-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NcKLzAsdUJm4L4fSe2hlr+PzN0i36RT/szS4//6QaJ9ay2W+DOUlROAUBcK/sdIk ZhWfuedAUtXOBAraNKyy1Q== 0000864906-98-000003.txt : 19980930 0000864906-98-000003.hdr.sgml : 19980930 ACCESSION NUMBER: 0000864906-98-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LUNAR CORP CENTRAL INDEX KEY: 0000864906 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 391200501 STATE OF INCORPORATION: WI FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-18643 FILM NUMBER: 98716721 BUSINESS ADDRESS: STREET 1: 313 W BELTLINE HIGHWAY CITY: MADISON STATE: WI ZIP: 53713 BUSINESS PHONE: 6082742663 MAIL ADDRESS: STREET 1: 313 WEST BELTLINE HIGHWAY CITY: MADISON STATE: WI ZIP: 53713 10-K 1 ANNUAL REPORT FOR YEAR ENDING JUNE 30, 1998 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark one) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from __________ to __________ Commission file number 0-18643 Lunar Corporation ------------------------------ (Exact name of registrant as specified in its charter) Wisconsin 39-1200501 - ------------------------------- ------------------ (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 313 West Beltline Highway Madison, Wisconsin 53713 - ------------------------------- ------------------ (Address of principal executive offices) Zip Code) Registrant's telephone number (including area code): (608) 274-2663 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value -------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of September 23, 1998, there were issued and outstanding 8,604,460 shares of Common Stock. The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $59,521,441 as of September 23, 1998 assuming solely for purposes of this calculation that all directors and executive officers of the Registrant are "affiliates." This determination of affiliate status is not necessarily a conclusive determination for other purposes. DOCUMENTS INCORPORATED BY REFERENCE Portions of Lunar Corporation Proxy Statement for its 1998 Shareholders Meeting to be held on November 20, 1998 (Part III) LUNAR CORPORATION INDEX TO ANNUAL REPORT ON FORM 10-K For Year Ended June 30, 1998 Page PART I ---- Item 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . 1 Item 2 Properties . . . . . . . . . . . . . . . . . . . . . . . . 8 Item 3 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 9 Item 4 Submission of Matters to a Vote of Security Holders. . . . 10 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters. . . . . . . . . . . . . . . . 10 Item 6 Selected Financial Data. . . . . . . . . . . . . . . . . . 10 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . 12 Item 7A Quantitative and Qualitative Disclosures about Market Risk 16 Item 8 Financial Statements and Supplementary Data. . . . . . . . 18 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . . . . . . . . . 33 Part III Item 10 Directors and Executive Officers of the Registrant. . . . . . . . . . . . . . . . . . . . . 33 Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . 34 Item 12 Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . 34 Item 13 Certain Relationships and Related Transactions . . . . . . 35 Part IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K. . . . . . . . . . . . . . . . . . 35 Index to Consolidated Financial Statements and Financial Statement Schedule . . . . . . . . . . . . . . . . . . . . . . 36 Report of Independent Auditors on Financial Statement Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Schedule II - Valuation and Qualifying Accounts for each of the years ended June 30, 1998, 1997, and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Index to Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 PART I 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, Bona Fide, Ltd., 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 recently published 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 is at least partially preventable if individuals at the greatest risk of fracture are diagnosed and treated in the early stages. DIAGNOSIS AND MONITORING. Relatively few people are diagnosed in time for effective therapy since there are no obvious symptoms of osteoporosis in the early stages. Often the first symptom is a debilitating fracture. Studies show that bone mineral density is correlated highly with bone strength. Since bone strength is a determinant of an individual's susceptibility to fracture (along with the likelihood of sustaining sufficient trauma), bone mineral density indicates fracture risk. Bone mineral density can be measured with accuracy (referring to how well the scanners measure the actual bone density) and precision (referring to whether the scanners yield the same result upon multiple scans of the same bone) using dual-photon absorptiometry ("DPA") or dual-energy x-ray absorptiometry ("DEXA") techniques. Bone densitometer technology is based on the fact that bone absorbs x-ray photons at a different rate than does soft tissue. Photons are directed at the body, and their differential absorption is measured. The first commercial bone densitometers utilized single-photon absorptiometry ("SPA"), a method which was developed at the University of Wisconsin - Madison, Department of Medical Physics, by investigators including Drs. Richard B. Mazess, James Sorenson, and John Cameron. SPA, which uses photons at a single-energy level, became commercially available in 1972 and was widely utilized in research. During the 1970s, Dr. Richard B. Mazess, James A. Hanson, Philip Judy, Walter Peppler, Charles Wilson, and other researchers at the University of Wisconsin - - Madison, Department of Medical Physics, developed a DPA scanner which used photons of two energy levels. Dr. Mazess organized Lunar to focus on the diagnosis and monitoring of osteoporosis and to market bone densitometers using DPA. In the 1980s, DPA and DEXA scanners were developed to measure bone density in the spine and the hip, which are more clinically significant areas of the skeleton. SPA and DPA scanners employ a radioactive source; DEXA scanners generate radiation using a conventional x-ray tube. DEXA scanners are accurate, have a low precision error, are safe because they emit low radiation, have scanning times of approximately 5 minutes, and have a low operating cost. In recent years, ultrasound technology has been developed to measure the bone density of certain peripheral sites such as the heel. Ultrasound bone densitometers are less expensive than DEXA bone densitometers, and since they use nonionizing radiation, ultrasound bone densitometers encounter fewer regulatory and licensing requirements as compared to DEXA bone densitometers. REIMBURSEMENT. To achieve broad acceptance and qualify for third-party reimbursement, diagnostic products not only must be safe and efficacious, but also must be deemed cost-effective by public and private health care payors. Sales of bone densitometers are also dependent upon the level of reimbursement provided by public and private health care payors. Reimbursement for DEXA and ultrasound scans has been approved in several countries. In August 1997, President Clinton signed into law the Medicare Bone Mass Measurement Coverage Standardization Act as a provision in the Balanced Budget Act. The provision sets forth national criteria under which Medicare would cover bone density diagnostic tests, and will be effective July 1, 1998. Under the provision, axial DEXA tests are reimbursed at $131 and peripheral DEXA or ultrasound tests are reimbursed at $40. While many private insurance carriers currently provide reimbursement for bone mass measurement, a significant number do not. California, Florida, Oklahoma, Tennessee, Texas, and Maryland have legislation mandating insurance coverage for bone density tests. 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 two years. Calcium supplements have not been approved for marketing and sale in the United States for the treatment of osteoporosis, but one preparation is awaiting consideration by the FDA. 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. In 1988, Lunar introduced its DEXA system, the DPX, which replaced the radioactive source with an x-ray source thereby allowing for faster scan times and improved precision. Since that time, the Company has developed numerous enhancements and instrument sizes available within this product line. Some of the more popular models are described below. Lunar's leading product is the DPX-IQ, introduced in 1996. The DPX-IQ includes a broad range of clinical applications, including software for the analysis of the spine, femur, hand, and total body bone density and soft- tissue composition. Additional applications are available via software upgrades versus hardware modifications. The DPX-IQ is available in a full- size model for complete clinical utility, and a compact model which requires less space. The versatility of the DPX-IQ meets a wide range of clinical and research needs. Primary customers include radiologists, gynecologists, rheumatologists, endocrinologists and orthopedists. The EXPERT is a high-end imaging bone densitometer, having improvements on previous densitometers because of its better speed (10X faster) and spatial resolution (3X finer). In addition, the imaging capability of the EXPERT allows determinations of the entire lateral spine to be achieved in less than a minute. Morphometry of individual vertebra can be readily done with standardized, semiautomated algorithms. EXPERT morphometry, compared to conventional radiographs, provides uniformity in geometry; there is no distortion along the axis of the spine, leading to exact values for vertebral height. The EXPERT is sold primarily to research institutions and high-end imaging centers. In 1997, Lunar introduced PIXI, the first peripheral instantaneous x-ray