544,375 812,475
Weighted average fair value of options granted during year $ 10.46 $ 9.54
The options outstanding at June 30, 1997 have been segregated into five ranges for additional disclosure as follows:
Options Outstanding Options Exercisable ---------------------------------------------- Range of Options Weighted Weighted Options Weighted Exercise Outstanding average average currently average Prices at June 30, remaining exercise exercisable exercise 1997 contractual price at June 30, price life 1997 - ----------------------------------------------------------------------------- $ 0.16 138,000 - $0.16 138,000 $0.16 0.64 67,045 0.7 0.64 67,045 0.64 5.66 - 7.83 445,570 5.9 6.92 252,235 6.79 10.00 - 14.33 54,120 6.6 11.45 27,390 11.69 16.50 - 25.50 366,880 9.8 16.61 1,620 20.64
The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, Accounting for Stock-Based Compensation, requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and net income per share is required by Statement 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to June 30, 1995 under the fair market value method of that statement. The fair value for those options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1997 and 1996; risk free interest rate of 6.0% for 1997 and 5.5% for 1996, volatility factors of the expected market price of the Company's common stock of .53 for 1997 and .52 for 1996, and no expected dividends. Based on an analysis of historical optionee exercise behavior, the option grants exercised have aggregated weighted average lives of four years.
The Black-Scholes option valuation model was developed for us in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair market value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
1997 1996 Pro forma net income $14,327,467 $9,047,185 Pro forma net income per share 1.57 1.02
Since Statement 123 is applicable only to options granted subsequent to June 30, 1995, its pro forma effect will not be fully reflective until 2000.
The Company has a longevity stock award program whereby 25 shares of common stock are issued to employees with five years of service, and 100 shares are issued for ten years of service. The Company issued 1,975, 775, and 975 shares under this program in the years ended June 30, 1997, 1996, and 1995, respectively.
The Company has a program which provides for bonuses to all employees contingent upon achieving certain financial goals. Total expense under the program was $315,165, $338,690, and $189,457 for the years ended June 30, 1997, 1996, and 1995, respectively.
(5) Profit-sharing Plan
The Company has established a 401(k) profit-sharing plan covering substantially all employees. Employer contributions to the plan are at the discretion of the Board of Directors. The Company's policy is to fund profit-sharing plan contributions as they accrue. Profit-sharing expense amounted to $199,322, $88,254, and $69,186 for the years ended June 30, 1997, 1996, and 1995 respectively.
(6) Settlement of Lawsuit
In December 1996, a court awarded the Company and the University of Alabama-Birmingham (the co-plaintiffs) $4,200,000 in a patent infringement case against EG&G Astrophysics (EG&G). The co-plaintiffs split the award after deducting legal expenses. The Company's resulting $1,828,905 share of the award is reflected in other income and represents $0.12 per share after tax. The co-plaintiffs entered into a Settlement and License Agreement with EG&G providing for future royalty payments based on the volume of EG&G equipment sales utilizing the technology subject to the license.
(7) Income Taxes
Income taxes consist of the following: 1997 1996 1995 ---------- ---------- ---------- Current: Federal $7,048,000 $4,714,000 $2,212,503 State 500,000 - 236,000 ---------- ---------- ---------- 7,548,000 4,714,000 2,448,503 ========== ========== ==========
Deferred: Federal (287,000) (804,000) (269,000) State (20,000) (29,000) ---------- ---------- ---------- (307,000) (804,000) (298,000) ---------- ---------- ---------- $7,241,000 $3,910,000 $2,150,503 ========== ========== ==========
A reconciliation of the provision for income taxes with the applicable Federal income tax rate is presented below:
1997 1996 1997
Percent Percent Percent of pretax of pretax of pretax Amount income Amount income Amount income ---------------------------------------------------- Provision computed at normal rate $7,319,121 34% $4,469,791 34% $3,009,600 34% Increases (reductions) in taxes resulting from: State income taxes 330,000 2 - - 161,480 2 Tax benefit of exempt foreign trade income (596,010) (3) (731,265) (6) (807,905) (9) Research and development credits - - - - (215,000) (3) Other 187,889 1 171,474 2 2,328 - ---------------------------------------------------- Provision for income taxes $7,241,000 34% $3,910,000 30% $2,150,503 24% ====================================================
The tax effect of temporary differences that give rise to deferred tax assets at June 30, 1997 and 1996 are as follows:
1997 1996 ---------- ---------- Accrued warranty $1,108,000 $1,011,000 Inventory valuation 167,000 113,000 Allowance for doubtful accounts 983,000 828,000 Other 33,000 32,000 ---------- ---------- $2,291,000 $1,984,000 ========== ==========
The Company has determined, more likely than not, that a valuation allowance is not required based upon the Company's history of prior operating earnings and its expectations for continued future earnings.
