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., Lunar France, Lunar FSC, Inc., Lunar Finance Corporation, Lunar Funding Corporation, and Lunar Capital 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. A Mayo Clinic study estimated the annual direct costs of osteoporosis-related fractures in the United States in 1995 to be $13.8 billion. Without effective diagnosis and treatment, the medical and social consequences of such fractures will worsen as the population ages. Osteoporosis related fractures are reduced if individuals at the greatest risk are diagnosed and treated in the early stages.
DIAGNOSIS AND MONITORING. Most people are not 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. 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.
Ultrasound technology has also 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 and ultrasound scans has been approved in several countries.
In the United States, Medicare pays an average of $131 for axial DEXA tests, and approximately $40 for peripheral DEXA or ultrasound tests. While many private insurance carriers currently provide reimbursement for bone mass measurement, a significant number do not.
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 Food and Drug Administration ("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 Novartis, is a nasal delivery formulation which was approved for sale by the 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 reducing vertebral fractures. Several other pharmaceutical companies are developing bisphosphonates to treat osteoporosis and expect to market these products within the next few 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. 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. In December 1997, Raloxifene (Evista by Eli Lilly) was approved for treatment of osteoporosis.
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. Lunar introduced its first x-ray system, the DPX, in 1988. 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 introduced the PRODIGY, a fan-beam densitometer, in December 1998. The PRODIGY uses a highly efficient detector to provide rapid throughput, superb image quality, excellent precision and signifiacantly lower radiation dose than competitive fan beam systems. The PRODIGY is priced between the DPX- IQ and the EXPERT, and is targeted to radiologists, gynecologists, rheumatologists, endocrinologists and orthopedists.
Lunar introduced the DPX-IQ 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. The DPX-IQ is available in a full-size model for complete clinical utility, and a compact model, which requires less space, but cannot perform total body measurements. Primary customers include radiologists, gynecologists, rheumatologists, endocrinologists and orthopedists.
The EXPERT is a high-end imaging fan-beam bone densitometer. 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.
Lunar introduced the PIXI in 1997. The PIXI is a peripheral x-ray bone densitometer, which utilizes cone-beam geometry to produce high resolution imaging of both the heel and forearm in 5 seconds. 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. Lunar sells the PIXI to medical specialists such as gynecologists, and other primary care physicians.
ULTRASOUND DENSITOMETRY SYSTEMS. Lunar introduced the first Achilles ultrasound densitometer in 1991. The Achilles series of products were the first to measure bone using both speed of sound and broadband ultrasound attenuation. Lunar introduced the Achilles+ in 1995, featuring increased ease of operation and reduced patient measurement time. In September 1997, Lunar introduced the Achilles+ Solo, with further improved scan times (40 seconds per measurement) and an internal computer. Lunar introduced the Achilles Express in April 1999. The Achilles Express also operates with an internal computer, but differs from previous models in that the heated water bath is replaced by heated water contained within two compliant membranes. These modifications allow for a smaller, more portable and more user friendly ultrasonometer. The Achilles products are sold to endocrinologists, obstetricians, gynecologists, and family practitioners.
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. In June 1999, the Company signed a non-exclusive distributor agreement with ESAOTE Biomedica Spa to distribute the E-Scan dedicated MRI system in the United States. These specialized MRI systems are suitable for imaging extremities such as knees, wrists, ankles, and, in the case of the E-Scan, shoulders. The Company sells these devices for less than $450,000, which is significantly below competitive whole body MRI systems. This lower price, coupled with lower installation and siting costs, makes these MRI systems attractive to radiologists, orthopedists, sports medicine specialists, and other MRI users. Under the agreement with ESAOTE Biomedica, Lunar is required to meet certain minimum annual purchase commitments. The distribution agreements with ESAOTE expire on December 31, 2003. There can be no assurance that the agreement will be renewed on terms satisfactory to the Company.
FLUOROSCOPIC C-ARM. The Company introduced ORCA, a fluoroscopic C-arm for extremity imaging, in 1996. ORCA utilizes digital imaging capabilities coupled with proprietary processing techniques to produce distortion-free images, particularly of bone. ORCA is designed for the orthopedic surgery market.
CUSTOMERS, SALES, AND MARKETING
Lunar's products are sold to hospitals, clinics and pharmaceutical companies active in the field of bone mineral metabolism. Specialists such as radiologists, rheumatologists, endocrinologists and orthopedic surgeons typically make the purchase decisions. Recently demand from primary care physicians such as gynecologists and family practitioners has increased.
Lunar markets and sells its products in the United States through a 30- person direct sales force and two independent distribution companies. The Company entered into distribution agreements in 1998 with Caligor (a division of Henry Schein Medical) and McKesson HBOC. Both companies have a presence in the primary care and gynecology markets with a combined sales force of over 700 representatives.
Lunar markets and sells its products outside of the United States 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, French, and Belgian subsidiaries provide direct sales and service support to German, French, 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 MRI scanners through a 6-person direct sales force and the fluoroscopic C-arm is sold through various radiological and orthopedic surgery equipment dealers.
Lunar markets its products by advertising in medical journals, direct mailings of brochures, attendance at medical seminars and trade shows, and personal visits by sales representatives with customers. Lunar products carry a one-year warranty. Extended service contracts are also available.
For the years ended June 30, 1999, 1998, and 1997, approximately 30%, 36%, and 37% of sales, respectively, were to customers located in foreign countries. No individual end user accounted for more than 2% of Lunar's sales for the fiscal year ended June 30, 1999, 1998 and 1997.
Substantially all of the Company's June 30, 1999 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.
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 PROPRIETARY 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 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. 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," "PIXI," "DPX-IQ," and "ORCA." Applications for various trademark registrations continue to be pursued worldwide.
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 White Plains, New York, sell bone densitometer scanners which compete directly with the Prodigy, DPX series and the EXPERT. In 1997, Schick Technologies, Inc., based in Long Island City, New York, introduced a low-cost x-ray based peripheral bone densitometer which competes with the Company's peripheral bone densitometers. Two Japanese companies, an Italian company 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 five 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. Siemens sells an extremity MRI device competitive to the E-Scan.
REGULATION
The Company's products and manufacturing systems 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. The premarket approval (PMA) 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) clearances and Pre- Market Approvals received by Lunar during the last 10 years:
510(k)Clearances 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 EXPERT Morphometry Software April 1995 Morphometry Software May 1995 DPX Tissue Quantitation Software October 1995 DPX Hand Software October 1995 ORCA Orthopedic C-arm May 1996 EXPERT Morphometry Reference Value Software July 1996 EXPERT Forearm and Hand Software November 1996 EXPERT Total Body Software April 1997 DPX Expanded Reference Value Software April 1997 PIXI Densitometer April 1997 PIXI Reference Data August 1997 Prodigy Bone Densitometer August 1998 Prodigy Total Body Software December 1998
Pre-Market Approvals Achilles+ Ultrasonometer June 1998 Achiles Express Ultrasonometer April 1999
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.