imager. PIXI is a new generation of peripheral densitometer, utilizing cone- beam geometry for rapid (5 seconds), high resolution imaging of both the heel and forearm. While the forearm is an adequate site to assess bone loss due to hyperparathyroidism, it is only a modest predictor of future fractures and a poor site to monitor therapeutic response. In contrast, the heel, as a weight-bearing site with metabolically active bone, has been shown to be both: (1) a good predictor of hip fractures, and (2) responsive to anti-resorptive therapies, much like the spine. For maximum clinical versatility, PIXI measures both of these peripheral sites. PIXI is designed to become an integral part of day-to-day patient management, occupies minimal floor space, requires no patient preparation, and weighs less than 25 kg, making it the lightest DEXA densitometer. Lunar sells the PIXI to medical specialists such as gynecologists, and other primary care physicians. ULTRASOUND DENSITOMETRY SYSTEMS. Lunar introduced the Achilles ultrasound densitometer in 1991. The Achilles series of products can measure bone using either speed of sound or broadband ultrasound attenuation. They are the first densitometers to combine both of these ultrasound measurements in one device. The Achilles is sold to customers such as endocrinologists, obstetricians, gynecologists, and family practitioners. In 1995, the Company introduced the Achilles+ having the same performance features as its predecessor with increased ease of operation and reduced patient measurement time. In September 1997, the Company introduced the Achilles+ Solo featuring a faster scan time (40 seconds per measurement) and operates without an external computer. In June 1998, the Company received premarket approval from the FDA to sell the Achilles+ Solo to customers in the United States. ORTHOPEDIC IMAGING SYSTEMS - MAGNETIC RESONANCE IMAGING SYSTEM. In September 1993, the Company signed an exclusive distributor agreement with ESAOTE Biomedica Spa, a medical device manufacturer based in Italy, to distribute the Artoscan dedicated MRI system in the United States. The Artoscan is a specialized MRI scanner suitable for imaging extremities such as knees, wrists, and ankles. The Company sells the Artoscan in the United States for less than $300,000, which is significantly below competitive whole body MRI systems. This lower price, and the fact that installation and siting costs associated with the Artoscan are minimal, has made the Artoscan 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 agreement expires in December 2003. There can be no assurance that the agreement will be renewed on terms satisfactory to the Company. FLUOROSCOPIC C-ARM. The Company introduced a fluoroscopic C-arm for extremity imaging at the 1996 Conference of the American Academy of Orthopedic Surgeons. ORCA utilizes digital imaging capabilities coupled with proprietary processing techniques to produce distortion-free images, particularly of bone. ORCA is designed for the orthopedic and radiology market. CUSTOMERS, SALES, AND MARKETING Lunar's products are sold to medical institutions, hospitals, pharmaceutical companies active in the field of bone mineral metabolism, radiological, orthopedic, and other specialty group practices. The Company has recently seen an increase in sales to primary care physicians and gynecologists. In the United States, Lunar markets and sells its products through two distribution networks and a direct sales force. In April 1998, the Company entered into distribution agreements with Caligor (a division of Henry Schein Medical) and McKesson General Medical. Both companies have a presence in the primary care and gynecology markets with a combined sales force of over 700 representatives. The Company continues to maintain a 30-person direct sales organization. Outside of the United States, Lunar markets and sells its products primarily through independent distributors, all of whom offer sales and technical support. Employees of these distributors have undergone product and technical training related to the Company's systems. The Company's wholly owned German, 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 Artoscan MRI scanner through a direct sales force and the fluoroscopic C-arm through a direct sales force and various radiological and orthopedic surgery equipment dealers. Lunar markets its products through advertising in medical journals, direct mailings of brochures, attendance of and presentations at medical seminars and trade shows, and personal visits by sales representatives with customers. Lunar had 165 employees engaged in the marketing, sales support, and service of bone densitometry equipment as of June 30, 1998. Lunar products carry a one-year warranty. Extended service contracts are also available. For the years ended June 30, 1998, 1997, and 1996, approximately 35%, 37%, and 54% 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, 1998 and 1997. For the fiscal year ended June 30, 1996, sales to the Company's distributor in Japan accounted for 13% ($8,580,406) of the Company's sales. As of June 30, 1998, substantially all of the Company's backlog was deliverable within 120 days. Orders included in backlog may generally be canceled or rescheduled by customers, without significant penalty, and therefore cannot be considered firm. Also, the Company's revenues tend to be somewhat seasonal, generally being lower in the first fiscal quarter due primarily to lower activity in Europe and North America in the summer months. MANUFACTURING Lunar's manufacturing operations consist primarily of assembly, testing, and quality control. Lunar purchases a majority of the parts and peripheral components for its systems and manufactures certain subsystems, such as the x- ray tube head, from basic components. Parts and materials are generally readily available from several supply sources. PATENTS AND 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 x-ray bone densitometry, it has obtained a number of United States patents relating to its technology. The Company owns a number of issued United States and foreign patents and patent applications related to various aspects of x-ray and ultrasound bone densitometry. The Company continues to file United States and foreign patent applications covering its developments in the bone densitometry and imaging technologies. 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 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. Innervision sells an extremity MRI device competitive to the Artoscan. REGULATION The Company's products are subject to regulation by the FDA and by many foreign governments. Under the United States Food, Drug, and Cosmetic Act ("FDA Act"), manufacturers of medical devices must comply with certain regulations governing the manufacturing, testing, packaging, and marketing of medical devices. The Company's x-ray bone densitometry products are also subject to the Radiation Control for Health and Safety Act, administered by the FDA, which imposes performance standards and record keeping, reporting, product testing, and product labeling requirements for devices using radiation, such as x-rays. Lunar believes it is in compliance in all material respects with these various laws and regulations. The FDA generally must authorize the commercial sale of new medical devices. Commercial sales of the Company's bone densitometry devices within the United States must be preceded by either a premarket notification filing pursuant to Section 510(k) of the FDA Act or the granting of premarket approval for a particular medical device. The Section 510(k) notification filing must contain information which establishes that the device is substantially equivalent to a legally marketed device or to a device which was marketed prior to May 28, 1976. The FDA may either deny the Section 510(k) submission or require further information within 90 days of submission. Commercial marketing of the device cannot begin until the 510(k) submission is cleared by the FDA. 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) clearance received by Lunar during the last 10 years: DPX Bone Densitometer June 1988 DPX Total Body Software June 1989 DPX Population Reference Data April 1990 DPX-L/DPX-alpha Bone Densitometers December 1990 Lateral Spine Software August 1991 DPX Forearm Software February 1992 DPX Orthopedics Software February 1992 EXPERT Bone Densitometer April 1995 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 DPX-RX Bone Densitometer August 1998 In June 1998, the FDA concluded its review of the Company's PMA application of the Achilles+ Ultrasonometer and granted its approval for the Company to begin distribution of this product in the United States. LUNAR believes new products being developed in the x-ray densitometry and imaging product lines will be eligible for a Section 510(k) marketing clearance. Lunar is also subject to regulation by the Nuclear Regulatory Commission ("NRC") as a result of its storage and handling of radioactive materials used in the design and testing of its medical devices. The NRC regulates the type, amount, form, storage, use, disposal, and handling of such radioactive materials. Licenses from the NRC must be renewed every five years. Lunar has in place a Radiation Safety Program and believes it is in compliance in all material respects with NRC regulations. The Company's product line is subject to approval by certain foreign regulatory and safety agencies. Lunar believes it is currently in compliance with all regulations in foreign countries applicable to its business. As a manufacturer of medical devices, Lunar is subject to certain FDA regulations which relate to its manufacturing processes and facilities, and these processes and facilities are subject to continuing review by the FDA. Lunar has had