(8) Supplemental Sales and Customer Information
The Company's approximate revenues by geographic regions are as follows (in thousands):
June 30, June 30, June 30, 1997 1996 1995 -------- -------- -------- United States and Canada $51,051 $30,835 $12,848 Europe 13,445 11,140 9,114 Asia 6,259 14,760 14,284 Latin America 10,712 10,124 8,326 -------- -------- -------- $81,467 $66,859 $44,572 ======== ======== ========
The Company sells its products to end-user customers or its distributors in Latin America on financed terms. Generally, the financing is over a two- or three-year time period and denominated in U.S. dollars. As of June 30, 1997, 1996, and 1995, the Company had approximately $4,614,000, $12,541,000, and $9,124,000, respectively, of financed trade accounts receivable from Latin American customers. The collateral for these receivables is generally the equipment sold and mortgages on customers' real estate.
During fiscal 1997, the Company sold approximately $10,800,000 of accounts receivable from selected customers in Latin America. The income statement effect of these transactions was not material. The Company continues to have recourse of approximately 10% of the sales price in the event of nonpayment of the underlying accounts receivable.
For the year ended June 30, 1997, no one distributor represented more than 7% of total sales. Sales to one distributor accounted for 13% of total sales for the year ended June 30, 1996, and 21% of total sales for the year ended June 30, 1995.
(9) Fee Per Patient Program
The Company has entered into an agreement with a leasing company whereby the Company sells its systems to the leasing company, which, in turn, leases the systems to third parties on a fee-per-patient basis. Under the terms of the agreement, the Company is contingently liable to the leasing company for approximately $485,157 as of June 30, 1997.
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS LUNAR CORPORATION:
We have audited the accompanying consolidated balance sheets of Lunar Corporation and subsidiaries as of June 30, 1997 and 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended June 30, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lunar Corporation and subsidiaries as of June 30, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP Chicago, Illinois August 2, 1997
QUARTERLY FINANCIAL INFORMATION (unaudited)
The following table sets forth unaudited selected quarterly financial information for each of the two most recent fiscal years.
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (in thousands except per-share data)
Revenues $18,915 $20,516 $19,857 $22,179 Income from operations 4,027 4,548 4,264 4,707 Net income 2,901 4,545 3,277 3,563 Net income per share 0.32 0.50 0.36 0.39
Revenues $12,360 $16,934 $17,287 $20,278 Income from operations 1,398 2,753 3,474 4,210 Net income 1,327 2,244 2,588 3,077 Net income per share 0.15 0.25 0.29 0.34
Lunar is unable to predict the timing of purchase orders and the related product shipments and is unable to predict demand for Lunar's products in specific foreign markets. Therefore, quarterly sales and earnings fluctuations can be expected.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company incorporates by reference the information included in the Company's definitive Proxy Statement for its 1997 Shareholders Meeting to be held on November 21, 1997 ("Proxy Statement") under the captions "Purposes of the Meeting - Election of Directors" and "Section 16(a) Beneficial Ownership Reporting of Compliance," which will be filed with the Securities and Exchange Commission separately pursuant to Rule 14a-6 under the Securities Exchange Act of 1934 and in accordance with General Instruction G(3) to Form 10-K, not later than 120 days after the end of the Company's fiscal year.