As a manufacturer of medical devices, Lunar is subject to certain FDA regulations which relate to its processes for product design, development, manufacturing, selling and service as well as its facilities. These process and facility requirements are subject to continuing review by the FDA, and as such, the Company's quality management system has been established to meet these FDA requirements. Lunar has had several FDA on-site inspections and has complied with FDA regulations.
The Company's quality management system is also certified as meeting the internationally recognized ISO 9001 standard as well as the specific requirements of the European Medical Devices Directive. The Company is subject to routine follow-up inspections by independent quality system auditors. Lunar has complied with these quality system requirements.
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. However, the Company's product line may be subject to approval by certain foreign regulatory and safety agencies as well. An increasing number of countries are implementing regulations requiring their own pre-market review of new medical devices prior to the Company exporting newly introduced devices to that country. Other countries require only that the Company comply with product safety and ISO 9001 quality system standards. Lunar believes it is currently in compliance with all regulations in foreign countries applicable to its business.
Most states and certain foreign countries monitor and require licensing of x-ray devices such as bone densitometers and fluoroscopic devices either by the user or by the manufacturer. Lunar believes that it is currently in compliance with relevant registration and/or licensing requirements for x-ray devices.
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.
Lunar is also subject to regulation by the Nuclear Regulatory Commission ("NRC") as a result of its storage and handling of radioactive materials used in the design and development of its medical devices. Lunar holds a license from the NRC which 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 it has recently been inspected by the NRC and complies with the relevant regulations.
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.
RESEARCH AND DEVELOPMENT
As of June 30, 1999, the Company had 52 employees engaged in research and development. During fiscal 1999, 1998, and 1997, Lunar's research and development expenses were $7.1 million, $7.6 million, and $5.9 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, 1999, Lunar had 317 full-time employees, including 63 in manufacturing operations; 52 in research and development; 171 in marketing, sales support, and service; and 31 in finance and administration. None of the Company's employees is represented by a union. The Company considers its employee relations to be good.
GLOSSARY OF DEFINED TERMS
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 NRC - Nuclear Regulatory Commission
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to the historical information presented in this annual report, the Company has made and will make certain forward-looking statements in this report, other reports filed by the Company with the Securities and Exchange Commission, reports to stockholders and in certain other contexts relating to future net sales, costs of sales, other expenses, profitability, financial resources, or products and production schedules. Statements relating to the foregoing or that predict or indicate future events and trends and which do not relate solely to historical matters identify forward-looking statements. Forward-looking statements are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are based on management's beliefs as well as assumptions made by and information currently available to management. Accordingly, the Company's actual results may differ materially from those expressed or implied in such forward-looking statements due to known and unknown risks and uncertainties that exist in the Company's operations and business environment, including, among other factors, technical risks associated with the development of new products, regulatory policies in the United States and other countries, reimbursement policies of public and private health care payors, introduction and acceptance of new drug therapies, competition from existing products and from new products or technologies, the failure by the Company to produce anticipated cost savings or improve productivity, the timing and magnitude of capital expenditures and acquisitions, currency exchange risks, economic and market conditions in the United States, Europe and the rest of the world, changes in customer spending levels, the cost and availability of raw materials, and other risks associated with the Company's operations. Although the Company believes that its forward- looking statements are based on reasonable assumptions, there can be no assurance that actual results, performance or achievements will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
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 a warehouse in Madison, Wisconsin of approximately 10,000 square feet, and office facilities in Germany, Belgium, and France.
The Company purchased a 25-acre parcel of land in January 1998 for $1,949,000 and began construction of an assembly, warehouse and office building in October 1998. The Company projects total construction costs will be approximately $10,750,000 of which $6,787,950 had been paid as of June 30, 1999. The Company moved its assembly operations and warehouse to the new building in July 1999. The Company will move its office personnel to the new building in October 1999.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
PATENT LITIGATION: On May 21, 1998 the Company filed suit against International Medical Research Ottawa (IMRO) for infringement of the Company's Canadian Patent 1,323,090 (the '090 Patent). IMRO manufactures and sells ultrasound bone densitometers in Canada and has manufactured ultrasound densitometers for Norland Medical Systems, Inc. for distribution and sale throughout the world. This suit is pending in the Federal Court of Canada-Trial Division. On September 10, 1999, the parties reached an agreement in principle to resolve this litigation. Under the terms of the agreement, IMRO will terminate its operations in Canada within three months and pay the Company a royalty for each system manufactured or sold during that period.
On November 24, 1998 the Company was issued U.S. patent number 5,841,832 (the `832 patent). On January 20, 1999 the Company brought suit against EG&G Astrophysics Research Corporation and its parent company EG&G, Inc. (collectively referred to as "EG&G") in the United States District Court for the Western District of Wisconsin for infringement of the `832 patent by EG&G's dual-energy baggage scanners. The parties have reached an agreement in principle to resolve this litigation. Under the terms of the agreement, EG&G will pay a future royalty to the Company for all sales of products that utilize the technology claimed in the `832 patent.
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, financial condition or cash flows 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 years 1999 and 1998.
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- ---- High $18.00 $11.81 $10.75 $ 8.44 Low $10.69 $ 9.25 $ 6.38 $ 5.38
---- High $24.50 $22.88 $24.50 $20.00 Low $19.00 $18.50 $19.75 $16.25
On September 23, 1999, the Company's common stock was held by approximately 3,500 stockholders of record or through nominee or street name accounts with brokers.