several FDA on-site inspections and has complied with FDA regulations. Most states and certain foreign countries monitor and require licensing of x-ray devices, such as DEXA scanners. Federal, state, and foreign regulations regarding the manufacture and sale of medical devices are subject to future change. Lunar cannot predict what impact, if any, such changes might have on its business. The Company is subject to various federal, state, and local laws and regulations relating to the protection of the environment. Lunar believes its current operations comply with all currently applicable environmental laws and regulations. Lunar's expenditures for environmental compliance have not had, nor are they expected to have, a material adverse effect on the results of operations or financial condition of the Company. Export clearance for the Company's products varies by country. Generally if FDA 510(k) or premarket approval is received in the United States, there are no other export clearances required. However, 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. The Company's quality management system for product design, development, manufacturing and servicing is certified as meeting the internationally recognized ISO 9001 standard. In December 1997, the Company also received certification indicating that its quality system meets the requirements of the European Medical Devices Directive. RESEARCH AND DEVELOPMENT As of June 30, 1998, the Company had 65 employees engaged in research and development. During fiscal 1998, 1997, and 1996, Lunar's research and development expenses were $7.6 million, $5.9 million, and $5.8 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, 1998, Lunar had 314 full-time employees, including 61 in manufacturing operations; 65 in research and development; 165 in marketing, sales support, and service; and 23 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 CT - computer tomographic DEXA - dual-energy x-ray absorptiometry DPA - dual-photon absorptiometry ERT - estrogen replacement therapies FDA - Food and Drug Administration FDA Act - United States Food, Drug, and Cosmetic Act HCFA - Health Care Finance Administration Hologic - Hologic, Inc. MRI - magnetic resonance imaging NOF - National Osteoporosis Foundation NRC - Nuclear Regulatory Commission SPA - single-photon absorptiometry SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, regulation, 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, currency exchange risks, competition from existing products and from new products or technologies, and market and general economic factors. Certain of these factors are discussed in more detail elsewhere herein. Readers should also carefully review the risk factors set forth in other reports or documents the Company files from time to time with the Securities and Exchange Commission. Given these uncertainties, readers are cautioned not to place undue reliance on such 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. 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. In January 1998, the Company purchased a 25-acre parcel of land located in Madison, Wisconsin, for $1,949,000. The Company plans to begin construction of an assembly, warehouse, and office building on that parcel in late 1998. Total construction costs are projected to be approximately $11,000,000. ITEM 3. LEGAL PROCEEDINGS PATENT LITIGATION: On March 5, 1996, the Company and University of Alabama-Birmingham Research Foundation (UAB) (collectively the co-plaintiffs) sued EG&G Astrophysics (EG&G) of Long Beach, California, in the United States District Court for the Western District of Wisconsin for infringement of U.S. Patent 4,626,688 (the '688 Patent) by EG&G's dual-energy baggage scanners. A trial of the matter in December of 1996 concluded with a verdict in favor of the co-plaintiffs. The Company and UAB were awarded $4.2 million in damages, which was divided between the co-plaintiffs after deducting legal expenses. The co-plaintiffs also entered into a Settlement and License Agreement with EG&G whereby EG&G was licensed under the '688 Patent and a related U.S. patent. The license agreement provides for payment of royalties to the co- plaintiffs on EG&G's dual-energy baggage scanners manufactured or sold in the United States. The license agreement ends on December 2, 2003. The Company is presently co-defendant and counterclaim co-plaintiff with UAB in two declaratory judgment actions filed in the United States District Court for the Central District of California. Both actions seek a determination of non-infringement and invalidity of the '688 Patent. The first declaratory judgment action was filed on January 21, 1997 by RapiScan Security Systems, Inc. ("RapiScan"). RapiScan manufactures and sells baggage scanning equipment and is a competitor of EG&G. The second declaratory judgment action was filed on February 26, 1997 by Osteometer Meditech A/S ("Osteometer"), a competitor of the Company. Osteometer manufactures and sells bone densitometry products and is located in Denmark. The Company has entered into settlement negotiations with both Osteometer and RapiScan. Terms of a settlement in principal have been read into the court record and negotiations of final settlement documentation are ongoing. The Company does not believe these lawsuits will have a material adverse effect on the results of operations or financial condition of the Company. 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 sales throughout the world. This suit is pending in the Federal Court of Canada-Trial Division. On June 30, 1998 the Company and Stanford University filed suit against Norland Corporation and its parent company Norland Medical Systems, Inc. in the United States District Court for the Western District of Wisconsin for infringement of U.S. Patent 4,686,695 (the '695 Patent). The '695 Patent is owned by Stanford University and is licensed to the Company for the field of medical devices. It is alleged that Norland x-ray densitometry products infringe the '695 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 or financial condition of the Company. To the Company's knowledge, there are no material legal proceedings to which any director, officer, affiliate or more than 5% shareholder of the Company (or any associate of the foregoing persons) is a party adverse to the Company or any of its subsidiaries or has a material interest adverse to the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None. PART II 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 1998 and 1997. First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1998 ---- High $24.50 $22.88 $24.50 $20.00 Low 19.00 18.50 19.75 16.25 1997 ---- High 40.00 35.75 40.75 34.50 Low 32.00 26.25 29.25 15.00 On September 23, 1998, 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. SELECTED FINANCIAL DATA The following selected consolidated financial data for each of the five years in the period ended June 30, 1998 have been derived from the audited consolidated financial statements of LUNAR. The consolidated financial statements for the fiscal years ended June 30, 1994 through 1998 have been audited by KPMG Peat Marwick LLP, independent auditors. References to a year are to Lunar's fiscal year ended June 30, unless otherwise designated. The following data should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report and "Management's Discussion and Analysis of Financial Condition and Results of Operations." STATEMENTS OF INCOME DATA (in thousands, except per-share data) Year Ended June 30, 1998 1997 1996 1995 1994 ------------------------------------------- REVENUES Equipment sales and other revenue $79,727 $81,467 $66,859 $44,572 $30,027 OPERATING EXPENSES Cost of sales 38,867 36,300 30,388 18,994 11,807 Research and development 7,577 5,922 5,812 4,495 2,847 Sales and marketing 19,698 17,215 14,513 9,869 6,833 General and administrative 4,097 4,051 4,311 4,002 2,292 - ------------------------------------------------------------------------------ 70,239 63,488 55,024 37,360 23,779 - ------------------------------------------------------------------------------ Income from operations 9,488 17,979 11,835 7,212 6,248 OTHER INCOME (EXPENSE) Interest income 1,813 1,533 1,549 1,312 1,229 Settlement of lawsuit - 1,829 - - - Other (1,115) 186 (238) 328 178 - ------------------------------------------------------------------------------ 698 3,548 1,311 1,640 1,407 - ------------------------------------------------------------------------------ Income before income taxes 10,186 21,527 13,146 8,852 7,655 Income tax expense 3,324 7,241 3,910 2,151 1,849 - ------------------------------------------------------------------------------ NET INCOME $6,862 $14,286 $9,236 $6,701 $5,806 ============================================================================== Basic Earnings Per Share $0.78 $1.66 $1.13 $0.85 $0.74 ============================================================================== Diluted Earnings Per Share $0.75 $1.57 $1.04 $0.76 $0.68 ============================================================================== Weighted average number of common shares 8,774 8,615 8,195 7,905 7,810 ============================================================================== Weighted average number of common and diluted potential common shares 9,112 9,106 8,908 8,824 8,526 ============================================================================== BALANCE SHEET DATA (in thousands) As of June 30, 1998 1997 1996 1995 1994 --------------------------------------------------- Working capital $40,786 $45,549 $38,999 $33,140 $17,603 Total assets 90,115 83,283 62,872 56,700 45,515 Long-term liabilities - - - - - Shareholders' equity 75,612 70,243 52,405 48,096 40,451 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS STATEMENTS OF INCOME (percent of sales) Year Ended June 