EXECUTIVE OFFICERS OF THE REGISTRANT
As of September 25, 1997, the executive officers of the Registrant are as follows:
Name Age Title - ----------------------------------------------------------------------------- Richard B. Mazess, Ph.D. 58 President
James A. Hanson, Ph.D. 47 Vice President - Marketing
Robert A. Beckman 43 Vice President - Finance
Carl E. Gulbrandsen, Ph.D., J.D. 50 Corporate General Counsel and Secretary James V. Pietropaolo 43 Vice President - Domestic Sales
James T. Karam, Ph.D. 56 Vice President - Operations
Dr. Richard B. Mazess, the founder of the Company, has been President and a director of the Company since its inception. Dr. Mazess became Professor Emeritus of Medical Physics at the University of Wisconsin - Madison in 1985, and has been on the faculty of the Department of Medical Physics since 1968. Dr. Mazess has authored over 100 scientific publications on bone, bone measurement, and body composition; he also has edited several books and has served on the editorial boards of several medical journals. Dr. Mazess has organized various international scientific meetings on bone measurement and osteoporosis.
Dr. James A. Hanson, Vice President of Marketing, joined the Company in September 1984. From July 1980 to August 1984, Dr. Hanson was on the faculty of the Department of Radiology at the University of Washington, Seattle, Washington, and from 1979 to 1980, he was a Researcher at the University of Wisconsin - Madison, Department of Medical Physics.
Robert A. Beckman joined the Company in 1986 as Controller, has been Vice President of Finance since 1987. Mr. Beckman is a Certified Public Accountant.
Carl E. Gulbrandsen, Ph.D., J.D., joined the Company in 1992 as Corporate General Counsel and Secretary. From 1989 until 1992, Dr. Gulbrandsen was a partner in the law firm of Stroud, Stroud, Willink, Thompson & Howard of Madison, Wisconsin, where he specialized in patent law. From 1987 until 1989, Dr. Gulbrandsen was a partner in the Madison office of Haight & Hofeldt, a patent litigation firm based in Chicago, Illinois. Dr. Gulbrandsen received his J.D. degree in 1981 from the University of Wisconsin School of Law and his Ph.D. degree in physiology from the University of Wisconsin - Madison in 1978.
James V. Pietropaolo joined the Company in September 1996 as Vice President of Domestic Sales. From March 1990 to September 1996, Mr. Pietropaolo was Vice President of Sales and Marketing for Aloka Co., Ltd's United States operations.
James T. Karam, Ph.D., joined the Company in August 1997 as Vice President of Operations. From 1992 to August 1997, Dr. Karam was Vice President of Systems Engineering at Sony Corporation of America, Business and Professional Group. Dr. Karam received his Ph.D. in Mechanical Engineering from Purdue University in 1972.
Officers are elected to serve, subject to the discretion of the Board of Directors, until their successors are appointed.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The Company incorporates by reference the information included in the Proxy Statement under the caption "Executive Compensation," other than the information included in the Proxy Statement under the sub-captions "Board of Directors Report on Executive Compensation" and "Performance Graph."
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company incorporates by reference the information included in the Proxy Statement under the caption "Securities Beneficially Owned by Principal Shareholders, Directors, and Executive Officers."
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company incorporates by reference the information included in the Proxy Statement under the caption "Certain Transactions."
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1 and 2. Financial statements and financial statement schedule
Reference is made to the separate index to the Company's consolidated financial statements and schedule contained on page 35 hereof.
3. Exhibits
Reference is made to the separate exhibit index contained on page 39 hereof.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fourth quarter ended June 30, 1997.