The Company 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, 1999 have been derived from the audited consolidated financial statements of LUNAR. The consolidated financial statements for the fiscal years ended June 30, 1995 through 1998 have been audited by KPMG LLP, independent auditors. The financial statements for fiscal year ended June 30, 1999 have been audited by Arthur Anderson 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 (in thousands, except per-share data) Year Ended June 30, 1999 1998 1997 1996 1995 ------------------------------------------ REVENUES Equipment sales and other revenue $88,062 $79,177 $80,891 $66,426 $44,349
OPERATING EXPENSES Cost of sales 50,562 38,020 35,242 29,739 18,583 Research and development 7,100 7,577 5,922 5,812 4,495 Sales and marketing 24,394 19,995 17,697 14,729 10,057 General and administrative 4,655 4,097 4,051 4,311 4,002 - ----------------------------------------------------------------------------- 86,711 69,689 62,912 54,591 37,137 - ----------------------------------------------------------------------------- Income from operations 1,351 9,488 17,979 11,835 7,212
OTHER INCOME (EXPENSE) Interest income 1,600 1,813 1,533 1,549 1,312 Settlement of lawsuit (580) - 1,829 - - Other 660 (1,115) 186 (238) 328 - ----------------------------------------------------------------------------- 1,680 698 3,548 1,311 1,640 - ----------------------------------------------------------------------------- Income before income taxes 3,031 10,186 21,527 13,146 8,852
Income tax expense 676 3,324 7,241 3,910 2,151 - ----------------------------------------------------------------------------- NET INCOME $2,355 $6,862 $14,286 $9,236 $6,701 =============================================================================
Basic Earnings Per Share $.27 $0.78 $1.66 $1.13 $0.85 =============================================================================
Diluted Earnings Per Share $.27 $0.75 $1.57 $1.04 $0.76 =============================================================================
Weighted average number of common shares 8,617 8,774 8,615 8,195 7,905 =============================================================================
Weighted average number of common and dilutive potential common shares 8,779 9,112 9,106 8,908 8,824 =============================================================================
BALANCE SHEET DATA (in thousands) As of June 30, 1999 1998 1997 1996 1995 -------------------------------------------------- Working capital $44,810 $40,606 $45,535 $38,987 $33,140 Total assets $96,164 $90,060 $83,269 $62,860 $56,700 Long-term liabilities - - - - - Shareholders' equity $76,345 $75,557 $70,229 $52,393 $48,096
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, 1999 1998 1997 ---- ---- ---- REVENUES 100% 100% 100%
OPERATING EXPENSES Cost of sales 57 48 44 Research and development 8 10 7 Sales and marketing 28 25 22 General and administrative 5 5 5 - ----------------------------------------------------------------------------- 98 88 78 - ----------------------------------------------------------------------------- Income from operations 2 12 22
OTHER INCOME (EXPENSE) Interest income 2 2 2 Other, net - (1) 3 - ----------------------------------------------------------------------------- 2 1 5 - ----------------------------------------------------------------------------- Income before income taxes 4 13 27 Income tax expense 1 4 9 - ----------------------------------------------------------------------------- NET INCOME 3% 9% 18% =============================================================================
YEAR ENDED JUNE 30, 1999 VERSUS 1998 - Equipment sales and other revenue increased 11% to $88,062,000 in fiscal 1999, from $79,177,000 in fiscal 1998. Sales by product line are summarized as follows:
Revenues by Product (in thousands)
Fiscal Year Fiscal Year 1999 1998 ----------- ----------- X-ray densitometry $55,533 $56,611 Ultrasound densitometry 8,551 4,118 Orthopedic imaging 15,543 12,223 Service 6,790 5,193 Other 1,645 1,032 ----------- ----------- $88,062 $79,177 =========== ===========
X-ray densitometry sales in fiscal year 1999 were relatively flat compared to the prior year in spite of an increase in the number of units sold. Average selling prices were lower due to competitive pricing pressures and an increased mix of sales to distributors in the United States at lower average selling prices than direct sales to end users. The increase in ultrasound densitometry revenue is primarily due to increased unit sales in the United States. The increase in Orthopedic Imaging sales for the current fiscal year is primarily due to the introduction of the E-SCAN and increased unit sales of the ORCA mini C-arm. The increase in service revenue is attributable to a growing installed base of densitometers in the United States.
Cost of sales as a percentage of equipment sales averaged 57% in fiscal 1999 compared to 48% in fiscal 1998. These lower margins primarily result from a decrease in average selling prices. Gross profit margins were also lower in fiscal year 1999 due to a higher mix of orthopedic imaging equipment which have lower gross profit margins.
Research and development expenditures decreased to $7,100,000 in fiscal 1999 compared to $7,577,000 in fiscal 1998. These expenses were lower in fiscal year 1999 due to the completion of development work associated with the Prodigy and Achilles Express bone densitometers. The Company expects this trend to continue and plans to spend less on research and development in the next fiscal year.
Sales and marketing expenses increased 22% to $24,394,000 (28% of product sales) in fiscal 1999 from $19,995,000 (25% of product sales) in fiscal 1998. Four key factors account for this increase. First, the Company increased the allowance for doubtful accounts by $1,000,000 in the quarter ended March 31, 1999 in anticipation of possible losses on it's portfolio of Brazilian receivables. Second, the Company increased sales and marketing efforts targeted to primary care physicians to address the expanding market for densitometry in the United States. Third, the Company incurred substantially higher expenses to translate product software and user documentation in order to comply with the new European Medical Device Directive regulations. Fourth, the Company started a direct sales and service subsidiary in France in March, 1998, which resulted in both increased revenues and expenses in that country.
General and administrative expenses increased to $4,655,000 in fiscal 1999 from $4,097,000 in fiscal 1998. The increase is primarily attributable to an increase in the number of employees and an increase in property taxes related to the Company's assembly, warehouse and office building under construction.
Interest income of $1,600,000 in fiscal 1999 compared to interest income of $1,813,000 in fiscal 1998. This decrease is primarily the result of decreases in the amount of investments partially offset by an increase in the amount of interest from financed receivables.
The Company settled a lawsuit with Osteometer Meditech A/S and Rapiscan Security Systems Inc. during the quarter ended September 30, 1998. As a result of the settlement, the Company incurred expenses of approximately $580,000 in that quarter comprised of legal expenses, a settlement payment, and a patent write-off related to this settlement. Other income included royalty income, income from the sale of Bona Fide Ltd., and foreign currency gains.
The effective tax rate averaged 22% in fiscal 1999 and 33% in fiscal 1998. The Company's effective rate is lower in fiscal year 1999 than in fiscal year 1998 due to an increased proportion of tax-exempt interest income and a higher benefit from the foreign sales corporation. The rate for both years is below the 34% federal statutory rate as a result of tax-exempt interest income and the benefit from the foreign sales corporation offset by the provision for state income taxes.