30, 1998 1997 1996 ---- ---- ---- REVENUES 100% 100% 100% OPERATING EXPENSES Cost of sales 49 45 45 Research and development 9 7 9 Sales and marketing 25 21 22 General and administrative 5 5 6 - ------------------------------------------------------------------------------ 88 78 82 - ------------------------------------------------------------------------------ Income from operations 12 22 18 OTHER INCOME (EXPENSE) Interest income 2 2 2 Other, net (1) 3 - - ------------------------------------------------------------------------------ 1 5 2 - ------------------------------------------------------------------------------ Income before income taxes 13 27 20 Income tax expense 4 9 6 - ------------------------------------------------------------------------------ NET INCOME 9% 18% 14% ============================================================================== YEAR ENDED JUNE 30, 1998 VERSUS 1997 - Equipment sales and other revenue decreased 2% to $79,727,000 in fiscal 1998, from $81,467,000 in fiscal 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 1,582 1,445 ----------- ----------- $79,727 $81,467 =========== =========== 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. The Company recently 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 the current fiscal year 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 49% in fiscal 1998 compared to 45% in fiscal 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 1998 compared to $5,922,000 in fiscal 1997, primarily due to increased expenditures for ultrasound and x-ray densitometry products. Sales and marketing expenses increased 14% to $19,698,000 (25% of product sales) in fiscal 1998 from $17,215,000 (21% of product sales) in fiscal 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 1998 from $4,051,000 in fiscal 1997. Interest income of $1,813,000 in fiscal 1998 compared to interest income of $1,533,000 in fiscal 1997. This increase is primarily the result of increased investments in marketable securities partially offset by decreases in the amount of financed receivables. Other expenses in fiscal 1998 are primarily the result of approximately $1,788,000 in legal fees incurred with respect to patent litigation with RapiScan Security Systems, Inc. ("RapiScan") and Osteometer Meditech A/S ("Osteometer"). The Company has entered into settlement negotiations with both RapiScan and Osteometer. A final settlement agreement has not yet been reached. These legal expenses were partially offset by royalties of approximately $632,000 from license agreements. The Company anticipates royalties from these agreements to be significantly lower in the future. The effective tax rate averaged 33% in fiscal 1998 and 34% in fiscal 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. YEAR ENDED JUNE 30, 1997 VERSUS 1996 - Equipment sales and other revenue increased 22% to $81,467,000 in fiscal 1997, from $66,859,000 in fiscal 1996. Sales by product line are summarized as follows: Revenues by Product (in thousands) Fiscal Year Fiscal Year 1997 1996 ----------- ----------- X-ray densitometry $61,827 $51,399 Ultrasound densitometry 5,528 5,054 Orthopedic imaging 9,121 6,402 Service 3,546 2,984 Other 1,445 1,020 ----------- ----------- $81,467 $66,859 =========== =========== The increase in x-ray densitometry sales from fiscal 1996 is primarily attributable to increased shipments in the United States, which the Company believes are related to the introduction of several new drug therapies during the last 24 months. The increase in orthopedic imaging sales is due to the Company's introduction of the ORCA mini C-arm, a portable x-ray device used by surgeons to image extremities, and higher Artoscan MRI sales resulting from increased acceptance of the system, particularly by orthopedic surgeons. Cost of sales as a percentage of equipment sales averaged 45% in fiscal years 1997 and 1996. Research and development expenditures remained stable at $5,922,000 in fiscal 1997 compared to $5,812,000 in fiscal 1996. Expenditures related to the development of densitometry products increased approximately $1,082,000 over 1996 levels offset by the discontinuance of D-hormone research. The Company spun off Bone Care International, Inc. to its shareholders on May 8, 1996 in a transaction intended to qualify as a tax-free distribution. The costs of clinical trials and any other costs related to the research and development of D-hormones are not included in the Company's consolidated net income after the spin-off. D-hormone related expenses were $972,000 in fiscal 1996. Sales and marketing expenses increased 19% to $17,215,000 (21% of product sales) in fiscal 1997 from $14,513,000 (22% of product sales) in fiscal 1996. This increase is primarily attributable to increased marketing personnel and sales force placed in position for an expanding market with increased products. General and administrative expenses decreased to $4,051,000 in fiscal 1997 from $4,311,000 in fiscal 1996. Legal expenses decreased approximately $965,000. Lunar had been involved in several patent lawsuits initiated in September 1994 with Hologic, Inc., a Massachusetts-based competitor, related to x-ray and ultrasound densitometers. These lawsuits were settled in November, 1995. Offsetting this reduction were increases in labor and other office-related costs. Interest income of $1,533,000 in fiscal 1997 approximated interest income of $1,550,000 in fiscal 1996. In December 1996, a court awarded the Company and the University of Alabama-Birmingham (the co-plaintiffs) $4,200,000 in a patent infringement case against EG&G Astrophysics (EG&G). The co-plaintiffs split the award after deducting legal expenses. The Company's resulting $1,829,000 share of the award is reflected in other income. The co-plaintiffs entered into a Settlement and License Agreement with EG&G providing for future royalty payments based on the volume of EG&G equipment sales utilizing the technology subject to the license. The effective tax rate averaged 34% in fiscal 1997 and 30% in fiscal 1996. The Company's effective rate has been below the 34% federal statutory rate as a result of the tax benefit from the Company's foreign sales corporation, Lunar FSC, Inc., and tax-exempt interest income offset by the effect of state income taxes. The effective tax rate was higher fiscal 1997 due to increased profits from sales within the United States, which do not benefit from foreign sales corporation treatment. LIQUIDITY AND CAPITAL RESOURCES - Total cash and cash equivalents decreased $9,809,000 to $4,608,000 at June 30, 1998 from $14,417,000 at June 30, 1997. Marketable securities increased $8,417,000 to $30,901,000 at June 30, 1998 from $22,484,000 at June 30, 1997. During fiscal 1998, the Company invested its excess cash in marketable securities. 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 $2,387,000 to $31,402,000 at June 30, 1998 from $29,015,000 at June 30, 1997. The increase is primarily attributable to higher accounts receivable from financed customers in Latin America and higher accounts receivable from Artoscan MRI customers which generally have longer payment terms. The Company sold $4,200,000 and $10,800,000 of Latin American accounts receivable in fiscal 1998 and 1997, respectively, to various finance companies. The Company continues to have recourse of approximately $1,395,000 in the event of non-payment of the underlying accounts receivable. Inventories increased 42% to $13,288,000 on June 30, 1998 from $9,373,000 on June 30, 1997. The increase in finished goods is primarily attributable to increases in Artoscan MRI units. The increase in materials and purchased parts is primarily attributable to higher service inventories needed to support the higher sales in the United States. In January 1998, the Company purchased a 25-acre parcel of land located in Madison, Wisconsin, for $1,949,000. The Company plans to begin construction of an assembly, warehouse, and office building on that parcel in late 1998. Total construction costs are projected to be approximately $11,000,000. The Company does not have any other pending material commitments for capital expenditures. On April 22, 1997, the Company approved a stock repurchase program pursuant to which it may repurchase up to 1,000,000 shares of its common stock from time to time based upon market conditions and other factors. The Company has repurchased 294,400 shares under this program as of September 23, 1998. 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. 130, "Reporting Comprehensive Income" is effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. The Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company is evaluating the Statement's provisions to conclude how it will present comprehensive income in its financial statements, and has not yet determined the amounts to be disclosed. The Company will adopt SFAS No. 130, as required, in fiscal 1999. SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" is effective for financial statements for periods beginning after December 15, 1997. SFAS No. 131 establishes standards for the way that public business enterprises report financial and descriptive information about reportable operating segments in annual financial statements and interim financial reports issued to stockholders. The Company is evaluating the new Statement's provision and will adopt SFAS No. 131, as required, in fiscal 1999. SFAS No. 132, "Employers' Disclosure About Pensions and Other Postretirement Benefits" is effective for fiscal years beginning after December 31, 1997. SFAS No. 132 revises employers' disclosures about pensions and other postretirement benefit plans. The Company is evaluating the new Statement's provisions and will adopt SFAS No. 132, as required, in fiscal 1999. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" is effective for financial statements for periods beginning after June 15, 1999. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. The Company is evaluating the new Statement's provisions. 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 or results of operations. 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. 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 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, 1998. 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 1999 2000 2001 2002 - ------------------------------------------------------------------------------ ASSETS Cash equivalents Variable taxable rate $2,599,275 Average taxable interest rate 5.05% Variable tax-exempt rate $2,009,152 Average tax-exempt rate 3.48% Marketable securities Fixed tax-exempt rate $8,025,000 $8,232,800 $9,173,600 $4,445,000 Average tax-exempt rate 3.92% 4.17% 4.25% 4.19% Forward contract German DM denominated $ 943,763 Contracted exchange rate 1.8013:1 (DM to US$) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Statements of Income Years ended June 30, 1998, 1997, and 1996 - ------------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------ Revenues $ 79,726,809 81,466,859 66,859,196 Operating expenses: Cost of sales 38,866,757 36,300,375 30,388,410 Research and development 7,576,796 5,922,409 5,811,929 Sales and marketing 19,697,733 17,214,627 14,512,905 General and administrative 4,097,413 4,050,713 4,311,342 - ------------------------------------------------------------------------------ 70,238,699 63,488,124 55,024,586 - ------------------------------------------------------------------------------ Income from operations 9,488,110 17,978,735 11,834,610 - ------------------------------------------------------------------------------ Other income (expense): Interest income 1,813,153 1,533,127 1,549,786 Settlement of lawsuit - 1,828,905 - Other (1,115,121) 186,058 (237,952) - ------------------------------------------------------------------------------ 698,032 3,548,090 1,311,834 - ------------------------------------------------------------------------------ Income before income taxes 10,186,142 21,526,825 13,146,444 - ------------------------------------------------------------------------------ Income tax expense (benefit): Currently payable 3,226,000 7,548,000 4,714,000 Deferred 98,000 (307,000) (804,000) - ------------------------------------------------------------------------------ 3,324,000 7,241,000 3,910,000 - ------------------------------------------------------------------------------ Net income $ 6,862,142 14,285,825 9,236,444 ============================================================================== Basic earnings per share $ 0.78 1.66 1.13 ============================================================================== Diluted earnings per share $ 0.75 1.57 1.04 ============================================================================== See accompanying notes to consolidated financial statements. Consolidated Balance Sheets June 30, 1998 and 1997 - ------------------------------------------------------------------------------ Assets 1998 1997 - ------------------------------------------------------------------------------ Current assets: Cash and cash equivalents $ 4,608,427 14,417,155 Marketable securities 8,117,655 5,891,350 Receivables: Trade, less allowance for doubtful accounts of $3,272,000 in 1998 and $2,602,000 in 1997 24,285,511 23,768,712 Short-term financed 2,092,164 1,700,169 Other 929,179 1,061,558 - ------------------------------------------------------------------------------ 27,306,854 26,530,439 - ------------------------------------------------------------------------------ Inventories: Finished goods and work in process 4,682,086 2,909,854 Materials and purchased parts 8,605,801 6,463,636 - ------------------------------------------------------------------------------ 13,287,887 9,373,490 - ------------------------------------------------------------------------------ Other current assets 350,360 84,790 Deferred income taxes 1,618,000 2,291,000 - ------------------------------------------------------------------------------ Total current assets 55,289,183 58,588,224 - ------------------------------------------------------------------------------ Property, plant, and equipment - at cost: Buildings and improvements 2,420,058 2,376,763 Furniture and fixtures 876,813 680,413 Machinery and other equipment 6,630,755 5,276,267 - ------------------------------------------------------------------------------ 9,927,626 8,333,443 Less accumulated depreciation and amortization 5,086,141 3,889,838 - ------------------------------------------------------------------------------ 4,841,485 4,443,605 Land 2,088,118 138,858 - ------------------------------------------------------------------------------ 6,929,603 4,582,463 - ------------------------------------------------------------------------------ Long-term trade accounts receivable 4,095,565 2,485,022 Long-term marketable securities 22,783,003 16,592,053 Patents and other intangibles, net of accumulated amortization of $1,512,781 in 1998 and $1,185,613 in 1997 809,468 850,867 Other 208,136 183,954 - ------------------------------------------------------------------------------ $ 90,114,958 83,282,583 ============================================================================== See accompanying notes to consolidated financial statements. Consolidated Balance Sheets June 30, 1998 and 1997 - ------------------------------------------------------------------------------ Liabilities and Shareholders' Equity 1998 1997 - ------------------------------------------------------------------------------ Current liabilities: Accounts payable $ 4,881,399 4,209,485 Customer advances and deferred income 1,027,872 639,707 Income taxes payable 3,494,822 2,375,955 Accrued liabilities: Commissions payable 2,186,040 2,146,189 Compensation payable 413,084 290,913 Property, payroll, and other taxes 155,683 141,906 Accrued warranty and installation expenses 2,145,000 2,984,000 Other 199,324 251,036 - ------------------------------------------------------------------------------ Total current liabilities 14,503,224 13,039,191 - ------------------------------------------------------------------------------ Shareholders' equity: Common stock - authorized 25,000,000 shares of $.01 par value; issued and outstanding, 8,701,210 shares in 1998 and 8,721,425 shares in 1997 87,012 87,214 Capital in excess of par value 24,936,811 26,500,942 - ------------------------------------------------------------------------------ 25,023,823 26,588,156 Retained earnings 50,568,281 43,706,139 Unrealized appreciation in marketable securities 136,932 34,220 Cumulative translation adjustment (117,302) (85,123) - ------------------------------------------------------------------------------ 75,611,734 70,243,392 - ------------------------------------------------------------------------------ $ 90,114,958 83,282,583 ==============================================================================
Consolidated Statements of Shareholders' Equity Years ended June 30, 1998, 1997, and 1996 - -------------------------------------------------------------------------------- - ------------------------------------- Unrealized Number Capital in appreciation Culmulative of Common excess of Retained in marketable translation shares stock par value earnings securities adjustment Total - -------------------------------------------------------------------------------- - ------------------------------------- Balance at June 30, 1995 7,988,190 $53,255 15,438,402 32,622,240 - (18,131) 48,095,766 Issuance of shares under stock option plans 497,315 4,421 2,085,272 - - - 2,089,693 Effect of 3 for 2 stock split - 27,180 (27,180) - - - - Payment of fractional shares resulting from stock split (30) - (875) - - - (875) Tax benefit from issuance of shares under stock option plans - - 5,280,585 - - - 5,280,585 Issuance of stock awards 775 7 25,899 - - - 25,906 Net income for the year ended June 30, 1996 - - - 9,236,444 - - 9,236,444 Spin-off of Bone Care International, Inc. - - - (12,438,370) - - (12,438,370) Unrealized appreciation in marketable securities - - - - 29,122 - 29,122 Translation adjustment - - - - - 87,132 87,132 - -------------------------------------------------------------------------------- - ------------------------------------- Balance at June 30, 1996 8,486,250 84,863 22,802,103 29,420,314 29,122 69,001 52,405,403 Issuance of shares under stock option plans 233,200 2,332 1,121,254 - - - 1,123,586 Tax benefit from issuance of shares under stock option plans - - 2,504,036 - - - 2,504,036 Issuance of stock awards 1,975 19 73,549 - - - 73,568 Net income for the year ended June 30, 1997 - - - 14,285,825 - - 14,285,825 Unrealized appreciation in marketable securities - - - - 5,098 - 5,098 Translation adjustment - - - - - (154,124) (154,124) - -------------------------------------------------------------------------------- - ------------------------------------- Balance at June 30, 1997 8,721,425 87,214 26,500,942 43,706,139 34,220 (85,123) 70,243,392 Issuance of shares under stock option plans 174,210 1,742 885,963 - - - 887,705 Tax benefit from issuance of shares under stock option plans - - 947,521 - - - 947,521 Issuance of stock awards 575 6 13,435 - - - 13,441 Repurchase of common stock (195,000) (1,950) (3,411,050) - - - (3,413,000) Net income for the year ended June 30, 1998 - - - 6,862,142 - - 6,862,142 Unrealized appreciation in marketable securities - - - - 102,712 - 102,712 Translation adjustment - - - - - (32,179) (32,179) - -------------------------------------------------------------------------------- - ------------------------------------- Balance at June 30, 1998 8,701,210 $87,012 24,936,811 50,568,281 136,932 (117,302) 75,611,734 ================================================================================ ===================================== See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows Years ended June 30, 1998, 1997, and 1996 - ------------------------------------------------------------------------------ 1998 1997 1996 Cash flows from operating activities: Net income $6,862,142 14,285,825 9,236,444 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,066,514 1,446,929 1,365,348 Minority interest in net income of subsidiary - - 79,983 Changes in assets and liabilities: Receivables (2,411,140) 6,895,502 (11,727,295) Inventories (3,914,397) (698,003) (2,024,761) Other current assets (265,570) 77,039 (52,094) Deferred income taxes 673,000 (307,000) (804,000) Accounts payable 639,735 546,557 1,436,573 Customer advances and deferred income 388,165 74,343 103,314 Accrued liabilities (714,913) (26,463) 2,164,204 Income taxes payable 1,118,867 1,824,103 (1,650,046) - ------------------------------------------------------------------------------ Net cash provided by (used in) operating activities 4,442,403 24,118,832 (1,872,330) - ------------------------------------------------------------------------------ Cash flows from investing activities: Purchases of marketable securities (14,512,714) (20,885,936) (700,000) Sales and maturities of marketable securities 5,717,000 1,601,600 13,132,594 Additions to property, plant, and equipment (3,543,443) (1,906,588) (839,703) Patents and other intangibles (347,641) (213,525) (303,664) - ------------------------------------------------------------------------------ Net cash provided by (used in) investing activities (12,686,798) (21,404,449) 11,289,227 - ------------------------------------------------------------------------------ Cash flows from financing activities: Proceeds from exercise of stock options 901,146 1,197,154 2,114,724 Income tax benefit from stock option exercises 947,521 2,504,036 5,280,585 Repurchase of common stock (3,413,000) - - Cash distributed with Bone Care spin-off - - (11,388,279) - ------------------------------------------------------------------------------ Net cash provided by (used in) financing activities (1,564,333) 3,701,190 (3,992,970) - ------------------------------------------------------------------------------ Net cash increase (decrease) in cash and cash equivalents (9,808,728) 6,415,573 5,423,927 Cash and cash equivalents at beginning of year 14,417,155 8,001,582 2,577,655 - ------------------------------------------------------------------------------ Cash and cash equivalents at end of year $4,608,427 14,417,155 8,001,582 ============================================================================== Supplemental disclosure of cash flow information-income taxes paid net of refunds $ 337,531 3,237,541 1,083,461 ============================================================================== 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, Bona Fide Ltd, Lunar FSC, Inc. (collectively referred to as Lunar USA), Lunar GmbH, Lunar Europe, N.V., and Lunar France. In May 1996, the Company spun-off its 97% owned subsidiary, Bone Care International, Inc. (Bone Care), and its subsidiary, Continental Assays Corporation (note 2). The accompanying consolidated financial statements reflect the results of operations of Bone Care prior to the date of the spin-off. All significant intercompany accounts and transactions have been eliminated in consolidation. DESCRIPTION OF BUSINESS The Company develops and sells x-ray and ultrasound bone densitometers for the diagnosis and monitoring of osteoporosis and other metabolic bone diseases. The Company also develops and sells medical imaging equipment used by orthopedists and radiologists for imaging extremities. Lunar GmbH supports customers and sells Lunar's products in Germany. Lunar Europe, N.V. supports customers and sells Lunar's products in Belgium and supports customers in other European countries. Lunar France supports customers and sells Lunar's products in France. Bona Fide, Ltd. reviews and analyzes data from clinical trials. Lunar FSC, Inc. is a foreign sales corporation responsible for the sale of Lunar's products outside of the United States. Lunar Finance Corporation, 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 upon customer acceptance. Amounts billed for service contracts are recognized as revenue when earned. CASH AND CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents. MARKETABLE SECURITIES Marketable securities generally consist of state and municipal bonds with original maturities generally ranging from less than one year to four years. The Company classifies its investment securities as available-for-sale. Available-for-sale securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity. Interest income is recognized when earned. INVENTORIES Inventories are stated at the lower of cost or market; cost is determined by the first-in, first-out method. DEPRECIATION AND AMORTIZATION Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. A combination of straight-line and accelerated methods of depreciation are used for financial and income tax reporting purposes. The cost of property and equipment are depreciated over the following estimated useful lives: Asset classification Estimated useful life - ------------------------------------------------------------------------------ Machinery, furniture, and fixtures 5-7 years 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. Stock-based compensation related to non- employees is not material. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences 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. EARNINGS PER SHARE In fiscal 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share includes the effect of all potential common shares that are dilutive and outstanding during the reporting period. Earnings per share amounts for all periods presented have been restated to conform to SFAS No. 128. 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 shareholders' equity. The Company uses forward currency contracts in its management of foreign currency exposures. Realized gains and losses on such contracts are included in other income at the time the hedged transaction occurs. Unrealized gains and losses, which were not significant at June 30, 1998 and 1997, 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, 1998 and 1997. (2) SPIN-OFF OF SUBSIDIARY The Company distributed all of its shares of Bone Care to the Company's shareholders on May 8, 1996 in a transaction intended to qualify as a tax-free distribution. Previously in October 1995, the Company had contributed its ownership of Continental Assays Corporation, and all other D-hormone related assets with a book value of $175,867, and forgave intercompany loans receivable of $634,683 for 1,806,075 shares of Bone Care common stock. The Company also contributed $10,000,000 for 1,698,674 shares of Bone Care common stock on May 8, 1996 and reimbursed Bone Care $725,000 for tax savings realized in prior years when Bone Care losses were included in the Company's consolidated tax returns. The shares distributed to the Company's shareholders represented 97% of the total outstanding Bone Care shares as of the date of the distribution. Bone Care entered into a Transition Agreement with the Company pursuant to which certain employees of the Company perform administrative services for Bone Care and lease office space to Bone Care. The term of the Transition Agreement is three years; however, Bone Care may terminate the agreement by giving the Company 90 days advance written notice. Total payments received under these arrangements were $65,950, $135,000, and $66,968 for the years ended June 30, 1998, 1997, and 1996, respectively. (3) MARKETABLE SECURITIES The Company's marketable securities are all classified as available-for- sale. As of June 30, 1998 and 1997 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, 1998 and 1997 were as follows: - ------------------------------------------------------------------------------ Gross unrealized Amortized holding 1998 cost gains Fair value - ------------------------------------------------------------------------------ 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 ============================================================================== 1997 - ------------------------------------------------------------------------------ Current $ 5,872,101 19,249 5,891,350 Due after one year 16,577,082 14,971 16,592,053 - ------------------------------------------------------------------------------ $ 22,449,183 34,220 22,483,403 ============================================================================== The scheduled maturities for marketable securities at June 30, 1998 were as follows: Less than 6 months More than 6 months to 1 year 1 year Total - ------------------------------------------------------------------------------ State and municipal bonds $ 4,093,923 4,023,732 22,783,003 30,900,658 - ------------------------------------------------------------------------------ $ 4,093,923 4,023,732 22,783,003 30,900,658 ============================================================================== The gross realized gains and losses on the sale of available-for-sale marketable securities for the year ended June 30, 1998 were not material. The Company had historically reported its marketable securities as held- to-maturity. In December 1995, the Company changed its classification of marketable securities from held-to-maturity to available-for-sale. The impact of the change in classification was not material to the consolidated financial statements as book value approximated the fair value. (4) INCENTIVE COMPENSATION PROGRAMS Lunar Corporation has granted options to key employees, directors, and consultants under two separate programs. Under a September 1, 1984 