LUNAR CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following documents are filed Page(s) in as part of this report: Form 10-K
(1) Financial Statements: Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . 31
Consolidated Balance Sheets at June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . 18-19
Consolidated Statements of Income for the years ended June 30, 1997, 1996, and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Consolidated Statements of Shareholders' Equity for the years ended June 30, 1997, 1996, and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . 20
Consolidated Statements of Cash Flows for the years ended June 30, 1997, 1996, and 1995 . . . . . . . . . . . . . . . . . . . . . . . . 21-22
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 23-30
Pages in (2) Financial Statement Schedule: Form 10-K
Report of Independent Auditors on Financial Statement Schedule . . . . . . . . . . . . . . . . . . . . . 36
Schedule II - Valuation and Qualifying Accounts for each of the years ended June 30, 1997, 1996, and 1995. . . . . . . . . . . . . . . . . . 37
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
Independent Auditors' Report
The Board of Directors and Shareholders Lunar Corporation:
Under date of August 2, 1997, we reported on the consolidated balance sheets of Lunar Corporation and subsidiaries as of June 30, 1997 and 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended June 30, 1997, which are included herein. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedule as listed in the accompanying index. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits.
In our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP Chicago, Illinois August 2, 1997
Schedule II
LUNAR CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Additions Balance Charged Other
at to Charged Charges Balance Beginning Costs and to Other Add at End Description of Year Expenses Account (Deduct) of Year - ------------------------------------------------------------------------------
For the year ended June 30, 1997: Allowance for doubtful accounts $2,235,000 $367,000 - - $2,602,000
For the year ended June 30, 1996: Allowance for doubtful accounts $1,150,000 $1,085,000 - - $2,235,000
For the year ended June 30, 1995: Allowance for doubtful accounts $ 900,000 $ 250,000 - - $1,150,000
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LUNAR CORPORATION
Date: September 25, 1997 By: /s/ Richard B. Mazess
Richard B. Mazess, Ph.D. President
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.
Name
/s/ Richard B. Mazess President and September 25, 1997 Richard B. Mazess, Ph.D. Director (Principal Executive Officer)
/s/ Robert A. Beckman Vice President of September 25, 1997 Robert A. Beckman Finance (Principal Financial and Accounting Officer)
/s/ Samuel E. Bradt Director September 25, 1997 Samuel E. Bradt
Director September 25, 1997 John W. Brown
/s/ Reed Coleman Director September 25, 1997 Reed Coleman
/s/ John J. McDonough Director September 25, 1997 John J. McDonough
/s/ Malcolm R. Powell Director September 25, 1997 Malcolm R. Powell, M.D. LUNAR CORPORATION INDEX TO EXHIBITS
Exhibit Number Document Description
3.1 Articles of Amendment and Restated Articles of Incorporation of
Registrant(1) (Exhibit 3.1)
3.2 By-Laws of Registrant(2) (Exhibit 3.2)
10.1* Lunar Corporation Amended and Restated Stock Option Plan(1)(Exhibit
10.4)and Forms of Stock Option Agreements
10.2* Forms of Stock Option Agreements(3) (Exhibit 10.4)
10.3 Distribution Agreement Between Bone Care and Lunar Corporation(1) (Exhibit 10.3)
10.4 Tax Disaffiliation Agreement Between Bone Care and Lunar Corporation(1) (Exhibit 10.4)
10.5 Transition Agreement Between Bone Care and Lunar Corporation(1) (Exhibit 10.5)
11 Computation of Per Share Earnings
21 List of Subsidiaries of Registrant
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
(1)Incorporated by reference to exhibits filed with Registrant's Annual Report on Form 10-K for the year ended June 30, 1996 (File No. 0-18643). Parenthetical references to exhibit numbers are to the exhibit numbers on the Form 10-K
(2)Incorporated by reference to exhibits filed with Registrant's Form 10-Q for the quarter ended December 31, 1996 (File No. 0-18643). Parenthetical references to exhibit numbers are to the exhibit numbers on the Form 10-Q.
(3)Incorporated by reference to exhibits filed with Registrant's Annual Report on Form 10-K for the year ended June 30, 1992 (File No. 0-18643). Parenthetical references to exhibit numbers are to the exhibit numbers on the Form 10-K
*Indicates a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K.