YEAR ENDED JUNE 30, 1998 VERSUS 1997 - Equipment sales and other revenue decreased 2% to $79,177,000 in fiscal year 1998, from $80,891,000 in fiscal year 1997. Sales by product line are summarized as follows:
Revenues by Product (in thousands) Fiscal Year Fiscal Year 1998 1997 ----------- -----------
X-ray densitometry $56,611 $61,827 Ultrasound densitometry 4,118 5,528 Orthopedic Imaging 12,223 9,121 Service 5,193 3,546 Other 1,032 869 ----------- ----------- $79,177 $80,891 =========== ===========
The Company's sales of bone densitometers in the United States have been negatively impacted by a shift away from traditional hospital buyers toward physician clinical practices, which tend to favor the lowest priced densitometers. In fiscal year 1998, the Company announced two new distributor agreements to better address this market segment. Bone densitometry sales were also negatively affected by the economic problems in Asian markets. The increase in Orthopedic Imaging sales for fiscal year 1998 is primarily due to increased unit sales of the Artoscan dedicated MRI system. The increase in service revenue is primarily due to the growing installed base of densitometers in the United States.
Cost of sales as a percentage of equipment sales averaged 48% in the year ended June 30, 1998 compared to 44% in the year ended June 30, 1997. The increase is primarily the result of lower gross profit margins on sales of densitometry equipment as a result of competitive pricing pressures and a higher mix of orthopedic imaging equipment which have lower gross profit margins.
Research and development expenditures increased to $7,577,000 in fiscal year 1998 compared to $5,922,000 in fiscal year 1997. The Company increased research and development expenditures for ultrasound and x-ray densitometry products during fiscal year 1998.
Sales and marketing expenses increased 14% to $19,995,000 (25% of product sales) in fiscal year 1998 from $17,697,000 (22% of product sales) in fiscal year 1997. This increase is primarily the result of increased sales and marketing efforts to address the expanding primary care market for densitometry.
General and administrative expenses increased to $4,097,000 in fiscal year 1998 from $4,051,000 in fiscal year 1997.
Interest income of $1,813,000 in fiscal year 1998 compared to interest income of $1,533,000 in fiscal year 1997. This increase is primarily the result of increased investments in marketable securities partially offset by decreases in the amount of financed receivables.
The effective tax rate averaged 33% in fiscal year 1998 and 34% in fiscal year 1997. 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.
LIQUIDITY AND CAPITAL RESOURCES - Cash and cash equivalents increased $9,058,000 to $13,666,000 at June 30, 1999 from $4,608,000 at June 30, 1998. Marketable securities decreased $15,356,000 to $15,545,000 at June 30, 1999 from $30,901,000 at June 30, 1998. 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 increased $3,658,000 to $35,060,000 at June 30, 1999 from $31,402,000 at June 30, 1998. The increase is primarily attributable to higher accounts receivable from MRI customers which generally have longer payment terms, higher accounts receivable from financed Brazilian customers and payment delays by Brazilian customers related to the recent currency devaluation.
The Company has approximately $8,091,000 in financed accounts receivable from Brazilian customers as of June 30, 1999. Two finance companies also have recourse against the Company for a maximum of approximately $1,395,000 for financed Brazilian accounts receivable that have been sold. All the Brazilian accounts receivable are denominated in U.S. dollars. In January 1999 the Brazilian government allowed its currency, the real, to freely trade against the U.S. dollar. As of September 1999, this policy change resulted in approximately a 56% devaluation of the real as compared to the U.S. dollar. The Company has incurred some payment delays from Brazilian customers and lower sales in Brazil as a result of this devaluation. The Company has renegotiated longer payment terms for these Brazilian accounts receivable.
Inventories increased 4% to $13,656,000 on June 30, 1999 from $13,163,000 on June 30, 1998. The increase in finished goods is primarily attributable to increases in Artoscan MRI and densitometry units. The decrease in materials and purchased parts is primarily attributable to decreased service inventories.
The Company purchased a 25-acre parcel of land in January 1998 for $1,949,000 and began construction of an assembly, warehouse and office building in October 1998. The Company projects total construction costs will be approximately $10,750,000 of which $6,787,950 had been paid as of June 30, 1999. The Company moved its assembly operations and warehouse to the new building in July 1999. The Company will move its office personnel to the new building in October 1999. The Company does not have any other pending material commitments for capital expenditures. The Company has received a commitment from the State of Wisconsin Investment Board to provide a 20 year term loan for up to $10,000,000 of the final building cost. The interest rate will be fixed at the time the loan proceeds are paid.
On April 22, 1998, 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 314,400 shares under this program as of September 23, 1999.
Management believes the current level of cash and short-term marketable securities is adequate to finance the Company's operations for the foreseeable future.
NEW ACCOUNTING PRONOUNCEMENTS - SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" is effective for financial statements for periods beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. The Company is evaluating the new Statement's provisions and does not expect this Statement to have a material effect on its financial statements.
YEAR 2000 COMPLIANCE - Many currently installed computer systems and software products are coded to accept only two-digit entries in the date code field. To distinguish 21st century from 20th century dates, these date code fields must be able to accept four-digit entries.
The Company has reviewed its existing financial and other business information systems and believes that its computer systems will be able to manage and manipulate all material data involving the transition from 1999 to 2000 without functional or data abnormality and without inaccurate results related to such data. During fiscal 1998, the Company replaced its manufacturing and financial accounting software package at a cost of approximately $230,000. This new software package is year 2000 compliant. The Company does not expect to incur significant additional costs to complete its year 2000 compliance program.
It is possible that third parties, such as suppliers and distributors, may have noncompliant computer systems or programs which may not interface properly with the Company's computer systems or may otherwise result in a disruption of the Company's operations. The Company is requesting assurances from third parties with which it has a material relationship that their computers, systems, and programs be year 2000 compliant.
The Company currently anticipates that the expenses and capital expenditures associated with its year 2000 compliance program will not have a material effect on its financial position, results of operations or cash flows. Because the Company's software programs are year 2000 compliant, and the Company does not believe any material problems will arise if a third party is not year 2000 compliant, the Company has not developed any contingency plan.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investment portfolio. The Company does not use derivative financial instruments in its investment portfolio. The Company places its investments with high credit quality issuers and, by policy, limits the amount of credit exposure to any one issuer. As stated in its policy, the Company is adverse to principal loss and ensures the safety and preservation of its invested funds by limiting default risk, market risk, and reinvestment risk. The Company mitigates default risk by investing in only high credit quality securities. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. All investments mature, by policy, in 48 months or less.
The Company uses forward currency contracts in its management of foreign currency exposures. The contracts are in German Deutsche Marks, French Francs, and Belgian Francs and generally have maturities which do not exceed three months. Realized gains and losses on such contracts are included in other income at the time the hedged transaction occurs. There were no deferred gains or losses at June 30, 1999. These contracts are entered into with major financial institutions thereby minimizing the risk of credit loss.
The table below provides information about the Company's market sensitive financial instruments and constitutes a "forward-looking statement." All items described below are non-trading and are stated in U.S. dollars.