agreement with an employee/officer, options to purchase 138,000 shares at $0.16 per share are outstanding and exercisable and will expire in the event of termination of employment. Under the second option program, titled the Non-Qualified Stock Option program, a total of 3,000,000 shares of common stock were made available, of which 544,600 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, 1998 1997 1996 -------------- --------------- -------------- Weighted Weighted Weighted average average average exercise exercise exercise Options price Options price Options price - ------------------------------------------------------------------------------ Outstanding - beginning of year 1,071,615 $ 9.20 1,131,115 $ 8.21 1,482,720 $ 4.87 Granted 286,150 17.91 531,480 20.31 203,750 22.97 Exercised (174,210) 5.10 (233,200) 4.82 (497,315) 4.20 Expired/canceled (43,560) 15.11 (357,780) 25.43 (58,040) 8.53 - ------------------------------------------------------------------------------ Outstanding - end of year 1,139,995 $ 9.50 1,071,615 $ 9.20 1,131,115 $ 8.21 ============================================================================== Exercisable at end of year 521,531 486,290 544,375 ============================================================================== Weighted average fair value of options granted during year $10.11 $ 7.74 $10.46 ============================================================================== The options outstanding at June 30, 1998 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 1998 life 1998 - ------------------------------------------------------------------------------ $ 0.16 138,000 - $ 0.16 138,000 $ 0.16 0.64 9,220 0.7 0.64 9,220 0.64 5.66 - 7.83 336,565 5.2 7.00 268,375 6.87 10.00 - 14.33 43,080 6.2 11.72 32,460 11.67 16.25 - 25.50 613,130 9.1 17.21 73,476 16.69 The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, Accounting for Stock-Based Compensation, requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and net income per share is required by Statement 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to June 30, 1995 under the fair market value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted- average assumptions for 1998, 1997, and 1996; risk free interest rate of 5.5% for 1998, 6.0% for 1997, and 5.5% for 1996, volatility factors of the expected market price of the Company's common stock of .52 for 1998, .53 for 1997, and .52 for 1996, and no expected dividends. Based on an analysis of historical optionee exercise behavior, the option grants exercised have aggregated weighted average lives of six years for 1998 and four years for 1997 and 1996. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair market value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows: - ------------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------ Pro forma net income $ 6,278,188 $14,327,467 $ 9,047,185 Pro forma net income per share 0.69 1.57 1.02 - ------------------------------------------------------------------------------ Since Statement 123 is applicable only to options granted subsequent to June 30, 1995, its pro forma effect will not be fully reflective until 2000. The Company has a longevity stock award program whereby 25 shares of common stock are issued to employees with five years of service, and 100 shares are issued for ten years of service. The Company issued 575, 1,975, and 775 shares under this program in the years ended June 30, 1998, 1997, and 1996, 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 $206,273, $315,165, and $338,690 for the years ended June 30, 1998, 1997, and 1996, respectively. (5) PROFIT-SHARING PLAN The Company has established a 401(k) profit-sharing plan covering substantially all employees. Employer contributions to the plan are at the discretion of the Board of Directors. The Company's policy is to fund profit- sharing plan contributions as they accrue. Profit-sharing expense amounted to $298,273, $199,322, and $88,254, for the years ended June 30, 1998, 1997, and 1996 respectively. (6) SETTLEMENT OF LAWSUIT In December 1996, a court awarded the Company and the University of Alabama-Birmingham (the co-plaintiffs) $4,200,000 in a patent infringement case against EG&G Astrophysics (EG&G). The co-plaintiffs split the award after deducting legal expenses. The Company's resulting $1,828,905 share of the award is reflected in other income and represents $0.12 per share after tax. The co-plaintiffs entered into a Settlement and License Agreement with EG&G providing for future royalty payments based on the volume of EG&G equipment sales utilizing the technology subject to the license. (7) INCOME TAXES Income taxes consist of the following: - ------------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------ Current: Federal $ 2,954,000 7,048,000 4,714,000 State 172,000 500,000 - - ------------------------------------------------------------------------------ 3,126,000 7,548,000 4,714,000 - ------------------------------------------------------------------------------ Deferred: Federal 83,000 (287,000) (804,000) State 15,000 (20,000) - - ------------------------------------------------------------------------------ 98,000 (307,000) (804,000) - ------------------------------------------------------------------------------ $ 3,224,000 7,241,000 3,910,000 ============================================================================== A reconciliation of the provision for income taxes with the applicable Federal income tax rate is presented below: - ------------------------------------------------------------------------------ 1998 1997 1996 ---------------- ---------------- ---------------- Percent Percent Percent of pretax of pretax of pretax Amount income Amount income Amount income - ------------------------------------------------------------------------------ Provision computed at normal rate $3,463,289 34% $7,319,121 34% $4,469,791 34% Increases (reductions) in taxes resulting from: State income taxes, net of federal benefit 113,520 1 330,000 2 - - Tax benefit of exempt foreign trade income (510,193) (5) (596,010) (3) (731,265) (6) Other 257,384 3 187,889 1 171,474 2 - ------------------------------------------------------------------------------ Provision for income taxes $3,324,000 33% $7,241,000 34% $3,910,000 30% ============================================================================== The tax effect of temporary differences that give rise to deferred tax assets at June 30, 1998 and 1997 are as follows: - ------------------------------------------------------------------------------ 1998 1997 - ------------------------------------------------------------------------------ Accrued warranty $ 747,000 1,108,000 Inventory valuation 86,000 167,000 Allowance for doubtful accounts 680,000 983,000 Other 105,000 33,000 - ------------------------------------------------------------------------------ $1,618,000 2,291,000 ============================================================================== The Company has determined, more likely than not, that a valuation allowance is not required based upon the Company's history of operating earnings and its expectations for continued future earnings. (8) EARNINGS PER SHARE Reconciliations of the numerators and denominators of the basic and diluted earnings per share computations for the years ended June 30, 1998, 1997, and 1996 are as follows: - ------------------------------------------------------------------------------ 1998 ------------------------------- Per Share Income Shares Amount - ------------------------------------------------------------------------------ Basic earnings per share $ 6,862,142 8,773,516 $ 0.78 ====== Effect of dilutive stock options - 338,779 ---------- --------- Dilutive earnings per share $ 6,862,142 9,112,495 $ 0.75 ========== ========= ====== ============================================================================== 1997 ------------------------------- 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 ========== ========= ====== ============================================================================== 1996 ------------------------------- Per Share Income Shares Amount - ------------------------------------------------------------------------------ Basic earnings per share $ 9,236,444 8,194,821 $ 1.13 ====== Effect of dilutive stock options - 713,002 ---------- --------- Dilutive earnings per share $ 9,236,444 8,907,823 $ 1.04 ========== ========= ====== ============================================================================== (9) SUPPLEMENTAL SALES AND CUSTOMER INFORMATION The Company's approximate revenues by geographic regions are as follows (in thousands): - ------------------------------------------------------------------------------ June 30, June 30, June 30, 1998 1997 1996 - ------------------------------------------------------------------------------ United States and Canada $ 51,440 51,051 30,835 Europe 13,333 13,445 11,140 Asia 3,591 6,259 14,760 Latin America 11,363 10,712 10,124 - ------------------------------------------------------------------------------ $ 79,727 81,467 66,859 ============================================================================== 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, 1998, 1997, and 1996, the Company had approximately $4,862,000, $4,614,000, and $12,541,000, 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 10% or approximately $1,080,000 to one finance company and 7.5% or approximately $315,000 to a second finance company. For the years ended June 30, 1998 and 1997, no one distributor represented more than 10% of total sales. Sales to one distributor accounted for 13% of total sales for the year ended June 30, 1996. (10) 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 two finance companies for approximately $378,000 as of June 30, 1998 and approximately $485,000 as of June 30, 1997. INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND SHAREHOLDERS LUNAR CORPORATION: We have audited the accompanying consolidated balance sheets of Lunar Corporation and subsidiaries as of June 30, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended June 30, 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 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1998, in conformity with generally accepted accounting principles. KPMG Peat Marwick 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) 1998 - ---- Revenues $18,832 $21,584 $18,060 $21,251 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 1997 - ---- Revenues $18,915 $20,516 $19,857 $22,179 Income from operations 4,289 4,548 4,334 4,808 Net income 2,901 4,545 3,277 3,563 Net income per share 0.32 0.50 0.36 0.39 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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III 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 1998 Shareholders Meeting to be held on November 20, 1998 ("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 24, 1998, the executive officers of the Registrant are as follows: Name Age Title - ------------------------------------------------------------------------------ - - Richard B. Mazess, Ph.D. 59 President James A. Hanson, Ph.D. 48 Vice President - Marketing Robert A. Beckman 44 Vice President - Finance John A. Comerford, J.D. 36 Corporate General Counsel and Secretary James V. Pietropaolo 44 Vice President - Domestic Sales James T. Karam, Ph.D. 57 Vice President - Operations Peter Peemans 39 Vice President - European Operations Dr. Richard B. Mazess, the founder of the Company, has been President and a director of the Company since its inception. Dr. Mazess became Professor Emeritus of Medical Physics at the University of Wisconsin - Madison in 1985, and has been on the faculty of the Department of Medical Physics since 1968. Dr. Mazess has authored over 100 scientific publications on bone, bone measurement, and body composition; he also has edited several books and has served on the editorial boards of several medical journals. Dr. Mazess has organized various international scientific meetings on bone measurement and osteoporosis. Dr. James A. Hanson, Vice President of Marketing, joined the Company in September 1984. From July 1980 to August 1984, Dr. Hanson was on the faculty of the Department of Radiology at the University of Washington, Seattle, Washington, and from 1979 to 1980, he was a Researcher at the University of Wisconsin - Madison, Department of Medical Physics. Robert A. Beckman joined the Company in 1986 as Controller 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. James T. Karam, Ph.D., joined the Company in August 1997 as Vice President of Operations. From 1992 to August 1997, Dr. Karam was Vice President of Systems Engineering at Sony Corporation of America, Business and Professional Group. Dr. Karam received his Ph.D. in Mechanical Engineering from Purdue University in 1972. 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. From January 1990 until December 1993, Mr. Peemans served as European Sales and Marketing Manager for Ferno Washington. 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. 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. 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. 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, 1998. LUNAR CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE The following documents are filed Page(s) in as part of this report: Form 10-K ---------- (1) Financial Statements: Independent Auditors' Report . . . . . . . . . . . . . . . . . 32 Consolidated Balance Sheets at June 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . .19-20 Consolidated Statements of Income for the years ended June 30, 1998, 1997, and 1996 . . . . . . . . . . . . . . . . . . . . . . . . 18 Consolidated Statements of Shareholders' Equity for the years ended June 30, 1998, 1997, and 1996 . . . . . . . . . . . . . . . . . . . . . . . . 21 Consolidated Statements of Cash Flows for the years ended June 30, 1998, 1997, and 1996 . . . . . . . . . . . . . . . . . . . . . . . . 22 Notes to Consolidated Financial Statements . . . . . . . . .23-31 Page(s) in (2) Financial Statement Schedule: Form 10-K ---------- Report of Independent Auditors on Financial Statement Schedule . . . . . . . . . . . . . . . . . 37 Schedule II - Valuation and Qualifying Accounts for each of the years ended June 30, 1998, 1997, and 1996. . . . . . . . . . . . . . . . . 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 AUDITOR'S REPORT The Board of Directors and Shareholders Lunar Corporation: Under date of July 24, 1998, we reported on the consolidated balance sheets of Lunar Corporation and subsidiaries as of June 30, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended June 30, 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 Peat Marwick 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, 1998: Allowance for doubtful accounts $2,602,000 $670,000 - - $3,272,000 For the year ended June 30, 1997: Allowance for doubtful accounts $2,235,000 $367,000 - - $2,602,000 For the year ended June 30, 1996: Allowance for doubtful accounts $1,150,000 $1,085,000 - - $2,235,000 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 24, 1998 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 24, 1998 - --------------------------- Director (Principal Richard B. Mazess, Ph.D. Executive Officer) /s/ Robert A. Beckman Vice President of September 24, 1998 - --------------------------- Finance (Principal Robert A. Beckman Financial and Accounting Officer) /s/ Samuel E. Bradt Director September 24, 1998 - --------------------------- Samuel E. Bradt /s/ John W. Brown Director September 24, 1998 - --------------------------- John W. Brown /s/ Reed Coleman Director September 24, 1998 - --------------------------- Reed Coleman /s/ James W. Nellen II Director September 24, 1998 - --------------------------- James W. Nellen II /s/ Malcolm R. Powell Director September 24, 1998 - --------------------------- Malcolm R. Powell, M.D. LUNAR CORPORATION INDEX TO EXHIBITS Exhibit Number Document Description - ------- -------------------- 3.1 Articles of Amendment and Restated Articles of Incorporation of Registrant(1) (Exhibit 3.1) 3.2 By-Laws of Registrant(2) (Exhibit 3.2) 10.1* Lunar Corporation Amended and Restated Stock Option Plan(3) (Exhibit 99.1) and Forms of Stock Option Agreements 10.2* Forms of Stock Option Agreements(3) (Exhibit 99.2) 10.3 Distribution Agreement Between Bone Care and Lunar Corporation(1) (Exhibit 10.3) 10.4 Tax Disaffiliation Agreement Between Bone Care and Lunar Corporation(1) (Exhibit 10.4) 11 Computation of Per Share Earnings 21 List of Subsidiaries of Registrant 23 Consent of KPMG Peat Marwick LLP 27 Financial Data Schedule (1) Incorporated by reference to exhibits filed with Registrant's Annual Report on Form 10-K for the year ended June 30, 1996 (File No. 0-18643). Parenthetical references to exhibit numbers are to the exhibit numbers on the Form 10-K. (2) Incorporated by reference to exhibits filed with Registrant's Form 10-Q for the quarter ended December 31, 1996 (File No. 0-18643). Parenthetical references to exhibit numbers are to the exhibit numbers on the Form 10-Q. (3) Incorporated by reference to exhibits filed with Registrant's 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. *Indicates a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K. EX-11 2 COMPUTATION OF PER-SHARE EARNINGS Exhibit 11 LUNAR CORPORATION AND SUBSIDIARIES Computation of Per-Share Earnings June 30, 1998 June 30, 1997 June 30, 1996 ------------- ------------- ------------- Net income $ 6,862,142 $14,285,825 $ 9,236,444 ============= ============= ============= Weighted average number of common shares 8,773,516 8,614,567 8,194,821 Effect of dilutive securities - Stock options calculated according to the treasury stock method 338,979 491,481 713,002 ------------- ------------- ------------- Weighted average number of common and diluted potential common shares 9,112,495 9,106,048 8,907,823 ============= ============= ============= Basic earnings per share $0.78 $1.66 $1.13 ===== ===== ===== Diluted earnings per share $0.75 $1.57 $1.04 ===== ===== ===== EX-21 3 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 LUNAR CORPORATION AND SUBSIDIARIES Name of Subsidiary Jurisdiction of Incorporation - ------------------------- ----------------------------- Bona Fide, Ltd. Wisconsin Lunar FSC, Inc. U.S. Virgin Islands Lunar Finance Corporation Delaware Lunar Funding Corporation Delaware Lunar Capital Corporation Delaware Lunar GmbH Germany Lunar Europe, N.V. Belgium Lunar France France EX-23 4 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF KPMG PEAT MARWICK LLP The Board of Directors Lunar Corporation: We consent to incorporation by reference in the registration statements on Form S-8 (File No. 33-63891) and Form S-3 (File No. 333-40469) of Lunar Corporation of our reports dated July 24, 1998 relating to the consolidated balance sheets of Lunar Corporation and subsidiaries as of June 30, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows and the related financial statement schedule for each of the years in the three-year period ended June 30, 1998, which reports appear in the June 30, 1998 annual report on Form 10-K of Lunar Corporation. KPMG Peat Marwick LLP Chicago, Illinois September 25, 1998 EX-27 5 ARTICLE 5 FDS FOR 10-K
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR THE YEAR ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JUN-30-1998 JUN-30-1998 4,608 30,901 34,674 3,272 13,288 55,289 9,928 5,086 90,115 14,503 0 87 0 0 75,525 90,115 79,727 79,727 38,867 70,239 0 0 0 10,186 3,324 6,862 0 0 0 6,862 0.78 0.75
-----END PRIVACY-ENHANCED MESSAGE-----