During fiscal year ended June 30, ----------------------------------------------- Maturity dates 2000 2001 2002 2003 - ----------------------------------------------------------------------------- ASSETS Cash equivalents Variable taxable rate $7,614,682 Average taxable interest rate 4.15% Variable tax-exempt rate $6,051,481 Average tax-exempt rate 3.1%
Marketable securities Fixed tax-exempt rate $4,241,900 $7,663,600 $3,245,000 Average tax-exempt rate 4.24% 4.23% 4.19%
Forward contract German DM denominated $ 691,048 Contracted exchange rate 1.8812:1 (DM to US$) French Franc denominated $1,742,988 Contracted exchange rate 6.311:1 (FF to US$) Belgian Franc denominated $ 514,668 Contracted exchange rate 38.86:1 (BF to US$)
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Statements of Income
Years ended June 30, 1999, 1998, and 1997
- ----------------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------------- Revenues $ 88,062,189 $ 79,177,098 $ 80,890,757
Operating expenses: Cost of sales 50,562,087 38,020,371 35,241,705 Research and development 7,100,078 7,576,796 5,922,409 Sales and marketing 24,394,129 19,994,408 17,697,195 General and administrative 4,655,190 4,097,413 4,050,713 - ----------------------------------------------------------------------------- 86,711,484 69,688,988 62,912,022 - ----------------------------------------------------------------------------- Income from operations 1,350,705 9,488,110 17,978,735 - ----------------------------------------------------------------------------- Other income (expense): Interest income 1,599,972 1,813,153 1,533,127 Settlement of lawsuit (579,555) - 1,828,905 Other 659,579 (1,115,121) 186,058 - ----------------------------------------------------------------------------- 1,679,996 698,032 3,548,090 - ----------------------------------------------------------------------------- Income before income taxes 3,030,701 10,186,142 21,526,825 - ----------------------------------------------------------------------------- Income tax expense 676,000 3,324,000 7,241,000 - ----------------------------------------------------------------------------- Net income $ 2,354,701 $ 6,862,142 $ 14,285,825 ============================================================================= Basic earnings per share $ .27 $ 0.78 $ 1.66 ============================================================================= Diluted earnings per share $ .27 $ 0.75 $ 1.57 =============================================================================
See accompanying notes to consolidated financial statements.
Consolidated Balance Sheets June 30, 1999 and 1998 - ----------------------------------------------------------------------------- Assets 1999 1998 - ----------------------------------------------------------------------------- Current assets: Cash and cash equivalents $ 13,666,163 $ 4,608,427 Marketable securities 4,311,834 8,117,655 Receivables: Trade, less allowance for doubtful accounts of $3,524,000 in 1999 and $3,272,000 in 1998 25,316,044 24,285,511 Short-term financed 4,848,186 2,092,164 Other 407,056 929,179 - ----------------------------------------------------------------------------- 30,571,286 27,306,854 - ----------------------------------------------------------------------------- Inventories: Finished goods and work in process 7,125,027 4,557,400 Materials and purchased parts 6,530,752 8,605,801 - ----------------------------------------------------------------------------- 13,655,779 13,163,201 - ----------------------------------------------------------------------------- Other current assets 431,931 350,360 Deferred income taxes 1,992,000 1,563,000 - ----------------------------------------------------------------------------- Total current assets 64,628,993 55,109,497 - ----------------------------------------------------------------------------- Property, plant, and equipment - at cost: Land 2,088,118 2,088,118 Buildings and improvements 2,287,356 2,287,356 Furniture and fixtures 1,055,780 876,813 Machinery and other equipment 9,368,111 6,755,441 Construction in progress 6,787,950 132,702 - ----------------------------------------------------------------------------- 21,587,315 12,140,430 Less accumulated depreciation and amortization 6,354,858 5,086,141 - ----------------------------------------------------------------------------- 15,232,457 7,054,289
Long-term trade accounts receivable 4,488,753 4,095,565 Long-term marketable securities 11,233,298 22,783,003 Patents and other intangibles, net of accumulated amortization of $764,000 in 1999 and $1,513,000 in 1998 463,270 809,468 Other 117,390 208,136 - ----------------------------------------------------------------------------- $ 96,164,161 $ 90,059,958 =============================================================================
See accompanying notes to consolidated financial statements.
Consolidated Balance Sheets
June 30, 1999 and 1998 - ----------------------------------------------------------------------------- Liabilities and Shareholders' Equity 1999 1998 - ----------------------------------------------------------------------------- Current liabilities: Accounts payable $ 9,133,277 $ 4,881,399 Customer advances and deferred income 1,573,523 1,027,872 Income taxes payable 2,682,104 3,494,822 Accrued liabilities: Commissions payable 2,009,340 2,186,040 Compensation payable 658,821 413,084 Property, payroll, and other taxes 250,150 155,683 Accrued warranty and installation expenses 3,118,000 2,145,000 Other 393,537 199,324 - ----------------------------------------------------------------------------- Total current liabilities 19,818,752 14,503,224 - -----------------------------------------------------------------------------
Shareholders' equity: Common stock - authorized 25,000,000 shares of $.01 par value; issued and outstanding, 8,598,580 shares in 1999 and 8,701,210 shares in 1998 85,986 87,012 Capital in excess of par value 23,454,316 24,936,811 Retained earnings 52,922,982 50,568,281 Accumulated other comprehensive loss (117,875) (35,370) ----------------------------------------------------------------------------- 76,345,409 75,556,734 - ----------------------------------------------------------------------------- $ 96,164,161 $ 90,059,958 =============================================================================
Consolidated Statements of Cash Flows Years ended June 30, 1999, 1998, and 1997 - ------------------------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 2,354,701 $ 6,862,142 $14,285,825 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,118,248 2,025,514 1,444,929 Deferred income taxes (429,000) 714,000 (305,000) Changes in assets and liabilities: Receivables (3,566,874) (2,411,140) 6,895,502 Inventories (492,578) (3,789,711) (698,003) Other current assets (81,571) (265,570) 77,039 Accounts payable 4,195,650 639,735 546,557 Customer advances and deferred income 545,651 388,165 74,343 Accrued liabilities 1,330,717 (714,913) (26,463) Income taxes payable (812,718) 1,118,867 1,824,103 - ------------------------------------------------------------------------------- Net cash provided by operating activities 5,162,226 4,567,089 24,118,832 - ------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of marketable securities - (14,512,714) (20,885,936) Sales and maturities of marketable securities 14,974,230 5,717,000 1,601,600 Additions to property, plant, and equipment (9,446,885) (3,668,129) (1,906,588) Patents and other intangibles (148,314) (347,641) (213,525) - ------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 5,379,031 (12,811,484) (21,404,449) - ------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from exercise of stock options 64,566 901,146 1,197,154 Income tax benefit from stock option exercises 28,513 947,521 2,504,036 Repurchase of common stock (1,576,600) (3,413,000) - - ------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (1,483,521) (1,564,333) 3,701,190 - ------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 9,057,736 (9,808,728) 6,415,573 Cash and cash equivalents at beginning of year 4,608,427 14,417,155 8,001,582 - ------------------------------------------------------------------------------- Cash and cash equivalents at end of year $13,666,163 $ 4,608,427 $14,417,155 =============================================================================== Supplemental disclosure of cash flow information- income taxes paid net of refunds $ 2,185,872 $ 337,531 $ 3,237,541 ===============================================================================
See accompanying notes to consolidated financial statements.
(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 Finance Corporation, Lunar Funding Corporation, Lunar Capital Corporation, Lunar FSC, Inc., Lunar GmbH, Lunar Europe, N.V., and Lunar France. In May 1999 the Company sold the assets of Bona Fide Ltd. a former 100% owned subsidiary. The accompanying consolidated financial statements reflect the results of operations of Bona Fide Ltd. prior to the date of the sale. The gain on the sale was not material. All significant intercompany accounts and transactions have been eliminated in consolidation.
DESCRIPTION OF BUSINESS
The Company develops, manufactures, 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. The Company operates as a single segment. 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. Lunar France supports customers and sells Lunar's products in France. Lunar FSC, Inc. is a foreign sales corporation responsible for the sale of Lunar's products outside of the United States. Lunar Finance Corporation, Lunar Funding Corporation, and Lunar Capital Corporation manage and sell Latin American receivables to third-party finance 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 accumulated other comprehensive income. Realized gains and losses are included in other income. 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 recognize 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 Buildings 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
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.
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 of temporary differences between the tax bases of assets and liabilities and their reported amounts. 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.
FOREIGN CURRENCY TRANSLATION
For each of 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 accumulated other comprehensive income.
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 and are not material. Unrealized gains and losses, which were not significant at June 30, 1999 and 1998, 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, 1999 and 1998.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Tax Effect Unrealized of Unrealized Accumulated Cumulative Gain/(Loss) on (Gain)/Loss on Other Translation Marketable Marketable Comprehensive Adjustments Securities Securities Income (Loss) ----------- ---------- ---------- ------------- Beginning balance $ (117,302) $ 136,932 $ (55,000) $ (35,370) Current period change (56,228) (44,277) 18,000 (82,505) ----------- ---------- ---------- ---------- Ending balance $ (173,530) $ 92,655 $ (37,000) $(117,875) =========== ========== ========== ===========
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" is effective for financial statements for periods beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. The Company is evaluating the new Statement's provisions and does not expect this Statement to have a material effect on its financial statements.
RECLASSIFICATION
The Company has reclassified the presentation of certain prior year information to conform with the current presentation.
(2) MARKETABLE SECURITIES
The Company's marketable securities are all classified as available-for- sale and consist of investments in state and municipal bonds. As of June 30, 1999 and 1998 there were no gross unrealized holding losses for any of the Company's marketable securities. The amortized cost, gross unrealized holding gains, and fair value for marketable securities at June 30, 1999 and 1998 were as follows:
- ----------------------------------------------------------------------------- Gross unrealized Amortized holding 1999 cost gains Fair value - ----------------------------------------------------------------------------- Current $ 4,284,488 $ 27,346 $ 4,311,834 Due after one year 11,167,989 65,309 11,233,298 - ----------------------------------------------------------------------------- $ 15,452,477 $ 92,655 $15,545,132 ============================================================================= - ----------------------------------------------------------------------------- Current $ 8,102,063 $ 15,592 $ 8,117,655 Due after one year 22,661,663 121,340 22,783,003 - ----------------------------------------------------------------------------- $ 30,763,726 $136,932 $30,900,658 =============================================================================
The gross realized gains and losses on the sale of available-for-sale marketable securities for the year ended June 30, 1999 were not material.
(3) INCENTIVE COMPENSATION PROGRAMS
Lunar Corporation grants 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 223,340 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 ending June 30, 1999 1998 1997 ---------------- ---------------- ---------------- Weighted Weighted Weighted average average average exercise exercise exercise Options price Options price Options price - ------------------------------------------------------------------------------ Outstanding - beginning of year 1,139,995 $11.79 1,071,615 $ 9.20 1,131,115 $ 8.21 Granted 959,930 8.09 286,150 17.91 531,480 20.31 Exercised (15,770) 3.50 (174,210) 5.10 (233,200) 4.82 Expired/canceled (638,670) 16.70 (43,560) 15.11 (357,780) 25.43 - ------------------------------------------------------------------------------ Outstanding - end of year 1,445,485 $ 7.25 1,139,995 $11.79 1,071,615 $ 9.20 ============================================================================== Exercisable at end of year 483,875 $ 5.49 521,531 $ 6.66 486,290 $ 4.38 ============================================================================== Weighted average fair value of options granted during year $ 3.98 $10.11 $ 7.74 ==============================================================================
The options outstanding at June 30, 1999 have been segregated into five ranges for additional disclosure as follows:
Options Outstanding Options Exercisable ------------------------------------ --------------------- Weighted Weighted Options Weighted Range of Options average average currently average exercise outstanding remaining exercise exercisable exercise prices at June 30, contractual price at June 30, price 1999 life 1999 - ----------------------------------------------------------------------------- $ 0.16 138,000 - $ .16 138,000 $ 0.16
5.37 - 7.83 613,165 6.8 6.22 305,415 6.96
9.25 - 14.33 681,520 9.1 9.39 35,040 11.60
16.50 - 25.50 12,800 6.7 18.70 5,420 19.07
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.
Pro forma information regarding net income and net income per share is required by FASB Statement No. 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 these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1999, 1998, and 1997; risk free interest rate of 5.75% for 1999, 5.5% for 1998, and 6.0% for 1997, volatility factors of the expected market price of the Company's common stock of .52 for 1999 and 1998, and .53 for 1997, and no expected dividends. Based on an analysis of historical optionee exercise behavior, the option grants exercised have aggregated weighted average lives of five years for 1999, six years for 1998, and four years for 1997.
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:
- ------------------------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------- Pro forma net income $2,618,830 $6,278,188 $14,327,467 Pro forma diluted net income per share $ 0.30 $ 0.69 $ 1.57 - -------------------------------------------------------------------------------
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 1,000, 575, and 1,975 shares under this program in the years ended June 30, 1999, 1998, and 1997, 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 $74,360, $206,273, and $315,165 for the years ended June 30, 1999, 1998, and 1997, respectively.
(4) 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 $429,806, $298,273, and $199,322, for the years ended June 30, 1999, 1998, and 1997 respectively.
(5) SETTLEMENT OF LAWSUIT
Expenses were incurred in the quarter ended September 30, 1998 associated with the settlement of a lawsuit between the Company and Osteometer MeditechA/S and Rapiscan Security Systems Inc. During that quarter, the Company incurred expenses of $579,555 related to legal expenses, a settlement payment, and a patent write-off as a result of the settlement of this 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.
(6) INCOME TAXES
Income taxes consist of the following: - ----------------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------------- Current: Federal $ 1,477,000 $ 3,054,000 $ 7,048,000 State 120,000 172,000 500,000 - ----------------------------------------------------------------------------- 1,597,000 3,226,000 7,548,000 - ----------------------------------------------------------------------------- Deferred: Federal (783,000) 83,000 (287,000) State (138,000) 15,000 (20,000) - ----------------------------------------------------------------------------- (921,000) 98,000 (307,000) - ----------------------------------------------------------------------------- $ 676,000 $ 3,324,000 $ 7,241,000 =============================================================================
A reconciliation of the provision for income taxes with the applicable Federal income tax rate is presented below:
- ------------------------------------------------------------------------------- 1999 1998 1997 ---------------- ---------------- ---------------- Percent Percent Percent of pretax of pretax of pretax Amount income Amount income Amount income - ------------------------------------------------------------------------------- Provision computed at normal rate $1,046,278 34% $3,463,288 34% $7,319,121 34% Increases (reductions) in taxes resulting from: State income taxes, net of federal benefit 79,200 3 113,520 1 330,000 2 Tax benefit of exempt foreign trade income (329,778)(11) (510,193) (5) (596,010) (3) Tax exempt interest (313,346)(10) (442,434 (4) (216,661) (1) Other 193,646 6 699,819 7 404,550 2 - ------------------------------------------------------------------------------- Provision for income taxes $ 676,000 22% $3,324,000 33% $7,241,000 34% ===============================================================================
The tax effect of temporary differences that give rise to deferred tax assets at June 30, 1999 and 1998 are as follows: - ----------------------------------------------------------------------------- 1999 1998 - -----------------------------------------------------------------------------
Accrued warranty $ 952,000 $ 747,000 Inventory valuation 271,000 86,000 Allowance for doubtful accounts 696,000 680,000 Other 73,000 50,000 - ----------------------------------------------------------------------------- $1,992,000 $1,563,000 =============================================================================
(7) EARNINGS PER SHARE
Reconciliations of the numerators and denominators of the basic and diluted earnings per share computations for the years ended June 30, 1999, 1998, and 1997 are as follows:
- ------------------------------------------------------------------------------ ------------------------------- Per Share Income Shares Amount - ------------------------------------------------------------------------------ Basic earnings per share $ 2,354,701 8,616,764 $ 0.27 ====== Effect of dilutive stock options - 161,979 ---------- --------- Dilutive earnings per share $ 2,354,701 8,778,743 $ 0.27 ========== ========= ====== ============================================================================== ------------------------------- Per Share Income Shares Amount - ------------------------------------------------------------------------------ Basic earnings per share $ 6,862,142 8,773,516 $ 0.78 ====== Effect of dilutive stock options - 338,979 ---------- --------- Dilutive earnings per share $ 6,862,142 9,112,495 $ 0.75 ========== ========= ====== ============================================================================== ------------------------------- Per Share Income Shares Amount - ------------------------------------------------------------------------------ Basic earnings per share $14,285,825 8,614,567 $ 1.66 ====== Effect of dilutive stock options - 491,481 ---------- --------- Dilutive earnings per share $14,285,825 9,106,048 $ 1.57 ========== ========= ====== ==============================================================================
The number of anti-dilutive options were 74,756, 90, and 111 in fiscal year 1999, 1998, and 1997, respectively.
(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, 1999 1998 1997 - ----------------------------------------------------------------------------- United States and Canada $ 61,716 $ 50,852 $ 50,696 Europe 15,635 13,241 13,353 Asia 4,174 3,838 6,215 Latin America 6,537 11,246 10,627 - ----------------------------------------------------------------------------- $ 88,062 $ 79,177 $ 80,891 =============================================================================
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, 1999, 1998, and 1997, the Company had approximately $9,337,000, $6,188,000, and $4,614,000, respectively, of financed trade accounts receivable from Latin American customers. The collateral for these receivables is generally the equipment sold.
During fiscal 1998 and 1997, the Company sold approximately $4,200,000 and $10,800,000, respectively 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 7.5% or approximately $315,000 to one finance company and 10% or approximately $1,080,000 to a second finance company.
(9) FEE PER PATIENT PROGRAM
The Company has entered into an agreement with a finance company whereby the Company sells its systems to the finance 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 three finance companies for approximately $840,000 as of June 30, 1999 and approximately $378,000 as of June 30, 1998.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Lunar Corporation:
We have audited the accompanying consolidated balance sheet of Lunar Corporation and subsidiaries (a Wisconsin Corporation) as of June 30, 1999 and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended. 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 audit. The consolidated financial statements of Lunar Corporation and subsidiaries as of June 30, 1998, and for each of the years in the two-year period ended June 30, 1998, were audited by other auditors' whose report dated July 24, 1998, expressed an unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lunar Corporation and subsidiaries as of June 30, 1999, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The supplemental schedule listed in the index to Item 14 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This information for the year ended June 30, 1999, has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP Milwaukee, Wisconsin July 30, 1999
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS LUNAR CORPORATION:
We have audited the accompanying consolidated balance sheet of Lunar Corporation and subsidiaries as of June 30, 1998, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the two-year period ended June 30, 1998. 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, 1998, and the results of their operations and their cash flows for each of the years in the two-year period ended June 30, 1998, in conformity with generally accepted accounting principles.
KPMG LLP Chicago, Illinois July 24, 1998
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 $22,825 $23,410 $19,749 $22,078 Income from operations 1,769 356 (1,575) 801 Net income 1,155 736 (825) 1,289 Net income per share .13 .08 (.10) .15
- ---- Revenues $18,663 $21,436 $17,953 $21,125 Income from operations 2,747 4,174 870 1,697 Net income 2,013 2,729 692 1,428 Net income per share 0.22 0.30 0.08 0.16
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
On December 16, 1998, the Company engaged the accounting firm of Arthur Andersen LLP as Company's independent accountants. The Company, on that same date, also informed KPMG LLP (formerly KPMG Peat Marwick LLP) of their dismissal effective December 16, 1998. The decision to change independent accountants was made upon the recommendation of the Audit Committee of the Company's Board of Directors.
During the two most recent fiscal years ended June 30, 1998 and 1997 and interim periods subsequent to June 30, 1998, there were no disagreements with KPMG LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure.
KPMG LLP's report on the Company's financial statements for the past two fiscal years did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles.
During the two most recent fiscal years and interim periods subsequent to June 30, 1998 there were no reportable events [as defined in Regulation S-K Item 304(a)(1)(v)].
The Company has requested that KPMG LLP furnish it with a letter addressed to the SEC stating whether it agrees with the above statements. A copy of the letter dated December 21, 1998 is filed.
During the two most recent fiscal years and interim periods subsequent to June 30, 1998 and prior to employing Arthur Andersen LLP, neither the Company nor anyone on its behalf consulted Arthur Andersen LLP regarding the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements or any matter that was either the subject of a disagreement [as defined in Regulation S-K Item 304(a)(1)(14)] or a reportable event.
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 1999 Shareholders Meeting to be held on November 20, 1999 ("Proxy Statement") under the captions "Purposes of the Meeting - Election of Directors" and "Section 16(a) Beneficial Ownership Reporting 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 23, 1999, the executive officers of the Registrant are as follows:
Name Age Title - ----------------------------------------------------------------------------- Richard B. Mazess, Ph.D. 60 President
James A. Hanson, Ph.D. 49 Vice President - Marketing
Robert A. Beckman 45 Vice President - Finance
John A. Comerford, J.D. 37 Corporate General Counsel and Secretary
James V. Pietropaolo 45 Vice President - Domestic Sales
Peter Peemans 40 Vice President - International Sales
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 and has been Vice President of Finance since 1987. Mr. Beckman is a Certified Public Accountant.
John A. Comerford, J.D., joined the Company in January 1998 as Corporate General Counsel and Secretary. From 1990 through 1997, Mr. Comerford was Associate Resident Counsel with National Presto Industries, Inc., in Eau Claire, Wisconsin. From 1988 until 1990, Mr. Comerford was a Staff Attorney with Fort Howard Corporation in Green Bay, Wisconsin. He received his J.D. degree in 1988 from Marquette University Law School and his B.A. degree in Business Administration from St. Norbert College in 1985.
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.
Peter Peemans joined the Company in January 1994 as a Director of European Sales. Mr. Peemans became Director of European Operations in June 1996 and was appointed Vice President of European Operations in January 1998. In July 1999, Mr. Peemans was appointed Vice President of International Sales. From January 1990 until December 1993, Mr. Peemans served as European Sales and Marketing Manager for Ferno Washington.
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 "Executive Compensation - Compensation Committee Interlocks and Insider Participation."
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 36 hereof. 3. Exhibits
Reference is made to the separate exhibit index contained on page 40 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, 1999.
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: Report of Independent Public Accountants and Report of Independent Public Accountants on Financial Statement Schedule Arthur Andersen LLP . . . . . . . . . . . . . . . . . . . 31
Independent Auditors' Report KPMG LLP . . . . . . . . . . . . . . . . . . . . . . . . 32
Consolidated Balance Sheets at June 30, 1999 and 1998 . . . . . . . . . . . . . . . . . . .18-19
Consolidated Statements of Income for the years ended June 30, 1999, 1998, and 1997 . . . . . . . . . . . . . . . . . . . . . . . . 17
Consolidated Statements of Shareholders' Equity for the years ended June 30, 1999, 1998, and 1997 . . . . . . . . . . . . . . . . . . . . . . . . 20
Consolidated Statements of Cash Flows for the years ended June 30, 1999, 1998, and 1997 . . . . . . . . . . . . . . . . . . . . . . . . 21
Notes to Consolidated Financial Statements . . . . . . . . 22-30
Page(s) in (2) Financial Statement Schedule: Form 10-K ---------- Report of Independent Public Accountants on Financial Statement Schedule Arthur Andersen LLP . . . . . . . . . . . . . . . . . . . 31 KPMG LLP . . . . . . . . . . . . . . . . . . . . . . . . 37
Schedule II - Valuation and Qualifying Accounts for each of the years ended June 30, 1999, 1998, and 1997. . . . . . . . . . . . . . . . . 38
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 July 24, 1998, we reported on the consolidated balance sheet of Lunar Corporation and subsidiaries as of June 30, 1998, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the two-year period ended June 30, 1998, 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 LLP Chicago, Illinois July 24, 1998
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, 1999: Allowance for Doubtful accounts $3,272,000 $1,292,000 - $(1,040,000) $3,524,000
For the year ended June 30, 1998: Allowance for doubtful accounts $2,602,000 $ 949,000 - $ (279,000) $3,272,000
For the year ended June 30, 1997: Allowance for doubtful accounts $2,235,000 $ 650,000 - $ (283,000) $2,602,000
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 23, 1999 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 23, 1999 - --------------------------- Director (Principal Richard B. Mazess, Ph.D. Executive Officer)
/s/ Robert A. Beckman Vice President of September 23, 1999 - --------------------------- Finance (Principal Robert A. Beckman Financial and Accounting Officer)
/s/ Samuel E. Bradt Director September 23, 1999 - --------------------------- Samuel E. Bradt
/s/ John W. Brown Director September 23, 1999 - --------------------------- John W. Brown
/s/ Reed Coleman Director September 23, 1999 - --------------------------- Reed Coleman
/s/ James W. Nellen II Director September 23, 1999 - --------------------------- James W. Nellen II
/s/ Malcolm R. Powell Director September 23, 1999 - --------------------------- 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
10.1* Lunar Corporation Amended and Restated Stock Option Plan(2) (Exhibit 99.1) and Forms of Stock Option Agreements
10.2* Forms of Stock Option Agreements(2) (Exhibit 99.2)
16 Letter from KPMG LLP dated December 21, 1998(3)
21 List of Subsidiaries of Registrant
23.1 Consent of Arthur Andersen LLP
23.2 Consent of KPMG LLP
27.1 Financial Data Schedule, June 30, 1999
27.2 Financial Data Schedule, June 30, 1998
(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 Registration Statement on Form S-3 (File No. 333-40469). Parenthetical references to exhibit numbers are to the exhibit numbers on the Form S-3.
(3) Incorporated by reference to exhibit 16 filed with Registrant's Current Report on Form 8-K dated December 16, 1998 (File No. 0-18643).
*Indicates a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K.